There’s a nice lift to stocks of hosted software companies this morning, following German software giant SAP AG’s (SAP) announcement Saturday that it would purchase San Mateo, California-based SuccessFactors (SFSF) for $40 a share, or $3.4 billion in cash, a 52% premium to the stock’s close on Friday.
Hence, SFSF is up by that much this morning, at $39.75. But rivals are also levitating. Taleo (TLEO), the most obvious comparable, is up $5.28, or 16%, at $38.24. Taleo in fact got an upgrade today, from R.W. Baird’s Mark Marcon, to Outperform.
Jefferies & Co.’s Ross MacMillan writes that the purchase price represents a multiple of 7.7 times enterprise value divided by sales, based on next year’s estimate, and is “not cheap.”
He also thinks there may be more deals ahead:
Despite investors thinking ORCL’s acquisition of [RightNow] RNOW was a one-off, we now have an even bigger SaaS deal. Other HCM vendors will likely catch a bid, but other SaaS domains not well addressed by big apps guys could also see interest, e.g. Concur or Ariba (ARBA).
And Needham & Co.’s Michael Huang writes something similar this morning:
it’s fair to conclude that SaaS M&A is heating up. Looking into our crystal ball, we believe that TLEO could be the SaaS name that gets acquired next and potentially by ORCL. Additionally, this takeout reflects the rising strategic importance of SaaS to large enterprises. CRM (5.6x) arguably is the highest quality , best scaled SaaS name in our universe that stands to benefit disproportionately from rising SaaS tide.
Citigroup’s Walter Pritchard, who rates Taleo Outperform, thinks it could end up in Oracle’s (ORCL) hands, ultimately. And he thinks potential M&A targets are even broader:
We expect this deal will ignite some excitement around small cap take-outs in software. As a result, we expect others in our universe such as FTNT, FIRE, WBSN, QLIK may also benefit as investors look for takeout candidates. Near- term, the SAP acquisition of SFSF likely takes SAP out of the market as an acquirer. We believe Fortinet (FTNT) and Qlik Technologies (QLIK) have higher odds of an attractive M&A outcome than SourceFire (FIRE) and Websense (WBSN).
As for what SAP gets out of it, Sanford Bernstein’s Mark Moerdler, who has a Market Perform rating on SAP, writes this morning that SAP is buying SuccessFactors to enhance its “ByDesign” product for enterprise resource planning (ERP). He thinks that product may “gain market traction” over the “longer term,” but it’s a couple years out, at least, and hence, not something to get excited about.
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