The ‘poster child’ and the ‘war horse’: What’s the rationale and the impact of this deal?
On 24 February 2020, Cornerstone announced a definitive agreement to acquire Saba Software for $1.395 billion. Two of the main players in corporate learning and talent systems are coming together to make the largest provider of people development systems. Through its combined scale and reach, additional R&D investment and heightened cash flow, Cornerstone believes this will give them the power to effectively compete against the growing power of Cloud HCM and ERP. What’s the impact? This is the Fosway analyst take.
Both companies are Strategic Leaders in learning systems. Cornerstone is a Strategic Leader in talent management and a Core Challenger in talent acquisition, Saba is a Strategic Challenger in both. This acquisition is no doubt a bold move by Cornerstone, and a big play that will impact the learning technology market significantly. But outside that, it is more questionable. Here’s why.
Led by Adam Miller, and in many ways the original poster child for Cloud technology in learning, Cornerstone has established itself as the leading (non-HCM) player in talent and learning systems by largely organic growth. Saba is the original war-horse of enterprise learning management. Under its period of ownership by Vector Capital, it has transformed through acquisitions (especially Halogen in NA and Lumesse in Europe) and the leadership of Phil Saunders into a highly profitable global force in talent and learning. Surely this is a marriage made in heaven?
In many ways, yes, this is transformative for Cornerstone. It consolidates a clear strategic leadership position in learning systems and removes its main legacy competitor. It strengthens its position in large enterprises, expands its talent footprint in the US mid-market, and adds a Strategic Challenger in talent acquisition in Europe (via TalentLink). Cornerstone plans to largely maintain Saba’s main go-to-market offerings (i.e. Saba Cloud and TalentLink), and existing customers on both sides will be dealing with a stronger and more globally diverse entity.
Maybe most significantly in our view, it also significantly accelerates Cornerstone’s own path to strong profitability and its goal of achieving the ‘rule of 40’ (where net growth + net profitability = over 40% per annum, a supposed holy grail for Cloud businesses). The deal is being funded largely (95%) in cash. Including the obligatory savings from ‘synergies’ – predicted at $35m p.a – it should also be accretive for Cornerstone investors and enable the company to repay loans quickly over three to four years.
What’s not to like?
In Fosway’s view, beyond the finance case which absolutely seems to make sense, from a competitive and capability standpoint, we don’t see the logic. Cornerstone was already large enough to have a dominant place in both learning and talent, although not yet in recruiting. But its biggest challenge was not Saba. It was getting eaten from above by HCM and eaten from below by disruptive specialists. Let’s look at both of these.
Over the last ten years, with the rise of Workday and the acquisition of SuccessFactors by SAP, the competitive dynamic for enterprise HR systems has firmly moved to the Cloud and become about Human Capital Management (HCM), incorporating strategic talent and learning as well as core HR. With its HCM Cloud suite, Oracle has now joined the party too. And the impact of the rise of Cloud HCM on the enterprise talent and learning market has been profound. The Cloud HCM leaders are much bigger than Cornerstone and growing faster. Corporate HR and IT buyers are attracted by the integrated HCM and single vendor story. And the HCM companies have built out their functional capabilities to the point where the decision to stick with best of breed solutions for talent and learning seems marginal. (In reality, this is debatable but that’s a story for another day).
The second threat to Cornerstone was from below; from disruptive specialists in parts of the talent lifecyle, effectively doing to Cornerstone what it did to Saba ten years previously. Whether it is Degreed or EdCast or Docebo in learning, or CultureAmp or Reflektive or Fuel50 in talent, or SmartRecruiters or Avature in recruiting, well-funded disruptive specialists have rapidly gained traction as more focused and more nimble competitors in the component markets that sit under talent and learning. Both Cornerstone and Saba have felt their competition in recent years, and all of the disruptor vendors love to tell their stories of replacing them in selective enterprise customers. This is by no means a rout, or even an inevitable loss. Cornerstone and Saba have both continued to grow in the last couple of years, but not at the rate they have in the past, and not without increasingly looking at acquisitions as a route to further growth. Organic innovation is faster in the disruptors, and whilst the leaders are also innovating, they are no longer setting the agenda.
What does this deal do to impact both these strategic threats? In reality, not a lot. Cornerstone is following the playbook on consolidation, but this move doesn’t seem to consider the growth that can come from acquisition in parallel markets. It fails to provide any additional functionality around time and attendance, workforce planning, core HR or payroll for example.
The deal consolidates Cornerstone’s market leadership position for talent and learning, and accelerates its path to $1 billion in annual revenues as well as its profitability and cash generation. That’s all good. But it also mires the company in the integration of the two businesses and pursuit of synergy cost-savings. As similar businesses, combining them does not really change the game on either of the strategic threats.
Whilst Cornerstone talks about the increased reach and opportunity to ramp R&D, it is still a big(ger) chimp in a world of HCM gorillas and fast-growing nano-bot disruptors. Whilst Saba brings some interesting capabilities, it is too similar to impact the disruptors. But maybe it now gives Cornerstone the size to make a meaningful acquisition in HR as well, or be acquired as a bigger HR vendor seeking to compete at the Tier 1 HCM table. It’s not clear that either of those scenarios is their plan, but time will tell.
Read the full press release here.
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