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Ultimate Software Stock Isn’t a Buy After Hellman & Friedman Buyout

Dana Blankenhorn

Ultimate Software (NASDAQ:ULTI) is going private in a transaction led by veteran tech investors Hellman & Friedman. The price, $11 billion or $331.50 per share of ULTI stock, is a 19% premium to the company’s Feb. 1 close and slightly above its record high of $330.73, achieved in September.

The Weston, Florida company went public in 1998 at just $10. But long-time investors are not the only winners. New employees get restricted stock units, which can be cashed in here as common stock, and they continue to acquire shares over time, so many are expected to become millionaires once the deal closes.

There is a 50-day “go-shop” period on the deal, where the company could seek a better price, which is why ULTI stock was due to open for trade Feb. 5 at $332.54 per share.

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The Island of Misfit Tech

Hellman & Friedman currently has 20 investments in its portfolio, and over the years, it has put over $50 billion into over 90 companies, including Nasdaq Inc (NASDAQ:NDAQ), Axel Springer publishers in Germany, Doubleclick (now part of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Getty Images, which it owned from 2008 to 2012. Its current portfolio includes SimpliSafe, the Web-based security company and Kronos, a human capital management company.

Hellman & Friedman says it seeks fast-growing businesses in developed markets, and the current fund, its eighth, has $11.1 billion in committed capital.

Ultimate operates in an increasingly competitive market that is expected to be worth $10 billion in 2022, with competitors like Oracle (NYSE:ORCL), SAP (NYSE:SAP), International Business Machines (NYSE:IBM) and Cognizant Technology Solutions (NASDAQ:CTSH).

Ultimate describes itself as a “cloud” company, but its history predates the cloud. It might be more accurate to call it a Software as a Service (SaaS) firm. The industry has been disrupted during this decade by the rise of cloud-native plays like Workday (NASDAQ:WDAY), which now has a market cap of almost $41 billion.

Ultimate has been growing its top-line regularly, but its bottom-line irregularly, in recent years. It reported revenue of $1.14 billion for all of 2018, on which it had net income of $65 million, $2.06 per share fully diluted. This was its best profit performance in several years, during which time it had doubled in size from 2014’s $505 million in revenue.


What Hellman Does

Hellman’s track record indicates they will continue investing in Ultimate, perhaps sacrificing short-term profits for market share gains, refocusing the go-to market strategy and, eventually, looking for an exit. It looks for the lemonade in a lemon grove.

One example of their work I am personally familiar with is Intergraph, a Huntsville, Alabama computer-aided design firm it bought in 2006. I had covered Intergraph for decades by the date of the sale, and it was clear they had lost ground in their computer-aided design niche to companies like Autodesk (NASDAQ:ADSK). When Hellman exited in 2010, selling Intergraph to Hexagon AB of Sweden, it was a “spatial information management” company whose software was used to create visual representations of vast data stores.

Ultimate appears to be the largest deal Hellman & Friedman has yet put together, the previous high being Multiplan, a healthcare cost management company, which cost $7.5 billion in 2016.

The Bottom Line on ULTI Stock

This is a happy day for Ultimate employees, most of whom can now look forward to a happy retirement or, at least, some money in the bank.

Investors looking for a better price on ULTI stock, however, may not do so well given the competitiveness and maturity of Ultimate’s market. Buying shares today would be highly speculative, putting a lot of investment into a small chance of a minimal gain.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

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