Thread by @JushuaRamo

The origin story of UKG offers a rare opportunity to unpack various interesting dynamics to me both as an ex-M&A deal practitioner & HR industry participant:

✅ Public company M&A deal dynamics
✅ Public company M&A deal dynamics
✅ #HR & #HCM strategy/trends

Let's dive in!🧵

This🧵will include the following components to help guide how this "all-in-one" HCM was formed & the go-forward path

1⃣ Ultimate Software Refresher
2⃣ Kronos Refresher
3⃣ H&F Combo Mechanics
4⃣ UKG: The Combined Company
5⃣ What a Public UKG cloud look like
6⃣ Summary takeaways

1⃣ Ultimate Software Refresher

🟢 Founded in 1990

🟢 IPO'd in 1998

🟢 "All-in-one" HCM SaaS platform (UltiPro)

🟢 Payroll & HR *fulcrum*

🟢 Enterprise focus (>2.5K EEs)

🟢 ~6K customers (~50m EEs)

🟢 ~$1.5bn rev. & ~6K FTEs

🟢 LBO'd by H&F-led group in '20 (more to come)

2⃣ Kronos Refresher

🔴 Founded in 1997

🔴 IPO'd in 1992

🔴 Enterprise-grade time & attendance (incl.⏰) via Dimensions, Central & Ready

🔴 LBO'd in 2007 (by H&F)

🔴 Recap'd in 2014 (Blackstone, GIC & JMI)

🔴 ~$1.5bn in rev. & ~6K FTEs

🔴 ~16K customers (w/ ~40m EEs)

3⃣ H&F Combo Mechanics - Kronos

'07: H&F & JMI LBO'd Kronos for $1.8bn (~$750m equity check)

'07 to '14: Kronos returned ~$2.0bn+ via various *dividend recaps*

'14: H&F & JMI sold 42% to BX & GIC for ~$750m

~5x (cashed out + upside) over 7 years ain't bad amid GFC

3⃣ H&F Combo Mechanics - Ultimate

2/19: H&F-led investor group (BX, GIC, CPPIB, JMI) LBO'd $ULTI for ~$11bn ($331.50/sh = 32% premium to 30-day VWAP)

1x1 process (mitigated by 50-day go-shop) & investor participation underscores "prewiring" a merger with Kronos downstream

3⃣ H&F Combo Mechanics

2 companies with...

✅Similar scale & HC (~$1.5bn & ~6K FTEs)

✅Same ownership (PE consortium)

✅Cross-sell (i.e. PeopleDoc)

❓Overlap (i.e. UltiTime vs Dimensions)

❓Different back-end

❓Operating models (i.e. Imp & CS)

How do you put it together?

3⃣ H&F Combo Mechanics (cont'd)

✅ $22bn TEV "all-stock" private-to-private M&A

✅ Kronos CEO Aron Ain tapped to lead CombinedCo

✅ Joint HQ'd in Lowell, MA (Kronos) & Weston, FL (Ultimate)

✅ Combined cap structure & clean-up / refi at Kronos (via Ultimate 1L/2L facilities)

3⃣ H&F Combo Mechanics (cont'd)

"Private-to-private" all-stock deals can be complicated (in🧵below) given "relative value conundrum"

But ownership & governance overlap (i.e. H&F's Lead Director at Kronos = Ultimate Chairman) simplified the dynamic

3⃣ H&F Combo Mechanics (cont'd)

As a general rule of thumb, fund limited partners will want to avoid any "self-dealing" on marks during these downstream portfolio mergers

Hiring advisors to assist with valuation views (i.e. GS and MS) mitigates imbalance in negotiations

4⃣ UKG: The Combined Company

*Merger of Equals* transactions can sometimes leave a lot of ambiguity with respect to "identity"

Following a 6-month process of surveying employees & bringing in various consultants, the CombinedCo rebranded as *Ultimate Kronos Group* ("UKG")

4⃣ UKG: The Combined Company (cont'd)

The revamped GTM strategy was focused on 3 product families - Pro (large MNCs), Dimensions (large & mid-size orgs) & Ready (smaller orgs)

Operating model inclusive of free live training & dedicated imp. & continuous client service RMs

4⃣ UKG: The Combined Company (cont'd)

UKG weathered it's 1st major headwind as its Kronos Private Cloud fell victim to a ransomware attack in Dec of '21 leading to tumult from 2K+ customers who experienced major outages during what's typically most chaotic payroll period

4⃣ UKG: The Combined Company (cont'd)

Going forward, a key *equity story* point will be the progress of the product unification & simplification for enterprise & SMB

Kronos Private Cloud & on-premise UKG Workforce Central will be retired by Q4 '25 & Q1 '27, respectively

4⃣ UKG: The Combined Company (cont'd)

UKG is aligning to many emerging feature sets that are viewed by many to be "table-stakes" for a buyer - e.g. earned wage access / on-demand pay

Key point: UKG Wallet (by Payactiv) is effectively a response to $CDAY's Dayforce Wallet

4⃣ UKG: The Combined Company (cont'd)

Given legacy HR systems lack ability to support end-to-end workflows or processes, there has been an arms race to deliver *modern architecture* (esp. *low-code*)

Key point: FleX is effectively a response to $CDAY's Integration Studio

4⃣ UKG: The Combined Company (cont'd)

There are 2 main M&A philosophies, emblematic of Ultimate & Kronos, respectively

*Emerging tuck-ins* like GPTW & Quorbit to augment modern experience

*Installed base M&A* like Ascentis (w/ NOVAtime) to migrate to UKG's new offerings

5⃣ What a Public UKG cloud look like

Chris Todd has stated a goal of ~$5bn revenue & ~$1.5bn "cash operating earnings" (call it Adj. EBITDA) by FY25

If equity market conditions are OK (w/ initiatives far along), IMO this is an "IPO-able" business in 2H '24 (off '25 numbers)

5⃣ What a Public UKG cloud look like (cont'd)

Investors will look at "all-in-one" SaaS HCM peers (e.g. $PAYC, $PCTY, $PYCR) & sponsor-IPOs (e.g. $CWAN, $INST, $PSWC etc) but $CDAY will be THE primary comp

Leverage & M&A story could be limiting factors to "premium" valuation

5⃣ What a Public UKG cloud look like (cont'd)

Figuring out what a UKG IPO could look like is really a matter of "what you can believe"

If by 2H '24 there is good visibility to hitting those FY25 targets, we can *work backwards* to come up with an *illustrative* structure

5⃣ What a Public UKG cloud look like (cont'd)

Now we don't know what the cap structure (i.e. debt and cash on BS) will look like at the time of the IPO (i.e. 2H '24)

But let's just say the *goal* is to be at pro forma ~4.0x net leverage when *fully-distributed* to trade OK

5⃣ What a Public UKG cloud look like (cont'd)

Today, $CDAY trades at ~8.0x fwd. rev. & I think you can make a good argument UKG trades at a discount to $CDAY based on:

❓Lower (overall & sub rev.) growth %

❓Less robust public market "report card"

❓Complex *platform* story

5⃣ What a Public UKG cloud look like (cont'd)

~6x FY25 rev implies $30bn TEV & $25bn Mkt Cap *@ trading* (say 4.0x PF net lev. on $1.25bn LTM EBITDA)

Hard to model pre-IPO cash/debt @ 2H'24 given all the recaps but *I think* a $3-4bn IPO *should* cover de-levering w/ secondary

6⃣ Summary takeaways - Key Question

Could this kind of M&A-led transformation have been done in the public markets (i.e. $ULTI M&A-ing Kronos)?

My thought is yes possible but would have been VERY difficult for a variety of reasons (notably how to *manage the Street*)

6⃣ Summary takeaways - Things to Watch

Both $CDAY & UKG have taken major steps in the past years to outgrow their *fulcrums* (i.e. Payroll for $CDAY and Time / Workforce Management for UKG)

The race for $WDAY and $SAP renewal base & emerging suites will be interesting for sure

Link to first tweet below in🧵

Follow me @GlogauGordon for thoughts on M&A, SaaS and other public & private markets topics

Like, retweet, share, spread the word🙏