Another Day, Another Deal For Oracle

By Stephen D. Simpson, CFA | February 13, 2012 AAA

If growth through acquisition is supposed to be bad (as some academic types suggest), Oracle (Nasdaq:ORCL) CEO Larry Ellison very clearly doesn't care. Less than half a year after the $1.5 billion acquisition of RightNow, Oracle is at it again with the acquisition of cloud-based HR specialist Taleo (Nasdaq:TLEO).

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The Deal
Taleo certainly cut to the chase in its PR announcement (titled "Oracle Buys Taleo"). The companies have reached an agreement on a deal that will see Oracle buy Taleo for $1.9 billion in cash. That values Taleo at $46 per share, or about an 18% premium to the prior day's close.

Based on a forward revenue estimate of almost $380 million for Taleo in 2012, Oracle is paying just five times forward revenue. That's well less than the eight times multiple that SAP (NYSE:SAP) shelled out for SuccessFactors (Nasdaq:SFSF) and less than the company paid for RightNow. It also happens to below the informal "rule of thumb" multiple for takeouts of growing software companies that ranges from six to eight times forward sales. (For related reading, see Key Players In Mergers And Acquisitions.)

What Oracle Is Getting
Some of the lower premium can likely be explained by the lower growth of Taleo relative to SuccessFactors. While Taleo is more profitable, time and time again the markets have shown that they will pay a lot more for growth in technology than profitability.

Still, it's not like Taleo is pokey. For the fourth quarter (which Taleo also reported after the announced deal) the company delivered 30% year-on-year revenue growth. That's less than SuccessFactors, but again, hardly terrible.

In buying Taleo, Oracle is buying the number two player in cloud-based HR software, but it's ranked number two by a very close margin. Relative to SuccessFactors, Taleo is stronger in services like onboarding and recruiting, while SFSF has the edge in performance management. This, too, may explain part of the difference in multiples - SFSF seems like a more natural fit with what SAP and Oracle do today, and arguably, an easier sale to make with prospective clients.

Who's Left?
With the top two companies off the board, investors are turning their attention to the remaining independents in the space. Kenexa (Nasdaq:KNXA), Cornerstone OnDemand (Nasdaq:CSOD), Saba (Nasdaq:SABA) and Ultimate Software (Nasdaq:ULTI) all traded up, at least initially in response to this announcement. That said, Kenexa is the only one of these with size and scale similar to Taleo and SuccessFactors.

This is not uncommon; investors see a deal and start playing "who's next?" Investors should be careful playing this game, though. First of all, the survivors now have to compete with SAP and Oracle, and that's hardly a good thing. Secondly, there isn't a surplus of potential buyers. Maybe a company like IBM (NYSE:IBM) would have some interest, but I suspect there are more sellers than buyers right now. I do wonder, though, if a company like NetSuite (NYSE:N) would like to do something here as a way of bulking up its own offerings and becoming a larger player in cloud/SaaS implementation.

The Bottom Line
Did Taleo get a good price? For the most part, I would say yes. Taleo's product positioning and market share wasn't going to drive a top-of-the-charts premium, and the company is not exactly bowing out cheap.

For Oracle, this is just business as usual. If they can't build it, they'll buy it. The Taleo acquisition isn't a transformative deal by any means, but it's a logical continuation of a proven business plan for one of the largest software companies in the game.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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