|SumTotal® Systems MindSolve® Technologies a privately held provider of performance management software. |
“We are buying MindSolve because our strategy is to transform SumTotal by offering best-of-breed solutions for each segment of talent management, both in pure-play market opportunities as well as integrated suite opportunities,” said Don Fowler, chief executive officer of SumTotal.
According to The Yankee Group, the market for talent management software – which deals with employee learning, performance, compensation and recruitment – will expand “at a compound annual growth rate of 17 percent.” Researchers expect that market to be worth approximately $2 billion by 2008.
“By developing and selling solutions for each segment of talent management, we believe we will address customers’ demands, grow our business and shape the market’s vision for these products,” added Fowler. “We believe that once we are through the initial integration activities, MindSolve will add a quarterly revenue run-rate of between $1.5 million and $2 million and generate positive cash flow from operations.”
By acquiring MindSolve, SumTotal adds its own performance management capability to an award-winning learning management suite, which delivers and tracks training over the Internet. According to industry analysts, the MindSolve solution provides best-in-class, patented technology for analyzing employee “bench strength,” creating and managing succession plans, aligning goals, appraising performance and evaluating compensation.
For example, Bersin & Associates – a research firm specializing in learning and talent management – states that MindSolve offers a “unique and compelling approach to performance management.” Performance Management 2006: Market Analysis, Trends, Best Practices, and Vendor Profiles, page 143, available at www.bersin.com/perfmgt . Bersin says that MindSolve’s technology offers “integration with ‘balanced scorecard’ applications and a patented user interface with proven efficiency and accuracy,” which customers such as Ernst & Young, Pfizer and Sonoco Products Corp. have purchased.
And Gartner writes in a report titled “MarketScope for Employee Performance Management Software, 2005” that “MindSolve has strong overall functionality. MindSolve is most appropriate for large companies that want deep performance management functionality and value strong manager support tools.”
“Over the years, we’ve made considerable investments in R&D, so we feel our technology is very strong,” said Dan Boccabella, general manager for MindSolve. “This merger, in the minds of MindSolve’s shareholders and management team, gives us a worldwide distribution channel and access to the industry’s leading learning solutions.”
“SumTotal has acquired a proven, best-of-breed solution, which SumTotal customers can benefit from immediately,” said Josh Bersin, president and founder of Bersin & Associates. “We believe that performance management solutions are becoming the core of integrated talent management. The Convergence of Learning and Talent Management: Has Talent Management Arrived? Available at www.bersin.com/convergence . SumTotal now has the opportunity to integrate the MindSolve solution with SumTotal’s learning management suite to deliver a complete solution for integrated performance and learning management.”
Under terms of the transaction, MindSolve shareholders will receive approximately $5.2 million in cash along with 925,000 shares of SumTotal common stock. The company will also incur additional cash obligations due to deal-related and retention expenses of approximately $1.5 million. The transaction was unanimously approved by the SumTotal and MindSolve Boards of Directors and the MindSolve shareholders. The shares are issued pursuant to Section 4(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D.
Craig-Hallum Capital Group LLC provided financial advisory services to SumTotal Systems in this transaction.
Updated Guidance for the Fourth Quarter of 2006
Under generally accepted accounting principles, or GAAP, SumTotal estimates that MindSolve will add between $0.1 million and $0.2 million in revenue and between $0.7 million and $0.9 million in expenses resulting in an increase in the net loss of between $0.5 million and $0.8 million.
On a non-GAAP basis, SumTotal estimates that MindSolve will add between $0.3 million and $0.4 million in revenue and add between $0.5 million and $0.7 million in expenses, resulting in a reduction in the net income of between $0.1 million and $0.4 million.
The weighted average number of shares for the quarter will increase by approximately 480,000 as a result of this transaction.
The reconciling items between GAAP and non-GAAP net income (loss) are estimated to be $0.2 million related to the acquisition adjustment to write-down deferred revenue, and $0.2 million for amortization of intangibles.
In managing its financial performance and establishing internal financial plans and targets, the company uses non-GAAP financial measures. Management believes that certain non–GAAP financial measures provide greater transparency in managing its operations and business. The company has presented these non-GAAP financial measures as supplemental information to allow investors to see how management views the operating performance of the company and how it communicates the performance internally. The company has historically reported similar non-GAAP financial measures to its investors and believes that the inclusion of comparative numbers provides consistency in its financial reporting. This non-GAAP information is subject to material limitations and is not intended to be used in isolation or instead of results prepared in accordance with GAAP, but rather in addition to the GAAP results. Also, the non–GAAP information prepared by SumTotal is not necessarily comparable to non-GAAP information provided by other companies.