In my recent article about Workday Inc (NYSE:WDAY), I pointed out that the company has a huge number of shares that are authorized for issue. The company did not wait long before taking advantage of that. Workday has announced that it proposes to offer $220 million of convertible senior notes due 2018 and $220 million of convertible senior notes due 2020. Later, the company increased the size of the first offering to $310 million.
What’s the reason?
At the end of April, Workday Inc (NYSE:WDAY) had $805.8 million in cash and marketable securities. The company finished the quarter with a net loss of $33 million. Other things being equal, this would have allowed Workday to last 24 quarters without the need for additional financing. Of course, this is not a realistic example. I give this one to give you a feeling that the company was not cash-strapped at the moment it took the decision to issue debt.
The company has stated that it will use proceeds for general corporate purposes. It was not alone. On the same day, its peer, Cornerstone OnDemand, Inc. (NASDAQ:CSOD) stated its plans to sell $220 million of convertible senior notes due 2018 with the same goal. Just as Workday Inc (NYSE:WDAY), Cornerstone offers cloud HR solutions.
Cornerstone had $76 million in cash and cash equivalents at the end of the first quarter. The net loss for the quarter was $10 million. The situation looks different from the one of Workday. Cornerstone OnDemand, Inc. (NASDAQ:CSOD) is not so cash-rich, and it would be great for the company to enhance its liquidity situation.
After salesforce.com, inc. (NYSE:CRM) acquired ExactTarget Inc (NYSE:ET) for $2.5 billion, paying a 53% premium, everyone is searching for the next target of M&A boom. It seems like Workday Inc (NYSE:WDAY) is targeting some company to make an offer. Otherwise, it does not seem logical to raise funds while the company has more than enough cash for its operations.
Good or bad?
What does this news make from an investor’s point of view? It seems like Workday would be purchasing something to expand its cloud presence and battle giants like SAP AG (ADR) (NYSE:SAP) and Oracle Corporation (NASDAQ:ORCL), which also have their HR management solutions. These firms have already bought themselves a piece of the HR management pie. SAP has made its move with the purchase of SuccessFactors, spending as much as $3.4 billion. Oracle bought Taleo for $1.9 billion.
I would like to remind that Workday Inc (NYSE:WDAY) is expected to post losses in the next two fiscal years. Workday is seen as a growth company, so the key factor for the success of its stock would be growth. Growth companies are often acquired by bigger peers that want to defend their market share. As Workday would not be profitable in the near future, it is important to examine whether it could be bought by someone.