Consolidation in cloud computing is gathering pace as companies jockey for position. Demand is growing for human resources software that improves the employee experience, and there is a growing appetite for mergers and acquisitions in this sector.
Witness the latest sign: Cloud-based human resources company Ultimate Software has accepted an $11 billion takeover bidOpens a new window from a group of private investors. The Nasdaq-listed company will now be taken over by a consortium led by Hellman & Friedman, a San Francisco-based private equity firm, with backing from BlackRock, GIC and the Canada Pension Plan Investment Board.
With earnings of $300 million in 2018 and sales topping $1.1 billion, up 20% on the previous year, Ultimate is the second-fastest growing business in HROpens a new window cloud software after Workday. Other rivals include SAP, Automatic Data Processing and Oracle.
Businesses are flocking to the cloud to manage a range of HR activities from recruitment to retirement. Legacy on premise HR software often relies on staff filling in complex spreadsheets. Many businesses have upgraded to automated cloud services, although many more have yet to make the leap.
International Expansion Encourages Centralized Operating System
Hellman & Friedman (H&F) and its band of investors are targeting Ultimate for its potential growth inside the US and worldwide. Last year, Ultimate paid $300 million for French start-up PeopleDocOpens a new window , which centralizes human resources documents from across sprawling organisations. The purchase has helped Ultimate expand its services internationally, giving it a foothold in the UK, France and Germany.
PeopleDoc’s platform also gives Ultimate additional services including customer contact centers, case management and employee file management.
Kronos, a similar business to Ultimate, is already in Hellman & Friedman’s stable. They offer the Kronos Workforce Central product, a set of human resource and workforce management applications that include scheduling and managing absences.
H&F has a history of combining acquisitions: Late last year, it merged two auto repair businesses. Kronos and Ultimate could potentially be combined for greater scale and merge capabilities in order to extract more value from the acquisition.
Based in Weston, Florida, Ultimate was founded in 1990 by current chief executive Scott Scherr. The company went public in 1998 and was one of the first to launch a software-as-a-service product with UltiPro in 2002, managing human resources activities that include payroll, benefits, holidays, pensions and onboarding new staff.
With 5,600 business customers, such as Subway Restaurants and Red Roof Inns, Ultimate manages human resources for 48 million workers. The new investors say that Scherr and the existing management team will continue to lead operations after the acquisition is completed.
Competitors Look to Expand as Revenue Predicted to Skyrocket
The coming years should see business boom: Cloud human capital management, as the sector is called, is expected to grow to more than $22 billion in worldwide revenues by 2023Opens a new window , up from $13 billion in 2016.
Leader in the sector is Workday, which posted sales of $4 billion last year. A large portion of its revenue comes from financial management and other back office, cloud-based software, an area the company plans to expand. In June 2018, Workday paid $1.55 billion to acquire cloud-based business planning and financial modeling start-up Adaptive Technologies.
Data analysis and financial modeling are key to business success as finance directors leverage data to become powerful players in the boardroom. The Adaptive acquisition gives Workday greater firepower in its drive to be the go-to provider for back office services.
Despite worries about a downturn in the technology industry, the cloud market is still buoyant as many companies have yet to shift in-house IT systems to the cloud. Human capital management is an attractive area, in part due to the sheer size of the sector — but also because providers can use HR services as a Trojan horse to capture other areas of back office services.
Ultimate’s takeover is not yet final. A clause in the agreement allows for a rival bid within 50 days, although given the excitement about human capital management in the cloud, a battle for control of Ultimate could be in the cards.