Vista Equity Acquires Bullhorn – Private Equity Firms Continue to Outbid Strategics

Vista Equity, a leading investor in SaaS software businesses is acquiring Bullhorn, the pioneer in SaaS recruiting software. Bullhorn has been around since 1999 with tremendous growth over the past few years. Bullhorn supports some of the largest staffing companies in the world including Randstad and Kelly. Its software has been the gold standard for years and they continually improve upon the offering incorporating cutting edge solutions such as social recruiting. With its brand recognition, revenue growth and institutional backing there is no doubt this deal was shopped heavily to both strategics and private equity. The fact that it is being acquired by a private equity group is of little surprise. This reinforces a number of important themes regarding Private Equity activity that Clearsight has been following over the past 12 months and is the reason why nearly every process Clearsight manages includes leading private equity groups.

1. PE buyers are actively pursuing recurring revenue software businesses

While Private Equity has been investing in software businesses for over 20 years, the rapid evolution of the SaaS business model has made this sector much more attractive in recent years. Financial investors are focused on managing risk and as a result, episodic revenue models (i.e one-time perpetual licenses) are challenging. In the 1990s when PE firms started investing in software, prior to the advent of the SaaS (or subscription) model, the focus was on recurring maintenance streams. Because PE buyers wanted most of the revenue to be recurring, many of the PE deals of the decade were for slow growth companies with large recurring maintenance streams and low percentage of new license sales. These deals often employed leverage (lenders viewed maintenance streams as a low risk) and were done at typical LBO valuations of 5-7x EBITDA. Today, SaaS is the dominant software model and in many cases virtually all of the revenue is recurring. The major difference in the market today is that leading SaaS businesses combine top line revenue growth with the recurring revenue model and instead of having to focus on software companies sun-setting products as they did in the 1990’s today the market leaders in software are attracting interest from PE groups. The other major difference is how these deals are priced. Historically, we saw average multiples for software companies in the 2-3x revenue range and today’s SaaS businesses can achieve 10x revenue multiples, just ask SAP who paid 8+x revenue for Ariba and 10+x revenue for Success Factors.

2. PE buyers compete on price with strategics

The overhang in private equity has been talked about widely and the M&A market is now seeing the benefit of all the cash that PE firms need to be deploy. Many of our clients are surprised when PE firms outbid strategics in a process but it is becoming more and more common. It is less surprising to see firms like Insight bidding for a company like Quest Software (NASDAQ: QSFT)- which is a modest grower and is being acquired at less than 3x revenue – than it is to see Vista outbidding strategics for Bullhorn, which is believed to be valued in excess of 5x revenue. From a PE perspective, the SaaS model is the perfect storm allowing companies to combine growth with highly visible revenue streams. Consequently, the Growth Equity firms are comfortable paying multiples of revenue that could hardly be imagined 5 years ago. For companies that can combine 40+% growth (Bullhorn was growing at 40%) with 90% recurring revenue, Growth Equity firms feel like they get good downside protection in the form of recurring revenue and are much more willing to focus on the growth and attribute value to that growth.