Taleo and Vurv. Some Thoughts As More Information Becomes Available

In early May of 2008, Taleo announced it would buy Vurv for about $128.8 million in a combination cash / stock deal.

On July 1, Taleo announced the completion of its acquisition of Vurv.

I've been waiting to comment on this deal until I had access to more financial information. Although I still look forward to reading their 2008 year-end financial filings, enough information was made available this week to justify a posting.

I'll let others debate the the impact of this deal on the broader human resource marketplace (Is it good for customers?, Does this change the market?, Will consolidation accelerate among the vendors?, How will the competitors like SuccessFactors, Kenexa, Authoria, Plateau, Cornerstone OnDemand, and others need to respond?) because frankly, nobody will know the true impact for quite some time. What we do know is that historically, mergers and acquisitions benefit bankers more than shareholders.

Let's take a look at some updated numbers surrounding the Taleo / Vurv deal:

1. Taleo announced that the combined company expects 2008 revenue to be around $177 million. In the same announcement, Taleo said that "excluding the acquisition" they expect 2008 revenue to be about $158 million.

The difference between $177 million and $158 million is a strange number to me because obviously Vurv was doing more than $19 million in annual revenue. So there is some accounting here that I do not understand. We'll get a better indication of what Vurv's revenues were once Taleo files their 2008 year-end financials. This is only relevant (to me) so I can estimate what multiple Vurv received for their company. Typically, profitable web-based software companies (e.g., net margins of 20% or higher) should expect to get a minimum of 5x revenue but can fetch more than 7x revenue or 20 times EBITDA. According to the 2006 Deloitte & Touche annual "Technology Fast 500", Vurv’s revenue grew from $3.3 million in 2002 to $40.6 million in 2006. So assuming Vurv was doing $50 million at the time of the acquisition (I am guessing), the multiple they received would be between 2x and 3x. This leads me to believe that Vurv had little if any profit.

2. According to filings, the deal ($128 million) consisted of $34.4 million in cash (27%) and approximately 3.8 million shares of Class A common stock (73%) of which approximately $33.8 million in cash and approximately 3.3 million shares of Class A common stock were paid on the closing date.

This means the value of the stock component is about $94.4 million and assumes a stock price of 24.84 which Taleo has not seen since January 2008. Taleo's stock closed today at $19.65 (not bad considering the recent performance of the broader market). Based on today's closing price of Taleo's stock ($19.65) the total deal would have a value of about $109 million (15% less than original deal). I realize this is a useless figure but it does show the risk of a selling company's management in accepting the acquiring company's stock. It also shows why some company's love to use stock for acquisitions.

Interestingly, research shows that cash deals are more successful than stock deals. According to an article from the Kellogg School of Management at Northwestern University, "cash deals do better than stock deals is a matter of huge debate among both academics and practitioners. It's also something of a minor miracle because, all other things being equal, stock deals enjoy a distinct advantage over cash deals due to U.S. tax policy".

But honestly, Taleo could not have paid cash for Vurv it it wanted to. Taleo was losing money as recently as a year ago and their Q1 financials show a cash balance of about $90 million. Taleo had no choice but to use stock to buy Vurv.

3. As a result of the acquisition (according to Taleo), the combined company now serves over 3,400 customers, including 48 of the Fortune 100, and more than 2,800 small and medium-sized businesses.

True, this acquisition continues the trend of consolidation in the HR software marketplace. But as we've blogged about before, there are a lot of smaller HR / Talent Management software players entering the space and having success – we’ve been introduced to many of these firms when they purchase a membership to HRmarketer.com and have seen them cherry pick accounts from the larger HR software firms. So while the Taleo deal removes a top competitor, it is by no means smooth sailing. The management of Taleo has a lot of work to do and many challenges ahead. This is still a young industry in historical terms - the profitable and vast "mid market" is untapped and smaller talent management firms are on more equal footing when competing in this space.

So anything can happen.

Finally. Taleo also announced that they expect to cut about 160 jobs at Vurv and will incur related restructuring charges of $6 million to $6.5 million in 2008. This is a pretty significant staff reduction but not surprising. Honestly, I expected to see a higher number here and my guess is more will be announced in the next 6-9 months as the integration progresses.

We wish the management of Taleo success - and we congratulate the management of Vurv for a terrific run and for building a great business!

Posted by Mark Willaman

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