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Analysis: Nimble HR software firms grab share from bigger rivals
(Reuters) - Large technology firms seeking new growth have acquired several HR software makers but the consolidation may, ironically, have opened the way for remaining specialist firms to grab market share.
Shares of Cornerstone OnDemand Inc, which helps companies hire and train employees, have jumped 64 percent this year, while Workday, a Silicon Valley startup that works with Cornerstone, plans an IPO after they were left out of a round of consolidation.
They are benefiting as German software giant SAP AG, Oracle Corp and IBM Corp take some time to digest HR software firms bought in recent months.
SAP bought SuccessFactors in December, Oracle swallowed Taleo in February and IBM acquired Kenexa Inc last month.
"This has been a near-term benefit to Cornerstone as its competitors focus on their integration challenges with their new parent companies," Nomura Equity Research analyst Rick Sherlund said.
Other HR software companies that may benefit from the consolidation include Ultimate Software Inc, and private companies such as SumTotal Systems, UK-based Lumesse, Peoplefluent, SilkRoad Technology Inc and Jobvite.
"Cornerstone has recently won one maybe two major deals where both SAP and SuccessFactors were the incumbents, proving best of breed trumps a soup-to-nuts solution," said Jim Landreth, an asset manager at investment firm 300 North Capital.
"Significant disruption" could be expected at Oracle as it folds most of Taleo's businesses into its Fusion product, said Landreth, adding that his funds have larger positions in Cornerstone.
Tech companies have often struggled with integration issues, losing sales momentum and market share. Oracle's purchase of Sun Microsystems and Hewlett-Packard Co's purchase of Palm are examples.
"If Cornerstone continues to grow at a high rate and the big boys screw it up, and it becomes a neutral Switzerland and emerges as a strong independent player in the market -- that's the best outcome (for it)," Barclays Capital analyst Raimo Lenschow said.
Workday, founded by ex-PeopleSoft executives after Oracle bought that firm, may sell $400 million in shares next month in an IPO.
Analysts forecast revenue at Cornerstone, which debuted on the Nasdaq in March last year, to jump 54 percent this year, according to Thomson Reuters I/B/E/S.
Of 13 analysts covering Cornerstone, nine have "strong buy," "buy" or equivalent ratings on the company's stock, while four have "hold".
The big firms, of course, are determined not to lose out to smaller cloud-based rivals and SAP and Oracle own the stickiest part of the HR system, the part that helps run payroll.
The ability to integrate all of a customer's HR needs will be attractive if it works seamlessly.
SAP's billings doubled in the second quarter, partly boosted by the SuccessFactors family of products. Oracle is yet to disclose details about how it is executing on the Taleo deal.
Automatic Data Processing Inc, a 63-year old payroll company with considerable muscle, and Salesforce.com Inc entering the HR software market with the acquisition of Rypple may also make the task more uphill for the smaller firms.
Oracle declined to comment for this article. SAP did not reply to an e-mail seeking comment.
"There is 60 percent probability of the big boys getting their act together and doing what they have done in every other part of their software industry," Barclays' Lenschow said.
"What we need to consider is 'can you keep the spirit of a software-as-service business alive as part of a colossal SAP or Oracle'," Lenschow said.
To combat the two big companies and their large customer bases and market muscle, smaller rivals must emphasize their more personalized service, unified system and strong alliances.
Cornerstone's successful partnership with Workday and their largely complementary products might woo customers away from the bigger players, said Thomas Otter, an analyst at market research firm Gartner.
Cornerstone provides companies with training tools and software to manage performance, while Workday deals more with employee data and payroll.
Analysts said many companies are now looking at Workday for customized answers to their problems as an alternative to packaged, less flexible products from bigger vendors.
Workday's revenue for the first half of 2012 nearly doubled from the year-ago period, according to its IPO filing.
(Editing by Rodney Joyce)
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