Kronos and Ultimate Software Combine To Create HCM Applications Powerhouse

In a $22 billion blockbuster deal, Kronos and Ultimate Software are merging into a HR applications powerhouse ready to take on Microsoft, SAP and Workday.

The announcement followed the $11-billion purchase of Ultimate Software in 2019 by a group of private equity firms and investors led by Hellman & Friedman, which has already owned Kronos since 2007.

The deal, which will usher in Kronos CEO Aron Ain as the head of the combined company, could be considered a stroke of genius with the stroke of the pen. More on that in a minute.

Shortly after the announcement, Kronos and Ultimate executives provided industry analysts with more details including a planned end of March closing date. New name of the combined company is likely to include both brands. So it could be either Kronos Ultimate,  Ultimate Kronos, or some variant depending on how that resonates with customers and employees.

After the deal with a valuation of $22 billion is done in April, the combined entity aims to replicate its rich history of both with Kronos dominating the workforce management applications market(time clock, attendance, scheduling, labor activity, etc.) and Ultimate revolutionizing Cloud-based Core HR applications with its ease of use, integrated offerings as well as exceptional customer successes(96% renewal).

Both companies have about 6,000 employees each and roughly $1.5-billion in total revenues, resulting in a $3-billion HCM powerhouse with 12,000+ employees. Customer count for both includes 6,600 for Ultimate UltiPro, 8,000 for Kronos Workforce Central, 4,000 for Kronos Workforce Ready, and 700 for Kronos Workforce Dimensions. Across an installed base of about 23,000 accounts, there is only a small percentage of overlapping customers between the two, according to company executives.

In terms of their standing in the HCM applications market, here’s what the combined company will fare as they close in on SAP to become the No. 2 vendor.

Current Standing of Top HCM Applications Vendors

Source: Apps Run The World, February 2020

New Standing of Top HCM Applications Vendors

Source: Apps Run The World, February 2020

The combined company is expected to pose significant threat to SAP and Workday just when the former is adjusting to a new management structure under Jennifer Morgan and Christian Klein who were named co-CEOs in October 2019, and the latter venturing beyond its HCM core to expand via acquisitions and pivots including analytics(Adaptive Insights), procurement(Scout RFP) and Cloud Platform(developer push in Workday 2020).

Company executives reiterate the strategic intent behind the combination of Kronos and Ultimate is to grow through increased synergy between the two that have already become dominant players in workforce management and Cloud HR, respectively. Consolidating two major forces into one HCM powerhouse could mean leapfrogging SAP and Workday just when they are being distracted by a host of issues, while launching a pre-emptive strike against Microsoft to prevent it from expanding further after the Windows developer bought its way into the HCM applications market with the $26-billion purchase of LinkedIn to seize a decisive lead in talent acquisition and eLearning.

As a result, one is tempted to suggest that the deal is a stroke of genius with the stroke of the pen. The former observation underscores the strategic value of HCM applications in the eyes of investors as talent is hard to find and automation of end-to-end HR processes has become more important than ever. The latter observation says a lot about the direction of the software industry as private equity firms like Hellman & Friedman, Vista Equity and others keep gobbling up software companies where executive transfers and customer overlaps are increasingly common.

The sense of inevitability calls for a CFO of one software company being acquired by a PE firm to land a similar position at another outfit, which happens to be owned by the same investor. Not surprisingly, customers involved in these deals are almost becoming interchangeable as they are being pitched to buy the full set of products, albeit under different brands, which all happen to be owned by the same investor group.

However, the combination of Kronos and Ultimate raises questions about the integration of the two entities with a long history of serving their respective market admirably.

Even though there are few overlapping customers between the two, Kronos does maintain a long-standing OEM deal with ADP, the archrival of Ultimate in Core HR, Payroll and time and labor management. Since 1993, ADP has been incorporating Kronos time clock and workforce management applications into its HCM offerings for thousands of customers worldwide.

More recently, Kronos has been partnering with SAP, which has become a reseller of Kronos Dimensions, its go-to-market workforce management product for large enterprises.

On the Ultimate side, it has been partnering with Infor by reselling its Workbrain product for workforce management for its large enterprise customers with more than 2,500 employees, in addition to selling its own time and attendance products to smaller firms.

The deal to combine Kronos and Ultimate could put those partnerships at risk, despite comments to the contrary from both firms reaffirming that all these alliances will stay intact, along with continuous developments and improvements to UltiPro, Workforce Dimensions, Central, Ready and other existing products.

Based on our continuous survey of thousands of Kronos and Ultimate customers every year since 2010, our assessment is that changes will come, but they will happen gradually for fears of disrupting the planned expansion of the combined company.

Vowing to add another 3,000 employees across all functions by 2023 and double its size to $6 billion by 2025, executives from both companies suggest that the greater good of the combined company will outweigh some of these potential problems from cloud integration to redundant products.

That brings us back to the first point. After first buying Kronos for $1.8 billion in 2007, a mere 13 years earlier, and investing even more to accelerate its transformation in subsequent transactions, Hellman & Friedman and its investment partners now sit on a combined company worth $22 billion.  Let’s just call it a stroke of genius.

List of Kronos and Ultimate Software Customers

Source: Apps Run The World, February 2020

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