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An Appetite For Acquisition

December 6, 2004
Related Topics: Mergers and Acquisitions, Human Resources Management Systems (HRMS/HRIS), Intranets/Extranets, Featured Article

Michael Mullarkey gobbles up workforce technology companies so fast he spends much of his time traveling from places like Orlando to San Francisco, back to New York and on to Ottawa to meet his new employees. As CEO of Workstream Inc., the acquisitive 36-year-old entrepreneur is accustomed to the nickname bestowed on his burgeoning firm: "Frankenstream," which refers to the fact that the company has been assembled from so many different parts.

    BusinessWeek Online hailed Mullarkey as "King of the Rollups" for his skill at picking up companies for pennies on the dollar.

    But the very nature of his business model--buying up failing companies that were struggling to survive--is feeding a frenzy of consolidation that is forcing hard choices on executives who must make decisions about where to put their software dollars. If they invest in this company, will it be around in a year or two?

    On this day, Mullarkey is at a human resources technology conference in Chicago selling a newly developed employment portal that covers careers from recruitment through rewards and recognition to outplacement and separation--all for $4 an employee per month.

    "Other people charge $6 or $7 for the same service," he says, touting his product with the bravado of a natural-born salesman.

    The new suite of services, called the Talent Center, will test his skill at developing a product, something critics say he has yet to prove. The suite represents the sum of many diverse parts that Mullarkey has been cobbling together for the last three years.

    At a time when workforce technology is transforming traditional human resources services, Mullarkey represents a new kind of player in the field. Attracted by the billions of dollars that companies invest in human resources software, he promises employers lower costs and more streamlined workforce management tools.

    Experts cite several reasons for the rush to consolidate small software companies into larger entities that can offer many more approaches to workforce management. One is a demand by corporate officers for simpler and less expensive human resources products. Rather than buying individual applications from several vendors, companies are pressing for aggregations of the products into single suites.

    Spending on workforce management technology is still small compared to the overall $71 billion human resources services market estimated by International Data Corp. Albert Pang, an IDC analyst, says revenues for software license and maintenance for human resources products alone will be about $3.6 billion in 2004.

    In this fragmented market, global software giants like SAP, Oracle and PeopleSoft find themselves competing with outsourcing companies like Hewitt, Ceridian and ADP, as well as the smaller workforce management companies like Workstream, Workscape and Softscape. Aaron Dun, a spokesman for Softscape, says it used to be fairly easy to identify companies and their market niches.

    It isn’t anymore. The Oracle-PeopleSoft fight has left companies open to sales pitches from smaller players whom they might not ordinarily consider but who might offer stability in what appears to be an unstable market.

    "We see PeopleSoft and SAP competing in a lot of the same deals we are going after," Dun says.

    Much of that money--it is unclear how much--represents funds that were previously or are currently spent in-house on human resources services. That should be sobering news to old-school human resources adherents whose primary focus is keeping up departmental headcount and protecting their traditional transactional turf. But for those who have a more strategic vision of the role of workforce management in a company, it may be an opportunity to focus on ways to streamline, manage and direct the workforce without many nagging administrative chores.

    Lisa Rowan, a program manager for human resources management at IDC, says the role of human resources is indeed changing. "They need to retool so they can be doing the kinds of things, like metrics and workforce management, that impact business results. In that sense, they need to embrace change, be part of it."

Strategy questioned
    No one in the industry debates Mullarkey’s talent for acquiring distressed companies. Since 2001, he has bought 15 firms that have created big revenue growth. But Workstream is still not profitable, and Mullarkey has yet to convince critics that he can stitch together a product that will generate significant amounts of new business for the company. At press time, its stock was selling at less than $3 a share.

(People in human resources) need to retool so they can be doing the kinds of things, like metrics and workforce management, that impact business results. In that sense, they need to embrace change, be part of it.

    The doubt about him is that all his company’s growth has come through acquisitions rather than the organic growth that comes with developing your own technology.

Mark Smith, CEO of Ventana Research, a technology research firm in the San Francisco Bay Area, likes Workstream’s Talent Center and is generally upbeat about the company. But he says questions remain about its ultimate success.

    "A big test for Workstream is how well it takes all these different pieces and uses them to expand its client base," Smith says. "A lot of other players in this business are pooh-poohing Workstream. They are saying, ‘They are just acquiring companies. It will never work.’ Like anything, the question is: How well do they execute?"

    Mullarkey has heard the criticism and shrugs it off.

    "Look at all the businesses shutting down," he says. "Our customers don’t worry (whether) we are going to be in business three or five months from now. I don’t know if they can say the same thing about some of our competitors."

    So far, the business has been good enough to put Workstream on several lists of the fastest-growing technology companies. In its latest quarterly report, Workstream reported revenues of $5.7 million, a 37 percent jump from the same quarter the year before. Even with the jump in revenues, the company reported a net loss of $2.5 million during the quarter, which ended August 31.

    The company is still a small player in a crowded field--one where competition for human resources dollars is intense, the rules change as fast as the technology and survival is anything but a sure thing.

    "A few years ago there were 200 to 300 vendors offering human capital products," says Craig Symons, an analyst with Forrester Research Inc. "Today there are about 100, and next year it may be half that. A lot of people are wondering what the final number will be. It will certainly be less than 50."

    Oracle’s effort to take over PeopleSoft is the most visible sign of a rapidly changing market. So many niche technology companies are being swallowed up by competitors or simply going out of business that Symons wonders whether "best-of-breed" software is dead. Symons cites Recruitmax acquiring KnowledgePoint, Authoria taking over Advanced Information Management, Workscape purchasing Performaworks and Recruitsoft swallowing White Amber, creating a new company under the name Taleo.

    Kronos Inc., a leader in the workforce management market, bought or acquired certain assets from six small companies this year and is in the process of completing a $54 million purchase of AD OPT Technologies.

    "It’s going to be extremely difficult for stand-alone niche providers to remain viable in the marketplace," Symons says.

Crowded space
    Siew-Joo Tan, a senior analyst with the Yankee Group, says that in the past, the industry pie was split into many pieces, with companies buying niche products for specific applications, like applicant tracking, then putting them together themselves. Today, she says, companies want single-source vendors, and that raises the stakes for people in the business because there can only be one winner.

    "It’s kind of messy these days," Tan says. "Companies are discovering it’s a lot easier and less complicated and more cost-effective to have one vendor handle all the HR functions than to outsource each piece to a different provider."

    Companies are also considering different kinds of services, including renting software from companies like Workstream and paying a monthly service fee rather than buying it. It gets rid of a lot of headaches, Tan says.

    It’s the kind of playing field that is made to order for Mullarkey, who has been on a buying binge since 2001, picking up executive recruiter, Kadiri, ResumeXpress and a dozen other companies, each specializing in a particular industry niche.

    At the recent human resources technology trade show in Chicago, dozens of small niche companies that may be doomed were there in force to show their wares. The gathering was both an opportunity for Mullarkey to survey the landscape as well as express amazement at the large number of companies chasing the same workforce management dollars.

    Referring to the large number of vendors and the billions of dollars pouring into the business, he said the bubble that was created with dot-coms in 2000 is happening now with human resources technology. "We are an industry that needs to be consolidated," he said.

Companies are discovering it’s a lot easier and less complicated and more cost-effective to have one vendor handle all the HR functions than to outsource each piece to a different provider.

    Mullarkey expects that pricing his latest suite of products at $4 a month per employee will be a huge selling point for companies fed up with expensive systems that need constant upgrading and maintenance and who are ready to try something new.

    Renting the software services can also cut through a lot of corporate red tape, he says. Since the software is leased, human resources or information technology chiefs can pay for it as an administrative expense, rather than as a capital expenditure that can be tougher to get approval for in many corporations.

    Mullarkey moves on companies fast, and there are often painful workforce reductions in the firms he takes over. More than 700 employees were with companies taken over by Workstream. Today, Workstream has a staff of only 230. Its headquarters are in Ottawa.

    He is a hard driver who became an expert at satellite wireless technologies in the Army. He joined the military out of high school and then got into sales and marketing with Sony Corp. after he left the service. At Sony, he steadily rose through the ranks and eventually became a vice president and general manager. During the dot-com boom in the 1990s, he helped start a private equity funding and investment firm, Information Technology Mergers & Acquisitions. It was during that time that Mullarkey realized that human resources customers were not getting the services they wanted.

    "They weren’t satisfied with 40 small vendors offering 40 different products," he says. "Everyone was walking in with one solution."

    The idea that integrating multiple services in one suite is now fairly common, but back then it was a fresh idea that seemed ripe with potential. Convinced he could build a company, Mullarkey spent $4 million to buy a controlling interest in a firm that would morph into Workstream.

    Mullarkey’s business plan for his swiftly growing company is simple. Let venture capital firms and software companies spend lavish amounts on research and development as they build their startup companies. When the investments fail to pay off, Mullarkey moves in to pick up the pieces for a fraction of their value.

    His latest acquisition is HRSoft, a 20-year-old company that specializes in performance and talent management. It boasts a healthy stable of clients, such as Cintas, Mitsubishi, Neutrogena and Visa.

    "HRSoft had 20 people working for it and $4 million in revenue," Mullarkey says. "But you know what? They couldn’t get past that size. Some companies have that difficulty."

    Many of these companies were losing money, he notes. Now they are flush.

    He makes it sound simple. "We reduce the expenses and grow revenues," he says. "It isn’t that difficult a model."

    The key is to charge the customer $1 for a service that costs 92 cents, he says, adding, "Most companies in this business charge $1 and spend $2."

    Mullarkey’s business style--move in fast, buy at bargain rates and lay off employees of the acquired firms--can seem rough-and-tumble, but he is unapologetic. "At the end of the day, you may not like the tactics I use to drive the business, but the strategy is sound."

    With so many mergers and acquisitions going on among human resources software companies, Mullarkey sees acquisitions as a matter of survival. "The little fish get eaten by the bigger fish," he says. "You either eat them up or you get eaten up."

Gaining recognition
    Word about Mullarkey is spreading. Kadiri, which specializes in compensation, may be the biggest prize in the group of companies assembled by Workstream, says IDC analyst Rowan. "It’s a gem," she says.

    Ventana considers Workstream a market leader in workforce management systems despite its relatively short history. The research firm’s Smith says the company’s rapid growth "caught most in the market by surprise." Workstream can challenge more established companies like Lawson, Oracle, PeopleSoft and SAP as a cost-effective counterpoint to the more expensive bigger systems, Smith says.

    "Workstream has acquired all these companies that built a base in their own niche area but didn’t have enough capital to expand and broaden their product line," Smith says. The company’s talent is "to take good ideas from small companies and translate them into a bigger company."

    The challenge for Workstream is to hold on to customers brought into the company through acquisitions and increase their customer base. Workstream has a number of blue chip companies among its customers, including Liberty Mutual, Nordstrom, Allstate, British Airways, the Home Depot and Georgia-Pacific.

    "These are companies that require strong customer relationships," Smith says.

    Earlier this year, Workstream got a $10 million injection of capital from William Blair & Co., which is now one of the company’s largest shareholders. Blair, a Chicago-based investment banking firm, recently issued a study counting Workstream among a group of companies developing software as more of a service than a technology by renting their products on a per user basis.

    "The appeal to the customer is that it is less expensive and easier to get the applications up and running and the customer does not have to worry about on­going maintenance issues," the report says. "We believe that customers in the next five years increasingly will opt to rent software rather than buy it."

    The researchers caution, however, that there are a number of risks involved with these companies. Intense competition will arise because if companies rent a product instead of owning it, they will be more prone to switching services. Since clients are buying service, they will be more likely to demand a good level of performance. The Blair researchers predict that only a small percentage of companies will be successful.

    Kevin Dobbs, Workstream’s senior vice president of marketing and business development, was with Kadiri when Mullarkey bought it. He decided to stay on and now is working to bring other companies into the fold. "We know how to buy companies, and we know how to integrate them quickly," Dobbs says.

    "Michael has a very high energy level," he says. "He has really done his homework on the industry. For someone who isn’t an HR person, he really understands the business."

Workstream: Growth through acquisitions

Workstream Inc. has been on a buying binge, gobbling up 15 workforce management software companies since 2001. Still small with 230 employees, the fast-growing Canadian company literally has pushed itself into the market for human capital management software.
Michael Mullarkey, Workstream’s acquisitive CEO, uses speed, cash and the company’s own stock to close out competitors and bring them into the fold.
With the exceptions of Paula Allen Holdings, which does business as Allen and Associates, and, each of the companies has been merged into Workstream, which in a previous life was known as E-Cruiter.
Name Year acquired Business niche
Paula Allen Holdings Inc. 2001 Outplacement, career
transition, recruiting  2001 Executive recruitment
OMNIpartners Inc. 2001 Recruitment research
RezLogic Inc. 2001 Résumé management
ResumeXpress 2001 Résumé distribution
Tech-Engine 2001 Information
technology job board
PureCarbon Inc. 2002 JobPlanet software
Xylo Inc. 2002 Employee retention
Icarian Inc. 2002 Time-to-hire process
Perform Inc. 2003 Performance and
appraisal software
Bravanta Inc. 2004 Incentive and
recognition software
Kadiri Inc. 2004 Compensation
PeopleBonus 2004 Résumé management
PeopleView Inc. 2004 Employee evaluation,
corporate compliance
HRSoft (Purchase pending) Succession planning, performance management
Source: Workforce Management research by Douglas P. Shuit

Workforce Management, December 2004, pp. 47-51 -- Subscribe Now!

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