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Taleo's Next Version Public Company

June 29, 2005

I n December, taking a company through an initial public offering was about the last thing on Michael Gregoire's mind. Rather, the 39-year old PeopleSoft executive vice president was ending his five-year tenure with the company on the day that Oracle's acquisition of it became official. His agenda called for spending more time with family, skiing at Lake Tahoe and, when the weather turned warm, riding his Harley-Davidson with friends through Yosemite and on to Las Vegas.

    But that trip is now on hold. In March, Gregoire was recruited to join Taleo, the San Francisco-based talent management software company, as its new CEO. Soon, probably within a matter of months, he'll lead the company on a different adventure, when Taleo becomes a publicly traded company.

    Initial public offerings may stir memories of the late 1990s, when it seemed like anyone with an idea, a Web site and a generous helping of other people's money could take a company public-and watch it all disappear just as easily. But Taleo, which originated in Canada five years ago as a company called Recruitsoft, is no dot-com pipe dream. It competes in a segment whose sales will grow to nearly $730 million by 2008, according to estimates by research firm IDC.

    A company filing with the Securities and Exchange Commission shows that while Taleo is not yet profitable, its losses have continuously shrunk. Revenue is growing, due in large part to sales of its Web-based services to nearly 300 companies (a small consulting operation accounts for about 15 percent of its revenue). The company states that renewal rates to its subscription-based services are at 90 percent. And it ranked No. 11 on last year's Deloitte Technology Fast 500, a list of companies with the fastest-growing revenue.

    The bulk of Taleo's business centers on its Enterprise Edition, a suite of services designed to let recruiters at companies with more than 5,000 employees act like air traffic controllers. They not only track individuals from the time they apply for a job to the time they join the company, but also monitor data about the overall process. Occasionally, that ability fosters unusual collaborations. For example, Taleo collaborated with three clients in the hotel business and brokered an agreement by which the software now allows each to see how its hiring efforts compare to those of the other two.

    Now, with a new CEO and a public offering looming, the company is putting its own house in order, boosting efficiency, redeploying staff and strengthening its financial reporting. That's laudable for any company, but for one whose bread and butter is software designed to improve these very things for customers, it takes on another dimension. For the first time, customers, prospects and potential investors will be able to look at the company's operations and form an impression of Taleo's worth.

Will others make the leap?
    Converting to public ownership gives companies increased flexibility that comes with a new and potentially powerful source of capital through its stock. But there's scrutiny, too, from a sea of shareholders and a regulatory environment dictated by Sarbanes-Oxley.

    At least one other company in the space, Kenexa, has filed documents with the SEC that signal an intention to stage IPO. Others, like Recruitmax and BrassRing, have no immediate plans for IPOs, people at both companies say. It takes time and expertise to assemble talent to register with the SEC and publish information about the company. Taleo had completed many of these steps a little over a year ago, but opted to put the process on hold. The culprits: choppy market conditions and a news cycle dominated by presidential politics.

    For its part, BrassRing thinks about "not what it takes to go public, but to be a public company," says CEO Deborah Besemer. Her concerns center on having to communicate with new stakeholders and whether they will share the goals of the company. Another issue is the infrastructure required to comply with Sarbanes-Oxley. She applauds that companies are held to high standards of integrity and accountability but worries about the cost of going public today, putting the tab at $3 million.

    Complying with securities laws and regulations already is a major consideration for Taleo. Its SEC registration runs some 160 pages and gives the first detailed public glimpse into the emerging company's practices and financial condition. Revenue, for example, increased by 54 percent, to $43.6 million, in 2003, the last year for which complete figures were available. (Company officials say that annual revenue is now about $70 million.) Taleo applications operate in 88 countries around the world. In the U.S., its customers include Dell, Procter & Gamble and Starbucks. Now, the company has set its sights elsewhere.

    "I think there is more opportunity now for growth than there was when the company started," says Taleo co-founder and executive chairman Louis Tetu. "What we're starting to see is that smaller organizations are moving to the Web." And generational differences neatly play into Taleo's products. "The average 20-year-old doesn't write a résumé; they go online," he says. Given a business environment that continues to adopt technology to streamline hiring, Tetu believes his company could one day gross $1 billion annually. To help, he gave up the CEO position.

Taking a new role
    Tetu says his strengths are suited to strategy, not day-to-day operations. Taking a different role is something he contemplated four years ago. "I've never been an 'in-the-office' CEO," he says, noting that he splits his time between Taleo headquarters in San Francisco and his home in Canada. He prefers to focus on the needs of customers, spending time in the field and pondering the needs of the recruiting industry.

    Tetu wanted to find his replacement before the company went public to avoid the scrutiny and the potential hit to the stock price such a move would draw. He had no date in mind to make the move, but he did have a figure: $100 million in revenue. As the company got closer to that mark, Tetu and his board began their search. Experience running a much larger business topped the list of requirements for any candidate, though experience in the space was not a prerequisite.

    "We did not want a rock star," he says, referring to the flashy breed of executive whose leadership style has fallen out of favor in recent years. Working with executive search firm Heidrick & Struggles yielded a list of some four dozen candidates that he and the board considered. Tetu knew of Gregoire, who ran four segments at PeopleSoft that together accounted for 85 percent of the company's $2.7 billion annual revenue, but the two had never met.

    Before long, Tetu joined Gregoire in Lake Tahoe, where the two ski enthusiasts got to know each other on the lifts. The fellow Canadians talked about the company's future, as well as their lives and family issues. Both men are married. Gregoire has twins and Tetu has three children. The two also discussed the need for no surprises-ensuring that there was nothing from the past that could cast a cloud over either of them.

    Tetu's ongoing role with the company was another issue. "I didn't want anyone working under my shadow," Tetu says. He is hardly the first CEO to move to a behind-the-scenes position. Michael Dell and Bill Gates have taken strategic roles as chairmen at their respective companies in recent years, leaving operations in the hands of others.

    Tetu adds that "the concept of a single individual running a company is flawed" and that both parties have to know how to "challenge the other as kindred spirits." But when Gregoire started, Tetu went silent for a few weeks while the new chief got acclimated.

    Gregoire's first move was hiring a new CFO, Divesh Sisodraker, another veteran with leadership experience at a publicly traded company-Pivotal, a customer relationship management firm that was bought out in 2004.

    Then he made the rounds at Taleo, meeting individually with each of Taleo's 525 employees to discover what they did each day. Gregoire says the process was essential to understanding where the company could become more efficient. Wall Street looks carefully at a company's revenue per employee.

    "Most companies are not short on ideas; they are short on execution," he says. "What I bring is discipline and process and tenacity to make sure questions are answered at a satisfactory level prior to making a decision."

    What Gregoire learned led to some people being reassigned "into what we what thought they should be doing," though he says no one was fired as a result. Along the way, he forged nine objectives for the company that included, for example, firm dates by which new software programs would be available to market. Gregoire, who studied physics and rose through the ranks at EDS as a software engineer, used that knowledge, too, asking Taleo developers to modify code to lighten the software's demand on customers' computers. And changes have come in the company's sales and marketing divisions, too, with the addition in June of another seasoned executive, Susan Chenoweth, as vice president of worldwide marketing.

    Gregoire says Taleo should be synonymous with talent management the way that Clorox is with bleach. Taking the company public is a key step in that strategy. Gregoire speaks plainly about his desire to use what he refers to as a "war chest of capital" to become the recruiting industry's "consolidator of choice."

Putting money to work
    The Taleo registration with the SEC indicates that the company intends to use the proceeds from the stock sale for expansion of sales, marketing, and research and development; paying down debt; and potential acquisition of "complementary businesses, products and technologies." Even as a private company, two recent acquisitions indicate how Taleo might grow in the future. Its acquisition of Recruitforce and White Amber gives it a presence in markets with smaller companies and beefs up its ability to help client companies manage contingent hiring. AMR analyst Judy Sweeney says that customers "don't want solutions from multiple vendors," preferring instead a powerful program from a single supplier.

    The move could make a lot of people wealthy, from Taleo insiders to its backers at Bain Capital, which has helped finance the company in its private stage. Guiding the IPO process are investment bankers that include teams from Citigroup, Lehman Bros. and CIBC. But going public, Gregoire says, is good for customers: Details about the company will be published with regularity.

    James Holincheck, a Gartner Group analyst in Chicago, says the ability to know more about a vendor can help it make customers' shortlists. But more important is how a company uses the proceeds from its IPO. Customers and prospects might be happy about the ongoing visibility that comes with an IPO, but they may ask what the company is going to do with the money and how it's going to benefit them.

    The actual timeline for going public is a closely guarded secret that no one at the company would discuss, citing a desire to avoid running afoul of securities regulators. But the move is bound to raise the visibility of the company and bring some validation to recruiting companies, and the software-as-services sector in particular. That's something even BrassRing's Besemer is up for. "You want them to succeed," she says. "It's good for the space."

Workforce Management, July 2005, pp. 63-66 -- Subscribe Now!