Kenexa's acquisition of Salary.com is the latest big M&A story in the HR technology spaces (well, technically, that honor goes to Taleo who later the same day announced they were buying Learn.com for $125 million).
Kenexa paid $80 million for Salary.com, or $4.07 per share - a 43% premium over the previous days closing price.
I believe this is a good strategic buy for Kenexa who in their media release stated the following "compelling" reasons for the acquisition:
What's interesting is how Kenexa's list of compelling reasons mentioned nothing about Salary.com's talent management / performance management software which would lead one to conclude little if any value was placed on anything but Salary.com's compensation management solutions.
- Compensation management is highly synergistic with Kenexa’s current suite of talent acquisition and retention solutions.
- Salary.com has established a market leadership position in the on-demand, compensation management market.
- Salary.com and Kenexa have complementary business models as both companies deliver a combination of software and proprietary content through a subscription-based, on-demand model.
- Kenexa believes there is a significant opportunity to expand Salary.com’s adoption in large organizations and on a global basis.
As such, the acquisition appears to be a horizontal integration play by Kenexa which may explain the premium price of 2x revenue for a company losing over $20 million annually on just $46 million in revenue. And with just $8.77 million in cash & equivalents (down from $49 million in 2007).
So why the premium? Or was it a premium? There really is no way of knowing at the moment. 2x revenue for a SaaS is not great but it is not bad either in this economy and considering Salary.com lost $26 million and has never made a profit as a public company.
Aside from the reasons Kenexa offers for the deal, which I 100% agree with, I suspect Kenexa sees tremendous cross-selling opportunities with Salary.com and also expects to benefit from a huge reduction of costs/expenses by removing duplicate departments/operations. They can start by focussing on Salary.com's bloated selling/general/admin expenses of $37 million. Salary.com's R&D expenses of $10 million may also be reduced since Kenexa no longer needs to fund Salary.com's talent management software pursuits - which never really gained traction. In fact, it would not surprise me to see Salary.com profitable within 18 months and for the deal to pay for itself within five or six years after that. So maybe Kenexa did not pay a premium.
Whatever the case, I do think this is a win for customers and a win for both Kenexa and Salary.com and arguably for shareholders (unless you bought prior to 2009). The deal also illustrates the continuing challenge for cash strapped companies in the HR marketplace and how difficult it can be to grow horizontally outside your core competency.
The deal ends a very interesting ride for Salary.com as an independent company.
Founder Kent Plunkett started the company in April 1999 and raised just $8 million before taking his company public in February 2007 at $13.50 and bringing in $175 million - a 22x exit value to capital used ratio! Very impressive. The company's stock peaked in October of 2007 at around $16 before a long, downward slide to the acquisition price of $4.07 - down 69% since the IPO.
Best of luck to all parties.
Post by HRmarketer CEO Mark Willaman. Join Mark on LinkedIn and Twitter.
Labels: mergers and acquisitions