June 15, 2016, Posted by Phil Wohl
Followers of the HCM software landscape have long been awaiting that high profile signature SaaS M&A transaction that would “break the dam” and lead to a flood of copy-cat transactions.
We’ve recently seen this type of feeding frenzy play out across other areas of enterprise software, such as Email Marketing, eCommerce Platforms, Social Marketing, Web Content Management and Web Security.
For the last big HCM consolidation wave, you have to go way back to 2012, when Oracle-Taleo, IBM-Kenexa and SAP-SuccessFactors all occurred in rapid fire succession. Since then, there has been a steady stream of acquisitions by established players such as Kronos, ADP and Bullhorn, as well as newcomers like LinkedIn, Workday and Cornerstone.
However, the vast majority of these deals were acquisitions of technology and talent, as opposed to healthy stand-alone businesses. In fact, since January 2013, there have been only five premium HCM transactions (i.e. with an enterprise value greater than $400 million)– not a great M&A track record considering the $3 billion+ of venture capital that has poured into the HCM sector in recent years.
Microsoft’s $26 billion purchase of LinkedIn earlier this week left many HCM software CEOs, VCs (and bankers!) hoping that this might be the catalyst for large strategic exits, rather than the smaller tactical transactions we’ve become accustomed to seeing.
The optimistic scenario goes something like this: with Microsoft making a dramatic entrance into the HCM arena, the Big 3 (Oracle, IBM, SAP) as well as the top tier aspirants (Workday, Cornerstone, Ultimate, Infor, ADP, etc.), will need to quickly fill out the white spaces in their product portfolios via strategic M&A in order to effectively compete with the $400 billion behemoth from Redmond.
What’s more, the optimists postulate, once Microsoft fully unwraps its new present, Satya and team will find that LinkedIn has some good building blocks in Talent Acquisition and Learning, but will need to return aggressively to the M&A market in order to add capabilities in other segments that enterprise customers will demand they play in, such as Talent Analytics, Goal Management, Performance Management, Workforce Planning, Culture Management and Core HR.
I hate to be the bearer of bad news, but don’t hold your breath. The more we learn about the transaction’s rationale, the more we can conclude that this was not an HCM-driven transaction. Instead, Microsoft was primarily interested in differentiating Microsoft’s cloud software offerings (especially Dynamics CRM) by embedding the data from LinkedIn’s professional network. It stands to reason that the primary objectives going forward will be to increase the size of the network and generate automated insights from the network—insights that will improve the productivity of Microsoft’s business users.
If our hunch is correct, the biggest beneficiaries of this deal are likely to be Indeed and Glassdoor. Over the next several years, these companies can expect to capture a much bigger share of HR department marketing budgets as LinkedIn pivots their R&D efforts away from recruiting products and towards Professional Cloud integration. Who is negatively impacted? The dozens of HCM startups who were counting on a sale to LinkedIn as their ultimate exit. That’s not to say that LinkedIn’s M&A spigot will be turned off completely, but we can certainly expect it to be more narrowly focused. And big splashy product expansion deals, like the $1.5 billion acquisition of Lynda.com, are probably off the table for the foreseeable future.
Phil Wohl is a Partner at Catapult Advisors, an investment bank providing M&A and capital raising advice to leading software and internet companies. https://www.catapultadvisors.com