Ultimate Software to go private in $11B cash deal

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(Bloomberg) --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 $11 billion.

Shareholders of Ultimate Software, which makes cloud-based human resources management software, will receive $331.50 per share in cash, the company said in a statement Monday. The terms represent a premium of about 32 percent over the company’s average stock price during the 30 days up to Feb. 1. Ultimate shares rose 20 percent 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. Turrin said the company has proven itself capable of delivering consistent 20 percent-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.

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” 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 Samana. Large enterprise software companies have extra cash due to the new tax law, 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 $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 also owns the human resources software maker Kronos and Needham & Co. analyst Scott Berg said it would be interesting to see if the two entities would be combined if the deal went through. “I think their view is buying high quality assets for a reasonable evaluation,” Berg said.

“This represents a transaction in a very large space,” said . Human resources software is the fastest growing software sector, with annual growth rates of around 10 percent, he said.

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