Shares of human resources software maker Taleo (TLEO) are up $6.72, or over 17%, at $45.66 after Oracle (ORCL) this morning said it would buy the company for $46 a share, or $1.9 billion after factoring in Taleo’s cash and debt.
The deal adds to a string of take-outs lately in what are known as “software as a service,” or SaaS, companies, with Oracle having already said it will buy RightNow Technologies (RNOW), and SAP AG (SAP) having bought SuccessFactors (SFSF).
In the release, the company pledged to “create a comprehensive cloud offering for organizations to manage their human resource operations and employee careers.”
A question for the Street is what this may do to M&A activity and valuations for the rest of the SaaS group.
Sanford Bernstein’s Mark Moerdler, who has a Market Perform rating on Oracle, writes today that the deal may actually put a cap on buyout prices for fellow SaaS companies.
SaaS stocks rallied early in the session, but have since cooled: while Salesforce.com (CRM), the poster child for SaaS, is up $3.18, or almost 3%, at $126.98, Concur Tecnologies (CNQR) is now down 6 cents at $56.72 after rising to a high of $58.55; and NetSuite (N) is down 32 cents, or 0.7%, at $46.18. However, Kenexa (KNXA) and Cornerstone onDemand (CSOD) are up almost 2% and over 1%, respectively.
While SaaS peers have traded up this morning based on today’s deal, we believe the relatively low transaction multiple puts a cap on how high these SaaS stocks could rally, and also caps the price for the next deal. The low premium could be due to the lack of buyers and a somewhat large pool of targets.
Piper Jaffray’s Mark Murphy, however, takes the opposite point of view:
The deal further legitimizes the valuations for cloud-based assets and bodes particularly well for talent management vendors such as KNXA and CSOD. We remind investors to respect the underlying value of high-gross-margin recurring subscription SaaS revenue streams, especially those trading at low EV/revenue multiples, such as KNXA, as these companies are attractive acquisition candidates.
Murphy maintains an Outperform rating on Oracle shares.
Perhaps splitting the difference between the two, Nomura Equity Research’s Rick Sherlund, who rates Oracle shares and SAP shares a Buy, writes that the run-up in Taleo before the deal already incorporated some extra take-out premium in the stock price:
The purchase price of $46 per share in cash represents a one-day premium of 18% and a 30-day premium of 24%, well below the average of precedent software transactions of 33% and 52%. While this premium is below precedents, we note that shares of Taleo traded up 20% on the day of the announcement of SAP’s intent to acquire SuccessFactors and thus Taleo’s stock price likely already incorporated some take-out premium.
Sherlund has a Buy rating on CSOD as well.