Seeking Alpha
Long/short equity, special situations, growth, momentum
Profile| Send Message|
( followers)  

Cloud computing aka software as a service "SaaS" is one of the hottest sectors in tech land. In early December, immediately after the SAP AG (SAP) takeover bid for SuccessFactors (SFSF), we wrote a two part article entitled "Cloud Computing Takeover Targets" (click here). The underlying thesis of our article was that with the October 2011 acquisition by Oracle (ORCL) of RightNow Technologies followed by the SAP acquisition of SuccessFactors that there would be pressure on all large software/computing companies to take heed and make their move to grab one or more of the existing players in the field or risk being "left at the station". In our prior cited article we highlighted ten cloud companies that we felt were logical takeover targets.

Our thesis was immediately confirmed by IBM's (IBM) takeover of one of our favorite targets, DemandTec, and, last week the thesis was reconfirmed by Oracle bidding for another of our highlighted favorites, Taleo. Thus, in two months fully twenty (20%) percent of the takeover targets we highlighted have been taken over.

We feel this latest cloud acquisition by Oracle (being their second in the field in less than six months) will turn up the heat on the other large players in the software/computing field to enter the "land grab" before all the prime real estate is gone. Therefore, we have decided to take yet another look at what we feel are the most logical takeover targets currently available in the cloud. Here are our five candidates:

Ariba, Inc. (ARBA)

Ariba is a $2.82 billion market cap company based in Sunnyvale, California with an average daily trading volume of 1.1 million shares. Ariba was founded in 1996 to revolutionize collaborative business commerce solutions. Today, the Ariba Commerce Cloud is home to more than 700,000 companies and is the leader in trading network volumes. Ariba is estimated to have earnings per share of $0.95 this year and $1.13 next year. Revenues should come in around $528 million this year and increase to $601 million next year. With its size, history and reputation Ariba would provide any company with an instant and meaningful presence in the cloud.

Kenexa Corporation (KNXA)

Kenexa is a $764 million market cap company based in Wayne, Pennsylvania with an average daily trading volume of 280,000 shares. The company operates in the same SaaS space as SuccessFactors. The company is estimated to earn $1.03 this year and $1.25 next year. Revenue this year should be $357 million and is estimated to increase to $408 million next year. As a pure play with good earnings Kenexa looks like an attractive bolt-on acquisition that could be done without much dilution. With recent cloud acquisitions being valued at 5 to 8 times current year revenues Kenexa not only is "bite sized" but offers the possibility of a significant takeover premium.

NetSuite, Inc. (N)

NetSuite is a $3.1 billion market cap company with an average daily trading volume of 401,000 shares. The company was founded in 1999 and is headquartered in San Mateo, California. NetSuite is a leading vendor of cloud computing business management software suites. NetSuite is the prized property in its playing field and would be a great acquisition. Keep in mind, with 2012 EPS estimated at $0.21 per share and revenues of $298 million this would come with some steep dilution. Earnings should increase in 2013 to $0.34 with revenues increasing to $370 million Also remember that the majority of the stock is held by insiders and with Larry Ellison as the largest shareholder it would seem logical that NetSuite is eventually going into the Oracle fold. It would seem to make sense for Oracle to bring this "in-house" sooner rather than later so that Oracle can offer a more complete suite of cloud solutions.

SPS Commerce, Inc. (SPSC)

SPS Commerce is a $307 million market cap company with an average daily trading volume of just 65,000 shares. The company was founded in 1987 and is based in Minneapolis, Minnesota. SPS Commerce is another 100% SaaS pure play. The company is profitable with earnings per share estimated at $0.43this year and $0.58 next year and revenue estimated at $70 million this year and $82 million next year. This company should be an easily digestible "bolt on" acquisition for any number of potential acquirers. Based on current cloud M&A valuations this company may also offer investor's a significant takeover premium.

Ultimate Software Group, Inc. (ULTI)

Ultimate Software is a $1.73 billion market cap company with an average daily trading volume of 206,000 shares. This company was founded in 1990 and is based in Weston, Florida. Like Taleo, Kenexa and Cornerstone this company competes in the same SaaS HR space as SuccessFactors. Ultimate is estimated to earn $1.01 per share this year on $330 million in revenue and $1.40 per share next year on $401 million in revenue. This is a well-run company that might be a good entry point for HP (HPQ) or any other company that wanted to have a significant and immediate cloud presence.

Source: 5 Cloud Computing Takeover Targets Revisited