Deal Making In The Software Market Heats Up As Ultimate Software Goes Private

Private equity activity in the software market is off to a strong start in 2019, with Hellman & Friedman the latest to make a headline-grabbing deal.

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Last week the San Francisco-based private equity firm reached an agreement to acquire Ultimate Software Group, making a roughly $11 billion cash offer to take the company private.  Hellman & Friedman, along with Blackstone Group, GIC, and Canada Pension Plan Investment Board are giving Ultimate Software shareholders a 19% premium to where the stock was trading the day the transaction was announced and a 32% premium to its thirty-day average stock price.  Both sides expect the deal to close in the middle of 2019.

Hellman & Friedman is just the latest PE firm to make an acquisition in the cloud computing market. With companies increasingly embracing cloud computing for all their business processes the cloud software companies have been booming. The recurring revenue stream and fragmented marketplace presents a bevy of opportunities for the PE market and thus the red-hot attention.

Ultimate Software, which has been around since 1990, makes cloud software for human resources departments. Some of its cloud offerings include software that enables employees to access tax documents and pay stubs, a platform to help HR departments handle compensation and cloud software that allows human resources professionals to survey employees.  The company has been in growth mode with sales increasing 21% last year. With cloud-based human capital management becoming a preference among corporations, Ultimate Software is expected to grow faster than peers including SAP, Oracle, and ADP that are moving to the cloud.

HR platform solutions are an attractive area of the software market because payroll is a requirement of every type of company, making for a huge addressable market. The deal comes with a 50-day go-shop period where Ultimate Software can seek other buyers.  Jefferies analyst Samad Samana told Bloomberg in a recent report that competing offers, particularly form strategic suitors, isn’t out of the question. What’s more, he said, more deal activity is on the horizon in the software sector given all the money PE firms and large enterprise software companies are looking to deploy.  

This year has been off to a strong start when it comes to PE activity focused around software companies.  In January Hellman & Friedman and Blackstone made a $5.34 billion move to take over Scout24, the German online classifieds company and in October it closed a $16 billion fund, the second largest buyout fund the firm has raised. Earlier this month Thoma Bravo raised $12.6 billion for what is now the largest software focused fund.