Updated to reflect added BMO analyst commentary starting in eighth paragraph.
NEW YORK ( TheStreet) -- Cloud-based deal premiums are falling as investors correctly anticipate acquisitions by large technology players and analysts independent software specialists face growing competition in the hot sector.
In early December, SAP (SAP) bought a cloud-based human resources SuccessFactors (SFSF) at a 52% premium, leading to speculation of other M&A targets. Thursday's announcement that Oracle (ORCL) is buying Taleo (TLEO) for $1.9 billion at an 18% premium signals that premiums are going down as investors anticipate future deals and competition ratchets up.
When SAP's $3.4 billion SuccessFactors acquisition was announced, analysts like Karl Keirstead of BMO Capital Markets pointed to other possible deals, anticipating that larger tech companies would continue to look at acquiring specialists in the cloud space as their services come in increasing demand in a mobile business world.In fact, Keirstead just about nailed Thursday's Taleo purchase by Oracle. "The cloud software sector is being consolidated faster than we were expecting, and in our view, most investors will likely conclude that Taleo is the most obvious acquisition candidate and that Oracle is the most obvious buyer," wrote Keirstead in a Dec. 5 note that gave Taleo's stock an "outperform" rating and a $40 a share price target. To his credit, Keirstead even downplayed the notion that Salesforce.com (CRM) would be acquisitive and that Workday would be an M&A target. On news of the Success Factors deal in December, Taleo shares spiked 20% higher and others in the cloud and human resources software space like Kenexa (KNXA), Saba Software (SABA) and Cornerstone OnDemand (CSOD) saw similar gains. Those companies' shares showed muted gains after Thursdays deal, signaling a cooling of M&A expectations in the sector and premium priced valuations.
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