Consolidation in Cloud HR continues - Cornerstone OnDemand to acquire Saba

Brian Sommer Profile picture for user brianssommer February 25, 2020
Summary:
In less than a week, another big deal in the HR/HCM space has been announced: Cornerstone OnDemand will acquire Saba. This $1.3+ billion deal is important to note and brings its own special characteristics.

Image of cornerstone logo

Late last week, Ultimate Software and Kronos announced a merger. This week, it’s Cornerstone OnDemand (CSOD) and Saba. Before we do the deal review, here’s a prophetic point I made in last week’s piece:

I can see why the deal is happening and it augers a new era/wave of consolidation and maturity in cloud HR solutions. I understand the financial underpinnings and synergies for the deal, too.

That was true for last week’s deal and I believe it will be so for this one, too. Consolidation definitely is underway in the HCM tech space.

The deal details

Here’s the quick CSOD/Saba deal review:

  • CSOD will pay $1.395 (USD) billion for Saba
  • The vast majority of that amount will be financed via CSOD’s cash on hand and short-term debt
  • Combined, the company should have over 7,000 customers, 75 million users and $818 million in ARR
  • Both parties will bring a number of large enterprise and mid-market company logos to the deal
  • Combined, the two companies will deliver approximately $838 million in revenues. Today, it appears CSOD will contribute $577 (i.e., total 2019 revenue) million and Saba would contribute approx. $243 million.
  • Adam Miller, CEO of CSOD will be CEO of the combined firm. Phil Saunders, CEO of Saba, will become Chief Operating Officer of the combined firm.

Planned merger benefits

The new company will go for many of the same synergy benefits that most acquirers seek. They’ll pursue economies of scale in back office functions, data center operations, etc.

Image of Cornerstone OnDemand Saba slide

What the slide above doesn’t show are expansion opportunities for the combined firms. We should expect CSOD to cross-sell Saba solutions into its own customer base and vice versa. Those sales should occur with substantially less sales and marketing expense compared to net-new deals. Those infill/cross-sell deals should help grow margins and aid in rule of 40 target compliance.

CEO Adam Miller told analysts he expects to better leverage the combined firms’ global R&D efforts. He also expects other deal dynamics including:

  • More focused development around Talent Management and Talent Experience
  • More sales successes with global marquee customers

The big goal

CEO Miller wants to grow CSOD into ‘one of the most successful cloud companies in the world’. Doing so will take some work.

First, there are competitors. CSOD, post-deal, will be a sub-billion-dollar (revenue) firm for at least another year or two. It will face larger HR technology competitors in the $3 billion revenue range. Those vendors include Workday and the newly combined Ultimate/Kronos firm. Even larger competitors, like SAP and Oracle, may eye a larger CSOD more warily. CSOD has maintained a peaceful relationship with Workday and other payroll providers for much of its existence. How friendly those providers will be now remains to be seen as the new CSOD will have much broader HCM/HR software footprint and will become a more material global solutions provider, too.

Second, there are all of those different products, product architectures and data models.  Saba bought Lumesse in 2018, Halogen in 2017 and Human Concepts long before that. CSOD is no stranger to acquisitions either. They acquired Sonar6 (a personal favorite of mine back then) about 8 years ago. Six years ago, they acquired Evolv and two years ago, they acquired Workpop and Grovo.  The Saba acquisition is, in my estimation, considerably larger than any of these. CEO Miller indicated that Saba was into well into the integration of Lumesse and that prior acquisition integrations are done. CSOD has, I believe, integrated all of its prior acquisitions. But, integration doesn’t always mean that all products are on the same architecture and share a common data model.

This will be an important matter as CSOD/Saba will be competing with firms like Workday and Ceridian. Workday makes its single architecture and architectural purity a key selling point (i.e., The Power of One). Ceridian’s Dayforce products have a similar singular architecture. A collection of acquired, but integrated, products generally will not fare as well in a competitive deal (all other things being equal). CSOD/Saba will nonetheless be a force to contend with in deals where robust learning, learning content, etc. is a key deal driver.

Third, what happens to CSOD’s partnerships? For much of its existence, CSOD tried to be the Switzerland of software. It stayed neutral. When CSOD was mostly a learning solution firm, big HR suite and ERP competitors wanted to partner with them. CSOD had learning tech to offer and the competitors had payroll & HCM capabilities. Even after CSOD created a fairly complete HCM suite, it still lacked a payroll module and maintained many of those same partnerships.

But CSOD has been growing and will get close to the $1 billion revenue mark before long. As a bigger firm, with more functionality and global coverage, competitors may be less inclined to partner with them. It will be interesting to see how Adam and the gang manage this.

On the other end are the partnerships with integrators, resellers, content providers, technology partners, etc. that both firms possess that could become real assets. These relationships can enhance functionality, extend capabilities, make vertical extensions possible, introduce CSOD/Saba into new accounts, etc.

The deal brings additional global opportunities

The Lumesse part of Saba had a fair bit of EU customers. Saba itself had a lot of global accounts, too.  CSOD has been implemented in much of the world. Added together, the new company should be able to better leverage its sales offices, development centers, data centers, etc. in an even more global and productive manner.

This could be a real positive as more and more companies want a truly global solution. They’re so not interested in solutions that only work in U.S. English for companies that are headquartered in the U.S., Canada, U.K. and Australia. Global is so much more than multi-national and it’s what businesses want today.

Deal trivia

  1. Vector Capital originally got involved with Saba back in 2013 but the relationship deepened in 2015 when Saba was taken private. Now, five years later, Vector may get its liquidity event.
  2. After Phil Saunders took the helm at Saba, I told him that the culture and customer service ethos of Halogen was a major asset. A year later, he confessed that it was. I hope CSOD can find a way to incorporate some of that post-merger.

My take

Compared to last week’s Kronos/Ultimate deal, this one’s way more digestible. While I wrote about all manner of post-merger integration issues in last week’s piece, many of the same concerns will apply here, too, although the degree of difficulty may be less.  

CSOD/Saba customers will want to watch for announcements from the company over the next few weeks and months. I’d expect we’ll hear a lot about product roadmaps, product support plans, etc. at Cornerstone’s user conference in a couple of months.

It’s now fairly safe to say that the era of micro- or mini-HCM suites is coming to an end. Buyers want a single vendor solution, wherever possible, and old functional moats are going away. CSOD/Saba is way bigger than before – now it must create a seamless, one UX, one data model, etc. solution to sell.

Is more consolidation in the offing? Well, Ceridian looks like a good target for someone to snap up. And Google or Microsoft (who already owns LinkedIn) could be the next big acquirers in the space. But, in the short-term, I suspect we’ll see a lot more tuck-in deals not large acquisitions.

This deal will likely trigger additional FUD commentary from Cornerstone’s competitors – I can’t wait to hear the spinning that’s to come.

For more information on Saba and Cornerstone OnDemand see:

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