Are Vague Taleo Rumors Likely to be True?

Taleo Corporation (NASDAQ: TLEO) is a talent management company that primarily uses cloud computing to determine optimal business strategies. By using proprietary algorithms, Taleo aims to optimize head hunting for large firms. Rumors started to circulate that Taleo might be a takeover target by another company, and its stock rallied over 7.5% today. However, is there any truth behind the rumors?

The first thing that people need to understand in mergers and acquisitions is that there are two types of buyers. Strategic buyers are primarily looking for companies that significantly add value to their operations. They want to acquire a company to gain market share in a geographic region or an untapped market. They may also consider purchasing a company so it can streamline operations and save costs. Ultimately, the potential synergies from a merger is what strategic buyers are concerned with.

Financial buyers are not so much concerned with the qualitative aspects of a company as strategic buyers, Essentially, they want to purchase a company and use its cash flows to make money during the holding period or even after. If a financial buyer pursues a leveraged buyout, it can use the cash flows to pay down the debt during the holding period and then resell the company after a variable amount of time. Private equity firms commonly use this strategy in their ventures. Frequently, financial buyers will have to make certain changes to their portfolio companies, whether its changing up management, cutting costs, or exploring business ventures that they consider worthy.

Rumors did not specify if the potential Taleo acquisition would be from a strategic or financial buyer.

Taleo's cash flows have been volatile over the last few quarters. Mostly as a result of acquisitions and capital expenditures, net cash has increased from $4 million to $20 million, quarter-over-quarter, except in Q4 2010. Then, due to a large acquisition of Learn.com, cash flows were -$138 million. Regardless, cash flows from operations have been increasing in 2011 despite negative net income numbers. A variable cash flow statement may not be the best thing for buyers when considering acquisition targets. While the volatile cash flow is of concern to both financial and strategic buyers, financial buyers would be much more concerned with it. Strategic buyers, such as competitor head hunting firms, may still consider Taleo a worthy target because of its unique, computerized approach to talent acquisition.

An extremely important metric that buyers are aware of is the company's capital structure. Taleo does not appear to have any debt on its books. A complex capital structure including multiple debt tranches is not a good sign. Essentially, companies want to be able to manage and take care of debt as easily as possible, and having multiple revolving credit lines along with various other obligations is tough to take care of.

Taleo can also be applied nationally. It predominantly operates in the west coast, but the presence of algorithms to streamline the head hunting process does not appear to be prevalent in other areas of the nation. Considering this aspect, a strategic buyer could apply Taleo's techniques on a national and even international basis. This could increase efficiency and ultimately save costs and time.

Lastly, Taleo's revenues have been increasing over the years. Its primary problem comes with managing costs, and it is possible that either strategic or financial buyers could take care of this problem. Financial buyers specialize in cutting costs, and could definitely improve the company's return on equity over time. Nonetheless, it appears that Taleo has been able to slowly increase market share and its overall impact on the market.

Taleo is a unique head hunting company that uses computer algorithms to optimize and quicken the recruitment process. It is possible that a strategic or financial buyer is considering taking it over. What can be done is increase its outreach and cut costs, and if both strategies are implemented, Taleo may be a lean, extremely effective company. An acquisition stands add a lot of value to its shareholders, and may be a good idea for everyone involved.

Taleo is currently trading at $31.61, up about 14.3% for the year.