Wednesday, February 15, 2012

You Get What You Pay For - Tale of Two Acquisitions - SAP-SFSF and ORCL-TLEO

Two months ago, SAP made an offer to acquire SuccessFactors("SFSF"), the leading cloud based Human Capital Management ("HCM") company for $3.4B, a multiple of 10.2 on 2011 on expected 2011 revenue of $332M.  I published the following two blogs on this development back in December:

Salesforce followed suite and acquired Rypple, a company that employs badges and achievements to imbue the employee review process with a collaborative, social media-like experience.  Financial terms were not disclosed. (Source: EnterpriseAppToday)

Oracle was long due after the RNOW acquisition and it decided to follow SAP (for the first time) and Salesforce by acquiring Taleo ("TLEO"), the #2 company in the business, for $1.9B, a multiple of 6.15 on 2011 revenues of $309M. (Source: BusinessWeek)

As usual, folks are reaching out and saying whether SAP's SFSF acquisition is expensive due to a higher multiple it paid to SFSF shareholders and whether it rushed in too early.  I don't believe that SAP's SFSF acquisition is expensive by any stretch of the imagination.  "You get what you pay for" - this notion is quite true in this case. 

The business rationale SAP announced when it made the decision to acquire SFSF was that SFSF is:
  • #1 HCM solution in the cloud
  • has 15m users from company of all sizes (SalesForce has only 3m users) in diverse 60 industries from across the globe (Example: Siemens has 450K seats)
  • 3,500 customers in 168 countries
  • 60% recurring revenues from existing customers
  • 90% of the growth is organic as oppose to Salesforce
  • Has just 14% overlap with SAP customers – a tremendous upside for both companies (with total addressable market of 500m employees of all SAP customers)
On the other end, this is what TLEO disclosed it has: 
  • one of the world’s largest cloud deployments with nearly 16 billion transactions per year
  • manages 15 percent of all hires in the US 
  • has a customer base comprised of 5,000 businesses 
  • its Talent Exchange boasts 240 million candidates 
  • of the top 30 career sites, nearly half are powered by its technology.
(Source: Taleo)

The two companies can hardly be compared on these business metrics, so I am going to focus purely on financials.  SAP put a forward multiple of 8 on SFSF's expected 2012 revenues of $420M while Oracle is paying a forward multiple of 5 on TLEO's expected 2012 revenues of $379M.  There is this informal "rule of thumb" in place that states that one should pay a multiple of six to eight times of forward earnings for acquiring growth companies. 

Through following series of comparison charts, one could clearly see why SFSF will fetch a higher premium over TLEO.  Everything boils down to just couple of financial metrics and these metrics are: growth and operational efficiencies:

1. SFSF is a better growth story with CAGR more than DOUBLE than that of TLEO:

2. SFSF has far better cost structure than TLEO even though SFSF has grown revenues more than TWICE as fast:

 3. SFSF has somewhat better operating structure and is rapidly becoming more efficient with every dollar it spends on its operating cost. TLEO has done a good job of keeping its cost structure the same, one must wonder, why TLEO is not becoming operationally more efficient:

4. Making money from the cloud apps has been very tough business but this is very quickly starting to change as economies of scale kick in and both companies improve their net-income. SFSF definitely has done a good job in trimming its losses: 

5. The last two charts just compare the growth in revenue for the two companies since inception:

The bottom line is that SFSF is a better growth story and is operationally more efficient than TLEO so a higher multiple for SFSF is fully justified in my opinion. 

Did you know that, Oracle paid a multiple of 10x on Endeca's 2011 revenues? It is not just other companies (SAP or HP) that pay a forward multiple of 10x.
“Though Oracle and Endeca haven't talked about the acquisition price, I reported in October that California-based Oracle had agreed to pay $1.075 billion for the company (based on a document I obtained related to the deal).” (Source:

Happy Browsing!

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