There was some M&A in the software space this morning as
Ultimate Software (ULTI 331.80, +53.97, +19.43%) agreed to go private. An investor group led by private
equity firm Hellman & Friedman is paying $331.50 per share in an all-cash
deal, for a total value of $11 bln, so this is a large deal. That's a healthy
19% premium over Friday's closing price of $277.83. Ultimate's Board of
Directors has unanimously approved this transaction.
Ultimate Software is a provider of cloud-based human capital management (HCM) software. Basically, its UltiPro platform helps companies handle HR, payroll, benefits, hiring, and time/labor management. Its platform reduces operating costs by eliminating the need to print and distribute paper communications, handbooks, forms, and paychecks. Ultimate also provides UltiPro functionality for use on mobile devices. Employees can manage their goals, provide feedback to managers, search and apply for career opportunities, access their own personal information, such as pay statements, and view their company's employee directory etc.
Some key takeaways
HCM is a growing business, it's an area where more companies want to automate better. HCM capabilities have historically been more premise-based, but companies are increasingly moving these functions to the cloud and ULTI is a play on that trend.
This deal is likely to spur investor interest in the HCM space and others could be acquisition targets. Names to monitor include Automatic Data Processing (ADP), Workday (WDAY), Paychex (PAYX), Ceridian (CDAY), Paycom (PAYC) and Paylocity (PCTY). In terms of valuation, ULTI is being acquired at 8.1x 2019E revenue. With a $62 bln market cap, ADP is much larger than ULTI so it's likely less of an acquisition target but they are a direct competitor. ADP trades a P/S of 4.4x.
As for the other names, WDAY is also much larger with a $41 bln market cap and it trades at a P/S of 11.6x, so it's pricier. PAYX is similar in size at a $26 bln market cap and it has a P/S of 6.9x. PAYC has a $9.1 bln market cap, so it is very similar in size, it trades at a P/S of 13.0x. Finally, PCTY is the small name in the group at a $4.0 bln market cap with a 8.8x P/S ratio.
Bottom line, compared to others in the space, ULTI is getting acquired at a reasonable P/S of 8.1x. We expect other HCM names will get a look. In particular, WDAY has been often mentioned as a takeover candidate. Perhaps a larger enterprise name like Oracle (OCRL) would be interested in beefing up its HCM offering.
Another thing to keep in mind is that this deal includes a 50-day "go-shop" period which permits ULTI to solicit other takeout offers. Ultimate will have the right to terminate the merger agreement to accept a superior proposal. It has been speculated that Oracle could join the fray for ULTI or perhaps another HCM name.
In sum, this looks like a fair deal for ULTI shareholders with a nice premium, although the valuation is a bit on the low side which suggests they could attract higher offers. It will be interesting to see over the next 50 days if other suitors come forward. The stock is slightly above the offering price, which suggests the market thinks there is a chance a higher bid comes in.
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