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More Acquisitions May Be Ahead in Race to the Cloud

by Dec 5, 2011, 7:33 pm ET

There’s nothing like a big-buzz acquisition to lift the boats in the HR SaaS harbor. Taleo, Kenexa, and even pricey Salesforce saw jumps in their stock today as investors reacted to the weekend news that ERP vendor SAP was buying SuccessFactors.

Taleo and Kenexa were both up by double-digits. Salesforce, trading well over $100, was up 4.5 percent. SuccessFactors, as to be expected, was the big winner, catapulting nearly 52 percent to close just below the $40-a-share SAP will pay.

The rally was to be expected, given the speculation about who might next be an acquisition target in the talent management/HR software sector. It was mere minutes after the conference call SAP held Saturday morning to discuss the sale that analysts began speculating about which company would be next to get bought up by whom.

Except for a bizarre TechCrunch post characterizing the deal as a yawner, the rest of the business press, and especially the HR analysts, saw the deal as both a validation of the cloud computing model and the likely start of an M&A war among the biggest names in business software.

Over at ZDNet, Michael Krigsman, CEO of tech consultancy Asuret, Inc., said the deal is a declaration that “CLOUD HAS ARRIVED.” (Caps are his).

MarketWatch today quoted JMP Securities analyst Patrick Walraven telling investors: “We expect this M&A trend to continue as it reflects the competitive pressure traditional software vendors are feeling from software-as-a-service companies and the margin pressures software-as-a-service companies face as they attempt to rapidly scale their distribution.”

The MarketWatch report cited an investment note from Citigroup analyst Walter Pritchard saying: “There is potential for Taleo to benefit here. Long term, we expect that Taleo will face a more competitive landscape and thus we’d expect will ultimately end up as part of a larger company. Oracle looks like the most likely candidate here.”

Several weeks ago Oracle, which, like competitor SAP, is heavily invested in the on-premises enterprise market, announced a deal to buy RightNow Technologies. The company is an SaaS provider of CRM and customer service solutions.

Thomas Kurian, EVP with Oracle Development, said of the acquisition, “Oracle is moving aggressively to offer customers a full range of Cloud Solutions including sales force automation, human resources, talent management, social networking, databases and Java as part of the Oracle Public Cloud.”

What does this mean for HR leaders?

First, as Krigsman says, the SAP acquisition of SuccessFactors is a validation of the cloud computing model. While there are different varieties of SaaS, all are cloud and all have the virtue from a financial standpoint of being less expensive to buy and manage. SuccessFactors has made a strong case for SaaS, building its business entirely in the cloud when that was considered a limiting business model. When Siemens AG embraced SuccessFactors in 2009 for talent and performance management, the company’s pioneering strategy was vindicated.

However, as Josh Bersin observes in his analysis of the deal, “The HR software market is highly fragmented, and for this acquisition to pay off over time the companies must build a strong integration roadmap.” While he is not at all certain that the integration will be either swift or easy, he points out that the trend for the ERP providers is talent management integration.

“If SuccessFactors gets bogged down with lots of integration, will they be able to keep pace with the billions of dollars of investment going into the ‘next generation’ of talent management?” he writes. “History says no, but time will tell.”

Analyst Ray Wang and Forrester’s Paul Hamerman both make similar observations about on-premises HRMS and cloud human capital management service. The former are the transactional systems that aren’t so nimble or innovative, thus enterprises with these systems tend to run best-of-breed HCMs in tandem, rather than use those solutions from their on-premises vendor.

As Wang writes, “While the core offerings provided a solid approach, these applications remained in the systems of transaction world and lacked many of the newer requirements for systems of engagement.”

Hamerman makes the same observation, writing, “The co-existence of best-of-breed talent management solutions (typically SaaS) alongside core HRMS (typically on-premises) is quite common.”

In other words, expect to see more consolidation as the largest vendors look to acquire the cloud expertise and market presence of HCM vendors with a hearty SaaS business.

Bersin says it directly:

This move is likely to set up a chain reaction. Oracle could decide to acquire Taleo. ADP could decide to acquire Cornerstone. Mercer could acquire Peoplefluent. IBM could decide to acquire another series of vendors. While I think this acquisition still has many questions to answer, large vendors will now see this as “the beginning of the end” of the era of independent talent management vendors — setting off a chain reaction of other acquisitions. I believe this market is still very young and has a long way to go — but the bigger vendors may just feel it’s ready for consolidation.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.