Today Kenexa (KNXA) announced the planned purchase via tender of Salary.com (SLRY).
On the plus side, the cloud technology space is begging for consolidation as companies find themselves using scores of vendors across their many business areas and processes. Companies are trying to broaden their offerings and companies are trying to consolidate their many vendors.
At the functional level the acquisition makes plenty of sense given that Kenexa has been focused on “talent management” and Salary.com has been in “compensation management” and on-demand HR solutions.
Both companies have the same business model, which is the classic on-demand/SaaS model we have all grown so accustomed to.
There are a few things that investors may or may not like about this transaction:
1. The price at just under 2x sales is reasonable. However, Salary.com hasn’t grown much in the past two years, no doubt thanks in part to the weak employment market. Worse still, the company has done little to control spending and has been losing money at an $18M annual rate.
2. Due diligence has been limited and Kenexa participated in an auction process, which means that they are likely to discover far more information once the deal closes and that there are bound to be some negative surprises.
3. Current customers of both companies may demand price concessions before any benefits of “cross-selling” can materialize. Most of the management commentary has been focused on opportunity but we know corporate customers are also interested in leveraging consolidation to get better “bundled” pricing.
We completed a quick Intrinsic Value analysis for Salary.com and it suggests that Kenexa is not wildly overpaying for the company. A scenario of restoring revenue growth to 10% and bringing SG&A down consistently from current levels to a more normal 50% of revenue generates an IV of $3.50/share.
As with most acquisitions, the value is going to be in how Kenexa can aggregate an excellent combined customer set with a rich set of data for better decision making and more efficient businesses processes.
It’s feeling like M&A activity levels around cloud computing are going to remain high this year. We’ve seen the recent activity in “big data” with Greenplum/EMC and 3PAR/Dell or HP and also the SaaS applications space.