5 Cloud Names That Could Be Part of M&A Wave

NEW YORK ( TheStreet) -- Cloud computing is shaping the information technology sector in a very drastic way, and companies are willing to pay dearly for the growth in this area.

SAP ( SAP) signaled that it wanted to expand its offerings in this space, by acquiring SuccessFactors ( SFSF) at $40 a share, a significant premium to the stock's closing price on Friday.
A resurgence in M&A in cloud computing could lead to additional deals.

SuccessFactor's board already has approved the transaction, and it will be funded by existing cash on hand and a €1 billion term loan facility. Both companies expect the transaction to close in the first quarter of 2012, and it is expected to be slightly dilutive to SAP's 2012 earnings. It will be accretive in subsequent years.

SAP has recognized that it needs additional exposure to its cloud computing offerings, and management believes adding the fast growing SuccessFactors is a solid choice.

SuccessFactors is growing exceptionally fast, with revenue rising 77% year over year in the third quarter of 2011, and 59% in the first nine months of the year.

SuccessFactors has one of the largest scale of paying users, with more than 15 million subscription seats. It also has more than 3,500 customers in 168 countries.

With such a heavy premium being paid for SuccessFactors, SAP sees the potential for cloud computing, particularly through its core applications and analytics offerings. Bill McDermott, co-CEO of SAP, believes the two companies " w ill create tremendous business value for customers, with potent synergies to accelerate our growth in the cloud."

Deutsche Bank believes there may be a wave of mergers and acquisitions in the space, as the SAP deal and the Oracle ( ORCL) deal to buy RightNow Technologies ( RNOW) could signal "a sign that large companies are feeling confident about current macro conditions and are willing to put cash to use in acquisitions."

With such a large premium being paid for SuccessFactors, it brings renewed interest in the space. Acquisitions in certain sectors tend to happen in bunches, as executive teams see the need to compete with rivals. Microsoft ( SAP) IBM ( IBM) and other large technology companies have made it a priority to continue growing cloud computing revenue. Specifically, IBM ( IBM) has said that it wants to have $7 billion worth of revenue from cloud computing by 2015.

Here is a list of five names to consider that might be part of the cloud M&A wave.

Citrix Systems ( CTXS) is another cloud computing name that has been rumored to be a takeover candidate. The company is known for its "GoToMeeting" application, which allows users to remotely access meetings from wherever in the world. It also offers a host of other "GoTo" products, including "GoToMyPc", which allows a customer remote access to his Mac and PC from any Internet-based computer.

Shares trade at 25 times projected 2012 earnings, and have returned 3.5% year to date.

Another name to consider name to consider off the SuccessFactors acquisition is Taleo ( TLEO).

Like SuccessFactors, Taleo is another human capital management (HCM) company. Shares are moving higher on the acquisition, and Raymond James analyst Terry Tillman believes the company could see some action.

Tillman wrote: "Our sense is the initial stock reaction for various publicly-traded HCM names is positive given a likely belief that a domino effect will occur whereby other leading software companies look to buy assets in this space in order to thwart SAP's move."

Stifel Nicolaus noted in an analyst report that it believes Taleo is "an interesting acquisition target given its mid-teens operating margins, larger size compared to other players and focus on larger enterprises with a direct sales force."

Shares trade at 29 times projected earnings, and have returned 19.2% year to date.

Tillman also mentioned Cornerstone OnDemand ( CSOD) as a potential name to watch, as information technology companies see "increasing pressures around building scale and delivering on a suite strategy in the space."

Cornerstone OnDemand is one of the smaller players in the space, with a market capitalization of just $727 million. The company's software-as-a-service (SaaS) includes a series of products geared towards learning and talent management solutions. Shares have lost almost 15% year to date.

Deutsche Bank's Tom Ernst Jr. agreed, saying this could spark a wave of consolidation. He mentioned in a research note Ultimate Software Group ( ULTI) as a potential name to consider among publicly traded HCM companies, in light of the SAP-Successfactors acquisition. Shares are sitting near their 52-week high, and have returned almost 33% year to date.

Revenue has grown by 18.8 year over year, and shares trade at a forward multiple of 62 times projected 2012 earnings.

One last name to consider as a potential acquisition target is NetSuite ( N). Oracle CEO Larry Ellison is a majority owner in the company, and the company operates in the SaaS market.

The company provides products that help companies with their suite of applications, including accounting, customer relationship management, professional services automation, and e-commerce.

Shares have returned 72.4% year to date, but trade at 2105 times projected 2012 earnings.

>>To see these stocks in action, visit the 5 Cloud Names That Could Be Part of M&A Wave portfolio on Stockpickr.

--Written by Chris Ciaccia in New York.

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