Evaluation of Cornerstone OnDemand’s acquisition of Saba Software, providers of Human Capital Management (HCM) software solutions.
Cornerstone OnDemand (NASDAQ: CSOD) completed its acquisition of Saba Software (a Vector Capital portfolio company) on April 22, 2020. Both companies offer learning and talent management solutions, a segment of Human Capital Management (HCM) product category hard hit by the COVID-19 downturn. In fact, while other categories like BI & Analytics recovered quite quickly after the initial COVID-19 decline, the broader HCM category has struggled to recover well into April / May.
Saba Software has had a long, messy history. Being a first-to-market player in the learning management segment, however, allowed them to remain one of the largest players in the space. Cornerstone, on the other hand, has become one of the largest and most successful standalone talent management platforms. This acquisition follows similar consolidation of the early 2010’s when SuccessFactors, Taleo, and Kenexa were all acquired by larger HCM / ERP vendors.
The COVID-19 Impact
COVID-19 wreaked havoc on many industries. With the majority of workforces working from home and unemployment at record highs, HCM was one of those hit hardest. HCM solutions like benefits administration, payroll, and learning management often price software on a transactional / volume basis. During periods of layoffs, transactional volume / demand often decreases significantly, and associated valuations drop as well. This is evidenced by HCM’s decline in YTD price change by 13%* .
Cornerstone OnDemand and Saba Software have felt the impact of COVID-19 strongly. At the time of the acquisition announcement in February, Saba Software was to be acquired for $1.4 billion (5.4x EV/Revenue). Just eight weeks later, the Company was ultimately acquired for $1.3 billion – a nearly $100 million dip in valuation. See transaction details on page 29 of our 1Q20 SaaS M&A Update
Since the acquisition, Cornerstone has been struggling. The company posted the fourth biggest loss in SEG’s SaaS Index with a -42.7% YTD price change(1) (See page 12 of SEG’s April SaaS Index Update). As stated on Cornerstone’s latest earnings call, Cornerstone’s new logo acquisitions are down, sales cycles are lengthening, and has revenue exposure with industries served (hotels, restaurants, leisure, retail, airlines, oil/gas, SMBs, and others).
As the ramifications of the pandemic, economic shutdowns, and stay at home orders ravages the U.S. economy, the long-term effects to unemployment and remote work is still unknown. Cornerstone OnDemand will need to adjust its strategy in order to be successful. Some areas which may fare well during the global pandemic are tools to promote remote work and collaboration. Learning management, in particular, is a key area which has been a long-term focus for Cornerstone OnDemand and may be its key to success in this new environment. Cornerstone is looking to be heavily integrated in the day to day lives of employees through learning and professional development tools. This could be the company’s saving grace and with the acquisition of Saba’s development team, cash flow, and ~3,500 customers, it could be an opportunity to thrive.
For more information on recent M&A transactions, please see SEG’s 1Q20 SaaS M&A Update.
*Data as of April 30, 2020.