by Scott Denne
Hellman & Friedman’s $11bn acquisition of Ultimate Software provides the ultimate case study in rising valuations for human resources (HR) software vendors. The deal marks the largest HR software purchase and fixes an 11x trailing revenue multiple on the target, a multiple that’s increasingly becoming common for such companies as private equity (PE) money floods that corner of the software market.
According to 451 Research’s M&A KnowledgeBase, each of the three previous years have witnessed more than double the typical number of HR software transactions sporting a multiple at or above 5x TTM revenue. Strategic acquirers have been more willing to pay up – Ultimate itself paid 8.8x last summer in its $300m pickup of PeopleDoc, its sixth and largest acquisition.
But most of the recent, strong valuations have come from PE shops. Today’s deal provides one data point, as do Thoma Bravo’s purchase of PEC Safety and Marlin Equity Partners’ reach for Virgin Pulse. HR software has long been a PE favorite – but it’s also attracting the interest of buyout firms that are less experienced in software as many of these businesses have a strong services component. Last year, 49% of such targets were bought by PE shops, compared with just 25% at the start of the decade. (For context, our data shows that roughly one-third of all software providers were acquired by PE firms last year.)
Hellman & Friedman, which is leading the syndicate that’s buying Ultimate Software, is neither new to software or HR. It acquired Kronos, a maker of HR software mainly used by organizations with hourly employees, back in 2007, paying 3x. That’s not to say prevailing prices have tripled or quadrupled in the time between those two transactions by the tech-focused PE shop. For one, Kronos began its transition to SaaS only a few years ago, whereas Ultimate’s revenue is overwhelmingly SaaS.
The market has changed in that time as well. When Hellman & Friedman bought Kronos, HR software – like many categories of business applications – functioned as a record-keeping and workflow tool. While that’s still true today, we find that more companies are turning to HR software and the data it contains for strategic insights. According to 451 Research’s Voice of the Enterprise: Data & Analytics, 28% of businesses run analytics on their employee behavior data, roughly the same number that analyze IT infrastructure data.