Thursday, February 7, 2019

CPPIB, GIC Take Ultimate Software Private?

Private Capital Journal reports, CPPIB to invest in Ultimate Software US $11B privatization led by Hellman & Friedman:
An investor group led by Hellman & Friedman and includes Canada Pension Plan Investment Board (CPPIB) has entered into a definitive agreement to acquire Ultimate Software (NASDAQ: ULTI), a leading global provider of human capital management (HCM) solutions in the cloud, in an all-cash transaction for US $331.50 per share in cash, representing an aggregate value of approximately US $11 billion.

Other members of the investor syndicate include Blackstone, GIC, and JMI Equity.

The transaction, representing the largest SaaS public to private, is expected to close in mid-2019, subject to stockholder approval and other customary closing conditions including regulatory approvals.

Ultimate Software currently employs 5,144, up from 4,408 reported in November 2017. Upon completion of the transaction, Ultimate will continue to operate under the leadership of CEO Scott Scherr and the existing senior management team.

As of March 8, 2018, institutional investors, including T. Rowe Price Associates, Inc., FMR LLC, Janus Henderson Group, BlackRock, Inc., and The Vanguard Group, collectively controlled 15,352,475 Ultimate Software common shares or 49% of the outstanding shares.

News Release

Ultimate Software Announces Agreement to be Acquired by an Investor Group Led by Hellman & Friedman to Operate as a Privately Held Company
  • Ultimate Software Stockholders to Receive $331.50 Per Share in Cash;
  • Ultimate to Continue Driving HCM Innovations Under Private Ownership
Weston, FL, February 4, 2019 — Ultimate Software (Nasdaq: ULTI), a leading global provider of human capital management (HCM) solutions in the cloud, today announced that it has entered into a definitive merger agreement to be acquired by an investor group led by Hellman & Friedman (“H&F”), a leading private equity investment firm, in an all-cash transaction for $331.50 per share in cash—representing an aggregate value of approximately $11 billion—after which Ultimate Software (“Ultimate”) will operate as a privately held company.

Under the terms of the agreement, all Ultimate stockholders of record will receive $331.50 in cash for each share of Ultimate’s common stock held upon the closing of the transaction. This price represents a premium of approximately 32% over Ultimate’s volume-weighted average price during the 30 trading days ending February 1, 2019, and a premium to Ultimate’s all-time high closing share price. Ultimate’s Board of Directors has unanimously approved this transaction and recommended that stockholders vote in favor of the transaction.

Upon completion of the transaction, Ultimate will continue to operate under the leadership of CEO Scott Scherr and the existing senior management team. The privately held company will be owned by an investor group led by Hellman & Friedman in partnership with significant investors Blackstone, GIC, and Canada Pension Plan Investment Board (CPPIB), and other investors including JMI Equity. The transaction represents the largest SaaS public to private.

“The transaction provides our stockholders with a substantial premium. Our decision was also made with the best interests of our 5,144 employees and our more than 5,600 customers at heart. This change will bring meaningful benefits to our employees and customers—both in the long and short terms. Since all of our employees are given equity in Ultimate when they join us, as stockholders, this transaction will result in immediate financial upside for them. Today’s announcement will also allow us to make additional, prudent investments in our products and services to better serve our customers,” said Scott Scherr, CEO, president, and founder of Ultimate.

“Our customers will benefit from our ability to bring new features and services to market more quickly, while still enjoying the same high level of service they have with Ultimate today, or better, with new innovations to our offerings. Hellman & Friedman is in full alignment with our vision to serve the global HR market, while preserving our unique company culture and mission,” said Scherr.

For almost 29 years, Ultimate has focused exclusively on helping businesses improve the experience of their employees through leading HR and payroll solutions, and in recent years, through a comprehensive human capital management suite. At the end of 2018, Ultimate’s total revenues exceeded $1.1 billion and the company currently serves more than 5,600 companies worldwide, with more than 48 million people records in the cloud. After the transaction is complete, Ultimate will continue to develop, market, deliver, and service its suite of human capital management and employee experience solutions globally—including HR, payroll, benefits management, talent acquisition, talent management, workforce management, employee sentiment analysis, and HR service delivery—with no changes to the markets Ultimate serves and no changes to its mission: put “People First.”

“Ultimate’s market leadership in the human capital management segment, and the company’s impressive track record of growth, are built on the outstanding quality of its software and its dynamic and motivated employees. The company deeply understands the essence of human capital management, having itself been recognized with numerous best workplace awards from leading publications for its exceptional mission-driven culture,” said David Tunnell, partner at Hellman & Friedman. “We look forward to building on Ultimate’s successes, working along with our investment partners: Blackstone, GIC, CPPIB, and JMI Equity.”

Martin Brand, senior managing director at Blackstone, added, “We are excited to partner with Ultimate and this investor group to support the strong growth and culture of this exceptional company.”

The transaction is expected to close in mid-2019, subject to stockholder approval and other customary closing conditions including regulatory approvals.

The definitive agreement for the transaction includes a 50-day “go-shop” period which permits Ultimate’s Board of Directors and financial advisor to actively initiate, solicit, and encourage alternative acquisition proposals, and potentially enter negotiations with other parties that make alternative acquisition proposals. Ultimate will have the right to terminate the merger agreement to accept a superior proposal subject to the terms and conditions of the merger agreement. There can be no assurance that this 50-day “go-shop” will result in a superior proposal, and Ultimate does not intend to disclose developments with respect to the solicitation process unless and until the Board of Directors makes a determination requiring further disclosure.

Goldman Sachs & Co. LLC acted as exclusive financial advisor to Ultimate Software, and Stroock & Stroock & Lavan LLP provided legal counsel. Qatalyst Partners acted as financial advisor to the investor group and Simpson Thacher & Bartlett served as legal counsel to Hellman & Friedman.

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the best interests of 20 million contributors and beneficiaries. In order to build a diversified portfolio, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At September 30, 2018, the CPP Fund totalled C$368.3 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.

About Ultimate Software

Ultimate Software is a leading global provider of cloud-based human capital management and employee experience solutions, with more than 48 million people records in the cloud. Our award-winning UltiPro delivers HR, payroll, talent, and time and labor management as well as HR service delivery solutions. Founded in 1990, Ultimate is headquartered in Weston, Florida, and employs more than 5,100 professionals. In 2019, Fortune magazine and Great Place to Work ranked Ultimate #1 on their Best Workplaces in Technology list, in the “Large Companies” category, Ultimate’s fourth consecutive year to top the list. In 2018, Fortune ranked Ultimate #3 on its prestigious 100 Best Companies to Work For list, our seventh consecutive year in the top 25; #1 on its 100 Best Workplaces for Women list; and #1 on its Best Workplaces for Millennials list, our second year at the top. Customer Sales and Service World Awards recognized Ultimate’s Services team as the #1 Customer Service Department of the Year in 2018 for companies with 2,500 employees or larger across diverse industries. Ultimate has more than 5,600 customers worldwide including Bloomin’ Brands, Culligan International, Feeding America, Red Roof Inn, SUBWAY, Texas Roadhouse, and Yamaha Corporation of America. More information on Ultimate’s products and services can be found at www.ultimatesoftware.com.

About Hellman & Friedman

Hellman & Friedman is a leading private equity investment firm with offices in San Francisco, New York, and London. Since its founding in 1984, Hellman & Friedman has raised over $50 billion of committed capital. The firm focuses on investing in outstanding business franchises and serving as a value-added partner to management in select industries including software, financial services, business & information services, healthcare, internet & media, retail & consumer, and industrials & energy. For more information, please visit www.hf.com.

About Blackstone

Blackstone is one of the world’s leading investment firms. We seek to create positive economic impact and long-term value for our investors, the companies in which we invest, and the communities in which we work. We do this by using extraordinary people and flexible capital to help companies solve problems. Our asset management businesses, with $472 billion in assets under management, include investment vehicles focused on private equity, real estate, public debt and equity, non-investment grade credit, real assets and secondary funds, all on a global basis. Further information is available at www.blackstone.com. Follow Blackstone on twitter @Blackstone.

About GIC

GIC is a leading global investment firm established in 1981 to manage Singapore’s foreign reserves. A disciplined long-term value investor, GIC is uniquely positioned for investments across a wide range of asset classes, including equities, fixed income, private equity, real estate and infrastructure. In private equity, GIC invests through funds as well as directly in companies, partnering with its fund managers and management teams to help world class businesses achieve their objectives. GIC has investments in over 40 countries. Headquartered in Singapore, GIC employs over 1,500 people across 10 offices in key financial cities worldwide. For more information on GIC, please visit www.gic.com.sg.

About JMI Equity

JMI Equity is a growth equity firm focused on investing in leading software companies. Founded in 1992, JMI has invested in over 140 businesses in its target markets, successfully completed over 90 exits and raised more than $4 billion of committed capital. JMI partners with exceptional management teams to help build their companies into industry leaders. For more information visit www.jmi.com.
This is a huge deal, Ultimate Software (ULTI) had a market cap of roughly $10.3 billion before this deal to take it private was announced and it's stock was on fire over the last five years (click on image):


I know this chart very well because it's one of the stocks I was tracking closely in late December during the bad Santa selloff of 2018. I was actually contemplating on buying this dip because the stock declined a lot but stayed above its 200-week moving average (I didn't buy it, sigh!).

Interestingly, from the institutional funds owning the shares as of the end of Q3, 2018, you have the usual big funds, Fidelity, Janus, BlackRock, T. Rowe Price, Vanguard and one US public pension, the Oregon Public Employees Retirement Fund which is the second largest shareholder (click on image):


Oregon's public employees can thank CPPIB and GIC for the nice 30%+ premium they will receive once this deal closes in mid-2019.

The bigger question is why did Ultimate Software decide to go private? The Business Times published a Bloomberg story, Ultimate Software to go private in US$11b cash deal:
Ultimate Software Group said it agreed to be acquired by an investor group led by Hellman & Friedman Capital Partners in a deal valued at about US$11 billion.

Shareholders of Ultimate Software, which makes cloud-based human resources management software, will receive US$331.50 per share in cash, the company said in a statement Monday. The terms represent a premium of about 32 per cent over the company's average stock price during the 30 days up to Feb 1. Ultimate shares rose 20 per cent in New York trading.

Weston, Florida-based Ultimate Software was founded in 1990 by Scott Scherr, who will remain at the company along with the existing senior management team. Ultimate Software manages employee relationships from recruiting to retirement. While starting with a basic package to manage payroll and benefits, Ultimate expands its offerings, sold on a subscription basis per employee, to include analytics tools that track a full range of human resources. Its customers include Subway Restaurants and Red Roof Inns Inc.

Payroll and human resources software "is a very attractive space to invest in", Jefferies analyst Samad Samana said. "It has very attractive characteristics - high retention rates. Everybody needs payroll, so it's a very large market."

Several analysts have recently taken note of the company. Deutsche Bank analyst Michael Turrin initiated coverage of the company last week with a buy rating, calling it a top "value" pick, based on its early transition to the cloud and a strong workplace culture. Mr Turrin said the company has proven itself capable of delivering consistent 20 per cent-plus recurring revenue growth and operating margin.

Ultimate Software was ranked No 1 on Fortune's Best Workplaces in Technology list for the fourth consecutive year. Goldman Sachs reinstated coverage of the company last week with a neutral rating on the stock.

Mr Samana said he wouldn't be surprised to see another company potentially make a bid for Ultimate Software. "The difference for a strategic buyer is there could be potential revenue and cost synergies that would make the deal more valuable for them than for a private equity buyer," Mr Samana said.

Deal activity among software companies, including payroll, should continue because of the amount of money that can be put to work, according to Mr Samana. Large enterprise software companies have extra cash due to the new tax law, Mr Samana said, adding that private equity firms have also raised a lot of capital and are increasingly finding value in software.

Ultimate Software is the second-fastest growing provider, behind Workday Inc, in the US$17 billion human-capital management and payroll-software market. It's moving beyond a core of mid-sized customers and has been gaining market share, while its acquisition of PeopleDoc should help it expand internationally, according to Bloomberg Intelligence analyst Mandeep Singh.

Corporations' increasing preference for cloud-based human capital management and payroll software should help Ultimate Software expand faster than large, legacy peers such as SAP SE, Oracle Corp and ADP.

The deal with Hellman will help Ultimate make additional investments in products and services, as well as rewarding employees, the company said.

Hellman & Friedman is a private equity fund that makes large-market buyout investments in the communications, consumer discretionary, financials, health care, industrials, and technology sectors. Other investors include Blackstone Group, GIC, Canada Pension Plan Investment Board and JMI Equity.
Hellman & Friedman is one of the best private equity funds in this space and they struck an incredible deal here, one that will benefit all the parties of this syndicate including CPPIB, GIC, Blackstone and JMI Equity.

But the deal also allows Ultimate Software to focus on new products and services over the next few years and once they expand as a private company, when the time is right, the group of investors will be able to sell it at an even higher multiple either to a strategic buyer or just take it public again and reap the gains (I doubt it, think it will eventually be sold to a strategic buyer).

The software payroll sector is a hot area. Just today, I was looking at another company provides cloud-based human capital management, Paycom (PAYC), and told my friend Fred Lecoq that it has one of the best 5-year charts I've seen, just incredible (click on image):


Anyway, as mentioned in the article above, Workday (WDAY) is the leader in the space and it or another competitor might make a bid for Ultimate Software but it will have to top a very generous premium (click on image).


All this to say, it's not over till it's over but if this deal goes through, it will be the largest SaaS public to private deal ever.

The other thing to keep in mind is these private equity funds and their investors have so much money that they're increasingly playing in public markets, taking public companies private. For CPPIB and GIC, it's great, it's a co-investment where they pay little to no fees and are able to expand their private equity portfolio very nicely. In other words, it's all about scale, keeping fees low and finding great direct deals (where you can put a lot of money to work) by co-investing with your partners which are top global private equity funds.

Of course, all these public companies being taken private is good news for one group of investors, but others may wonder what happens if private markets take over the world and public markets keep shrinking, offering fewer and fewer choices for investors looking to invest in great companies.

We're not there yet but I view the attrition of public markets as a secular theme that will remain with us for a very long time.

Below, MFAM Funds’ Bill Barker, a shareholder of Ultimate Software, discusses the deal in a segment of the MarketFoolery podcast. He talks with host Chris Hill about the upsides of this company, which has been taking market share from larger rival Paychex, and what the founder/CEO might have been hoping for in selling out to private equity.

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