Hard on the SAP / Successfactors and the SalesForce / Rypple transactions, last week Oracle announced it’s intention to buy Taleo for $1.9 billion.
Now, $1.9 billion is a big number but its peanuts next to £3.4 billion that SAP spent on Successfactors in December.
Interestingly, Taleo and Successfactors are similar sized businesses in terms of revenue. At the time, Forrester analyst Paul Hammerman put Successfactor’s run rate revenue at between $300 and $330 million. Taleo’s reported $85 million in revenue for the last quarter of 2011 (£309 million for the full year) giving it a run rate of £340 million.
Given their similar revenue base, the valuation difference put on the two businesses is substantial. SAP effectively paid 10-11x revenue while Oracle paid between 5-6x revenue for Taleo.
- Buying Taleo and Successfactors for cloud capability is unlikely to accelerate SAP or Oracle’s overall cloud capability and, even if it was a sound technology strategy, poaching the core cloud engineering team would have been a far cheaper way to get there.
- If Oracle or SAP are making these acquisitions to gain product innovation in the HR technonlogy space, they are likely to take the next 12-18 months minimum integrating the products before they can expect to deliver a coherent and innovative product roadmap to their customers.
- Oracle does not have a great reputation for integrating acquisitions quickly. Just look at PeopleSoft and Oracle HR so it likely to continue operating Taleo independently for the time being.
Workday is the Winner
Overall, Workday is the bigger winner out of this transaction.
Not only do they have some great valuation metrics for 2012 IPO or sale process but many of their main competitors are unlikely to be driving product innovation in the coming year.
Taleo, Successfactors, Oracle and SAP all have critical and expensive integration challenges in the next 12 months. Meanwhile, Workday should be targeting customers that bought Taleo and Successfactors to get away from Oracle and SAP as well as Oracle and SAP customers that are tired of waiting for the product to improve (Workday has always targeted these customers).
It will be interesting to see if Workday sticks to its organic growth strategy and can continue to grow into a major standalone HR vendor or if it becomes an acquirer in the current consolidation.
At this point, it would be surprising if Workday wasn’t already a target in the consolidation dance. To date, they have resisted the urge for a payout and continued to dance to their own tune.
Just a few weeks after SAP purchased SuccessFactors for more than $3 billion, Salesforce announced the acquisition of Rypple for a rumoured $65 million.
Rypple is an interesting entry into the HR technology space for Salesforce and probably indicates a different strategy towards the sector between Salesforce and SAP.
Salesforce has cloud-credibility coming out of its ears and assets like Chatter so a tactical product acquisition affords them the chance to ‘try’ the HR sector and write it off if it doesn’t work. At these prices, Salesforce has left its powder dry to deal again if it needs to.
SAP needs more than a tactical expansion of their product line. They needed cloud capability, HR technology and the management team to make it work. To get all of that, they paid the price. Given the valuation, SAP could still be consolidator in the market.
It’s still early days for both acquisitions but it will be interesting to see how two so opposite strategies develop.
Either way, I’d expect more consolidation …
Over the weekend, SAP acquired HR vendor SuccessFactors in a piece of news that was welcomed by snores among the Techcrunch consumer IT crowd.
At Forrester, Paul Hamerman gave a succinct summary of the valuation:
SAP is a paying a substantial premium to acquire SuccessFactors, a leading SaaS performance and talent management vendor. The press release of December 3, 2011 states that the deal price of $40 per share is a 52% premium over the Dec. 2 closing stock price. Even more startling is that SuccessFactors has a revenue run rate of roughly $300 to $330 million for 2011, and the acquisition price of $3.4 billion is more than 10 times revenue!
via Paul Hamerman
In other words, it’s a big number but what does it mean?
Without listening to the analyst calls, here are a few things the price probably tells us:
SAP needed the deal more than SuccessFactors – It’s hard to justify a 10x revenue multiple in this economy any other way.
SuccessFactors was not a forced seller – the opposite of the previous point but really worth stating. The SuccessFactors Board got a big number so obviously didn’t feel like a forced seller in this market.
The cloud business model in HR is the future – I noted before that IT professionals need to get over their cloud security concerns since the battle has been decided in the the HR tech market. Almost all of the innovation and new entrants are on some sort of cloud-based computing model. SAP has provided a huge validation of that direction.
Workday is the winner – If they are really really going for an IPO in 2012, this is a great valuation reference point.
Will it work?
As a bolt-on line of business acquisition, it’s hard to fault the logic. SAP is the top provider globally of transactional HR systems but weak in the more value-add areas of HR. SuccessFactors neatly provides both growth and innovation.
As an entry into the cloud, I’m not sure that it make any difference. SuccessFactors is still under 2% of the revenues of the combined entity and the addition of their multi-tenanted cloud offering adds another reference architecture to SAP’s portfolio rather than streamlining it. If they integrate it tightly, they are likely to lose the innovation they were hoping to buy and, if they don’t, they probably overpaid.
So far they have indicated that they will run it as a separate business. The bolder move might to follow IBM’s lead. When Big Blue bought Lombardi, Phil Gilbert from the Lombardi came to run the Websphere BPM product strategy.