Now, while I thoroughly agree with the acquisition, as I quoted in Spend Matters’ initial coverage … because it does make perfect sense for Workday and for Scout … I have to admit that the valuation is incredible and the multiple almost non-sensical at first, second, and even tenth glance.

So let’s take a step back. One of the rules that investors follow is the rule of 40, which means that, in 5 years, the company revenue should be 5X what it is today. It might be a bit less, but if growth stays steady, revenue should at least be 3.5 to 4X what it is today, and that’s enough to justify a 7X investment as the investor should be able to “sell the company up the chain” to a bigger investor at 3X what they invest today. And if the deal is just right, maybe a 8X to 10X if there is a lot of cross-company application synergy with another company in the portfolio and they can quickly market and sell to a larger customer base than either company could on its own, but that’s about it. (And of course, assuming the revenue is focussed entirely on license/subscription fees and not services.)

But, as far as can be fathomed, Workday payed a 20X+ multiple for Scout, and that, on the surface, is usually beyond absurd. Even at aggressive growth, it will take Workday at least a decade to make their investment back if we follow the rule of 40. And a lot can change in the market in ten years. But it’s more than just an application and another market for Workday. It’s a strategic acquisition that will give Workday much more than a key component missing in its B2B wheelhouse. Why?

Whatever the reason the acquisition team came up with internally, Workday has to contend with the fact that not only was it’s suite lacking in S2P, and significantly lacking in upstream capability, but that in order to move upstream in the ERP world, and contend with the likes of Oracle and SAP (and fend off any efforts of SAP and Oracle to poach Workday’s customers as the customers grew and matured), Workday needed a good S2P offering, tightly integrated with their Finance and HR applications, and Workday needed one fast. Scout, with which they already have a few integrations with, fits the bill and has a track record, like Workday, of rapid development. It is Workday’s best shot at building and integration an 80% S2C solution for the mid-market quickly.

Also, Workday also has to contend with the fact that some of its earlier interfaces, while more modern than many of Oracle’s and SAP’s older interfaces, are not as modern as some of its newer applications and even some of its newer applications could use a facelift. And Scout has the interface customers like.

Finally, if the mid-market is moving towards a combined Procurement/Finance suite, Workday is going to need to have a true cloud-native S2P platform integrated sooner rather than later. (It’s not a party that Workday, with its ambitious growth plans, wants to miss.)

So while a deal like this would usually be absurd and one that any investment firm should run from as fast as they can, this was a very strategic acquisition investment for Workday and the sooner they got started on the S2P path, the better their chances of actually becoming a serious player both in the ERP market and the S2P market before it’s too late to make a difference.

(This is just a high level analysis. If you really want to understand all of the nuts and bolts behind a deal such as this, I recommend checking out the prophet‘s 4-part deep analysis over on Spend Matters Nexus [membership required]: Part I, Part II, Part III, and Part IV. In addition, the prophet and the maverick teamed up for a customer recommendation piece over on Pro [membership required]. Note that the prophet‘s views may not entirely correspond with the doctor‘s.)

However, the end result is that they’ve just taken the M&A mania up a notch, and now firms that don’t have a solid grip on the models, but want in on the action, will be making mad men bids and all hell is sure to break loose. So buckle up, the ride’s about to get rough!