Volume 16, Number 13 -- April 2, 2007

Kronos To Be Taken Private Through a $1.8 Billion Buyout

Published: April 2, 2007

by Timothy Prickett Morgan

Several weeks ago, when this newsletter reported on the very good financial results that workforce management software maker Kronos posted in its fiscal first quarter, I quipped that Kronos has come to dominate its niche software market and the only question about its future was why Oracle, Infor, or SAP had not acquired it yet. Last week, private equity firm Hellman & Friedman Capital Partners (H&F) shelled out $1.8 billion to take Kronos private and to keep keeping time all to itself.

Through several key acquisitions over the past decade as well as through organic growth, Kronos has been able to take over the market for time-keeping and workforce management software, although the big three ERP suite providers mentioned above do have some of the software tools that Kronos sells. Kronos has made no secret about its desire to break through $1 billion in sales level, but as a public company, it has to grow in a way that pleases Wall Street each quarter, not in a way that may suit its own longer-term goals.

"We believe that being a private company will offer many benefits, including allowing us to devote our full attention to our customers, and, with H&F's support, to make decisions focused on the long-term success of our business, solutions, and brand," explained Aron Ain, chief executive officer at Kronos in a letter to customers that was posted on the Securities and Exchange Commission's Edgar site. "Upon completion of the transaction, our current senior management team will continue to lead the company." Ain said the company did not have plans to significantly trim down its 3,400-person workforce as part of the acquisition, excepting some redundant back office functions. Ain said that the acquisition would allow the company to get off the quarter-to-quarter treadmill that public companies have to run on.

It would also get Kronos out from under the whole compliance and regulatory environment that public companies have to endure--at least, once the deal is closed in the fourth fiscal quarter of Kronos' business year. The proposed acquisition by H&F represents an 18 percent premium over the market capitalization that Kronos had before the deal was announced last Monday, but the run up in the company's shares starting the Friday before suggests that some gums were flapping somewhere and people profited from the impending news. Kronos is not private yet, and the SEC still has some say about such matters. The company's shares started moving up around two weeks ago, and in the days prior to the deal, twice as many shares as normally trade hands were moving.

H&F is based in San Francisco, and has over $16 billion of private equity capital that has been invested in various companies. Largely because of its patent portfolio and its very good geographical information systems software, H&F owns a piece of former workstation maker Intergraph, which was taken private for $1.3 billion last August. H&F owns Web advertising service provider DoubleClick, too, which it bought for $1.1 billion in July 2005 with some help from JMI Equity (which is also kicking in some funds for the Kronos buy). H&F also has a share in the takeover of Dutch publishing and media monitoring giant, VNU Group, which owns scads of magazines as well as Nielsen Media Research. (VNU is co-owned by AlpInvest Partners, Blackstone Group, Carlyle Group, H&F, Kohlberg Kravis Roberts, and Thomas H. Lee Partners.)

Having a sugar daddy like H&F take it over will make the job of growing a whole lot easier, especially considering that the private equity firm is pulling cash from its eighth technology fund, which has over $8 billion in it. That war chest means that H&F can be aggressive about acquisitions on behalf of Kronos and about the company competing on price over a short term to bulk up its customer base, presumably for a future resale of Kronos to the public and presumably after it hits that dreamed of $1 billion mark as a profitable firm. In its fiscal year ended September 2006, Kronos had sales of $578.2 million, up 11 percent, but profits fell 23 percent to $41.4 million. The growth has come at the cost of diminished profits. Wall Street hates this, but private equity firms can tolerate it if they can wring out some costs and invest in the firm for greater revenue and profit growth over a longer haul. Kronos sells software that runs on Windows, i5/OS, Unix, and Linux platforms.

As previously reported, Kronos is just beginning to dabble in a Web delivery model for its applications, with a subscription style price, and this is probably one of the key areas it wants to invest in to get to that $1 billion level. Kronos' software is used by more than 30 million users worldwide; the company no longer publishes a customer count, but it is probably in the multiple tens of thousands. It seems very likely that this software as a service offering is going to be one of the main ways that H&F pumps up Kronos.


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Editor: Timothy Prickett Morgan
Contributing Editors: Dan Burger, Joe Hertvik, Brian Kelly, Shannon O'Donnell,
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