Oracle today announced the $2bn acquisition of Taleo, and SAP is getting closer to completing its $3.6bn purchase of SuccessFactors. Both announcements come less than a month after Oracle closed its $1.5bn RightNow Technologies buy. These transactions are the largest we’ve seen in the SaaS sector. However, we doubt they represent the end of the acquisition spree of these companies, with their highly disruptive business models. Although SaaS M&A has been playing out for some time now – and even set new records in 2011 – dealmaking in this sector is far from over.
If the growing use of SaaS and public cloud is any indication of deal flow, we expect volume to continue to rise. According to a report by ChangeWave Research, 22% of respondents currently use applications that run on public cloud services, up from 17% a year earlier. We’ve been beating the drums on cloud and SaaS M&A for a while now. The reason is simple: customer demand is pushing IT vendors to change the way IT services are delivered.
As businesses increasingly adopt cloud services, as opposed to packaged software maintained on-premises, the largest IT firms are increasingly looking to break into this industry. Oracle’s RightNow and Taleo acquisitions alone represent a total of $3.5bn invested in cloud services in less than a half-year. SAP spent that much on SuccessFactors alone. And there’s undoubtedly more to come. We’ll take a deeper look at the Taleo buy, as well as provide information on SaaS valuations, in a longer report in tonight’s Daily 451.
In its first acquisition outside North America, Dublin, California-based Taleo announced today that it is buying European HCM vendor Jobpartners for €26m ($38m). While the price is a fraction of the $145m in cash that Taleo held at the end of March, it’s a fairly rich value for what we understand was a struggling company. We expect that Jobpartners’ wide European reach was the primary influencer for the company’s valuation, particularly since Taleo’s competitors are also looking to expand internationally.
Taleo is paying €26m in cash for Jobpartners and expects to close the deal in its third quarter. That price should be considered plentiful since we understand that the target was burning through cash (at least €36m in VC equity financing, by our tally) and that its revenue was likely in decline. Taleo hasn’t provided full-year revenue for Jobpartners, but expects the target to generate $2-3m in GAAP revenue from the date the deal closes to the end of the year. Annualizing that number would put Jobpartners’ full-year 2011 revenue at about $8-10m, or roughly €5-6m based on current conversion rates. That’s a nearly 50% decline from 2005, when the company issued a press release saying that its fiscal-year revenue hit €8m. We’ll have a longer report on this transaction in tomorrow’s Daily 451.
Rather than hitting the public markets, Authoria has landed in a private equity (PE) portfolio, where it is slated to serve as the initial plank in a rollup in the fragmented human capital management (HCM) market. PE shop Bedford Funding picked up Authoria last week, after checking out the market for about a year and a half. (The guys behind Bedford know a thing or two about market consolidation. Before hanging out a shingle with their $400m buyout fund, the Bedford directors and principals served as executives at ERP rollup Geac, which gobbled up dozens of companies before getting swallowed in a $1bn LBO.)
Its experience with ERP consolidation will likely come in handy for Bedford because we have noted a number of times that the current HCM market – with more than 50 startups, along with three or four large vendors – bears more than a few similarities to the ERP market earlier this decade. The ranks of ERP companies were thinned quite a bit as both strategic and financial acquirers went on shopping sprees. (Oracle, Microsoft and Lawson have all inked significant ERP acquisitions this decade, while PE-backed Infor and Consona got their ERP rollups started in 2002 and 2003, respectively.)
We suspect a similar wave of consolidation may be heading to the HCM market, which covers all the stages of hiring, from pre-employment screening to succession planning. And it’s not a bad time to be a buyer, since HCM valuations are coming down. (Authoria sold for about 1.3x its trailing sales, just half the level Vurv Technology got in its $128.8m sale to Taleo earlier this year. Granted, that’s only one data point, but we’ve heard from sources that the markdown of multiples is being seen across the sector.) Given that, along with Bedford’s stash of cash, we expect the rollup to get rolling very soon. What might it be looking for? Maybe a small vendor that could bolster Authoria’s offering around the early part of the hiring process, such as talent acquisition or screening.
Once thought to be just part of the broader ERP offering, the so-called human capital management (HCM) market has come into its own in recent years. That has meant a few IPOs (going back to when there was a market for the offerings) as well as two or three HCM deals each year worth more than $100m. Recently, those twin threads came together in HireRight. The $195m acquisition of that company, which sells pre-employment screening software, closed earlier this month, almost exactly a year after the company went public.
In addition to the acquisition of HireRight by a private company serving the US government, we also noted one of the largest deals for market consolidation earlier this summer when Taleo spent $129m for longtime recruiting software rival Vurv Technology. (As opposed to consolidation, earlier HCM deals were typically done as a way for the acquirer to get into new markets or expand its product portfolio, such as outsourcing giant ADP spending an estimated $160m two years ago for Employease, an on-demand HCM vendor focused on the midmarket.)
So what does HCM deal flow look like for the rest of the year? Salary.com, which picked up a small British firm on Tuesday, has indicated that it plans to ink another deal or two before the year is out. Salary.com went public last year and has done two deals since then, including this week’s $5m purchase of InfoBasis.
More intriguing, however, is the rumor we heard from two market sources that PreVisor, a PE-backed HCM vendor selling employee screening and testing software, is looking to sell. The company was formed in August 2005 through the combination of three companies, and it has done a handful of acquisitions since then. There is no initial word on who might be bidding on PreVisor, which is owned by Veronis Suhler Stevenson.
After sitting out an earlier wave of consolidation of on-demand human capital management (HCM) vendors, Taleo will spend roughly $129m in cash and stock for rival Vurv. The deal would double the number of customers at Taleo. The acquisition values Vurv at roughly 2.8 times trailing revenue, a bit lower than other recent HCM transactions. In mid-2006, three comparable deals got done at roughly 3-5 times trailing revenue and Taleo itself trades at about 3.7 times trailing sales. Since the consolidation wave hit the HCM sector two years ago, we have heard that Vurv was being shopped several times.
However, we would note that Taleo and Vurv have a fair amount of overlapping technology, particularly in the offering around employee recruitment. A similar transaction by the one-time HCM market darling, Kenexa, caused a number of integration headaches, which landed it in the penalty box on Wall Street. Kenexa shares currently change hands about 25% lower than they did in October 2006, when it grabbed ahold of BrassRing for $115m.