With the economy starting to show signs of improvement the merger and acquisition market sure is heating up. This week SumTotal put a significant stake in the ground with their purchase of Massachusetts-based Softscape. Like many other vendors SumTotal now faces significant integration issues in order to build out their full talent management suite. Similar to the issues Kenexa has with the Salary.com or Taleo with Learn.com’s, Worldwide Compensation and Vurv, and ADP with Workscape’s . Integration of the technology, the client base and the company cultures are always extremely difficult. In fact, many industry experts say that 80% of mergers and acquisitions fail to derive shareholder value. From covering the industry for the last 12 years, I can unequivocally say that the following characteristics happen before and after a merger and acquisition.
1) Sales and Growth stop. The CEO and senior management team become consumed in the transaction and lose site of day to day operation.
2) Significant intellectual property and people leave every organization, willingly or unwillingly, taking with them industry good will and an HCM knowledge base and contacts that in many cases can never be replicated.
3) Integration always is much more challenging than ever estimated and usually takes years to complete. This takes the focus off of sales and is disruptive to the growth of the business in the short term. So just because they own the asset don’t assume it is integrated or you can get reporting across applications.
4) Rarely does 1+ 1 = 3 …and if it does it’s usually the guy who did the deal saying this not the people who have to live with the deal.
5) Not everyone wins. Many senior executives have been deleted in their equity investments over years and years of capital infusion. Generally employees and senior executives at firms being acquired do not have the good sense of the value of their equity until an acquisition takes place and most are usually disappointed. This includes the founders or the current operating CEOs in many cases. Many CEOs and founders acquire venture capital funds or debt to build their business. This dilutes their ownership or equity position, as well as the equity positions on several key managers. More often than not, unless the service is for an ungodly amount, the VCs or debt is paid off first for the owners and then employees can realize the equity from the sale. There are many ways to look at ways to grow your business, for example it may be better to own 100% but with opportunity for growth is harder because you don’t have the capital required. Or conversely you look at selling a substantial amount and having a smaller piece of the larger firm. Both theories have realistic outcomes but careful planning is required at the onset to meet these goals. In my past experience, where I owned 100% of a firm sold to the Washington Post, which was a very profitable and rewarding experience for me, other stakeholders did not make out as well. The new entity “Brassring” included several entities that were rolled up. Some of the founders, from the original Brassring aka Hiredesk, did not make it nearly as well as I did, in fact they became less than .02% equity participants.
Another caution or words o wisdom from someone who has seen and heard everything. Never say never! Over the years we have continually heard, “We are not for sale” (too many to name) only to be sold 6 months later, “We are only focused on the Talent Acquisition space for global 500 firms” (Taleo), “Our new investors believe in our management team and we’re here to stay” (Authoria - now on their third set of management in 2 years). What they really mean is for the short term this is the strategy we believe in but the market is changing and we will need to adapt to these changes in the future.

On a further note, as a leader or founder of a HCM firm, we have choices. It is important to note that even people who have had successful outcomes still choose different options when funding or starting their next company. At a recent digital puck meeting David Ossip, serial entrepreneur and current CEO of Dayforce and past CEO of WorkBrain, indicated that although he and past partners have seeded the new entity Dayforce he still needs to show up at due diligence meetings with his personal net worth statements. How crazy is that?! First of all having a VC does not guarantee you have money in the bank or a business model that works. Someone with 10M in the bank could be burning through 1M a month. It also does not guarantee that the business works. Often when businesses are sold or integrated to other products they become one of many product pillars that need attention and never get the development dollars required. Or in the case of David Ossips’ previous venture the acquiring company Infor had a different model that focused on maintenance revenue and cutting costs with minimal product development and sales effort. Not really a sustainable model for the long term but it is a model. I call it the GEAC model as they perfected this.

My final words of wisdom for those in the space planning their ultimate exit … In order to get lucky and have a great financial outcome you need 2 things to happen.
o       You need to be in the business for a long time and
o       You need to get lucky

So what can buyers learn from all this merger and acquisition talk… beware. Your top pick today could be in maintenance mode tomorrow or even discontinued. When evaluating contracts spend more effort on the contractual clauses that involve getting your data back

We are off to HR Tech next week so be sure to look for us on the show floor as I am avoiding the pressroom in hopes of finding the future rising stars!

On a separate note, I have booked a few briefing before HR Tech. Yesterday Saba’s briefing was informative and had a different view from the HCM world’s norm. They have adopted the view of the individual or person as being center or core to the human capital space and embed their lives in learning products which includes social networking in the central product into a suite that really focuses on what I would call knowledge management of an organization. They currently offer workforce planning (I am sure they define this differently than I do as they are currently only looking at the internal demographics of an organization and not a financial analysis or extra labor forces that are embedded in true workforce planning products), performance management with goals, objectives, succession planning, and compensation (as fairly new product) in addition to their core roots of learning. Although they are correct in assessing that no other HCM vendor has this suite of products, many such as SilkRoads, CornerstoneOnDemand, and Successfactors have most of this and much more.

As I mentioned in a previous blog I thought this would have been an excellent acquisition for Taleo, someone who is very strong in the recruitment space, which Saba currently doesn’t touch. I am beginning to think that Bobby (their CEO) is the only CEO in the HCM space who may outlive me! I’m still a bit skeptical on the company social network without very strong integration points to Linked in or Facebook. Having lived in the social networking environments with HR.com for the past five years the contribution and activity level traditionally follows an 80/20 rule. 20% of our audience are active participants were 80% just look and consume. In order to create an internal corporate social environment and be successful I really believe these numbers need to be reversed. One way to do that is to have the record of choice to be a Facebook or LinkedIn account and have apps integrated to the corporate social network. We’ve yet to see this happen as most HM vendors believe they need to own the desktop or the personal record.