Wall Street Job Pays Off for Salary.com

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Includes: IBM, SLRY
by: 451 Research: Inorganic Growth

By Brenon Daly

Strictly from the view of the corporate treasurer’s office, Salary.com (SLRY) got paid while on Wall Street. The compensation management vendor went public at a valuation that – in rather short order – would never again be available to the company. The outsized chunk of money that it raised in its early 2007 IPO, which came right before the window for new offerings slammed shut, has helped fund its money-burning operations since then.

In its mid-February 2007 IPO, Salary.com sold 5.7 million shares at $10.50 each. Of that amount, 4.9 million came from the company, meaning it raised some $51m. (That relatively fat offering came despite the company only recording $23m in revenue in the year leading up to its IPO.) In the year after the debut, the stock basically traded at or slightly above the offer price. But in early February 2008, it broke issue and would never again change hands in the double digits. Kenexa (KNXA) bid $4.09 for each share of Salary.com.

The fact that Salary.com is getting taken off the Nasdaq at less than half the price that it came on the exchange underscores just how much Wall Street has backed away from risk. And, unfortunately for Salary.com – a tiny company that’s put up only red numbers – that has meant investors backing away from it. To get a sense of just how small Salary.com is, consider this fact: each year, the company generates about $40m in sales, roughly the amount that its acquirer, Kenexa, generates each quarter. And we can’t overlook the fact that its unprofitable operations had burned down its stash of cash to about $8m, compared to more than $20m last year.

So all things considered, the planned sale of Salary.com is not such a bad outcome for the vendor. It gets valued at about 1.6 times trailing sales, roughly matching the multiple in some other recent human capital management (HCM) deals. (For instance, we understand that ADP paid about $110m for Workscape earlier this summer, a transaction that valued the HCM vendor at about 1.8x trailing sales.) In any case, if Salary.com hadn’t gotten a Wall Street windfall in the form of an IPO, we’re fairly certain that the company would have had a much rougher go of it during the Credit Crisis, and probably wouldn’t even have fetched the $80m that it got in its sale to Kenexa, or any other buyer.