Last night, private equity firm Thoma Bravo said it agreed to acquire Anaplan for $10.7 billion. The financial planning software company’s stock has declined sharply in the last six months, which likely gave the PE firm a chance to pounce.
The stock market hasn’t been kind to SaaS companies in recent months, which makes us wonder if we’re seeing the beginning of a trend of private equity taking aim at vulnerable SaaS firms.
To answer that, let’s quickly unpack the Anaplan transaction and better understand if Thoma Bravo is paying a premium for this company. From there, we’ll be able to get an idea of how much private equity types are willing to shell out for modern tech companies.
Afterward, we’ll apply what we’ve gleaned to a host of public SaaS companies that could find themselves answering inbound calls from other private equity concerns. Don’t forget that private equity is richer than it has ever been in terms of available dry powder, and that money could be looking for a target.
Private equity firms look for strong market positioning, and a large and valuable customer catalog with room for growth, all of which modern cloud companies have in surplus.
Inside the Anaplan-Thoma Bravo deal
Anaplan said fourth-quarter revenues rose about 33% to $162.7 million — of which $148 million came from subscription sources — from a year earlier. On a full-year basis, revenue rose just under 32%, meaning that its Q4 growth rate was similar to its full-year outcome.
If we convert the company’s Q4 revenue into run-rate revenues, we can apply that figure (about $651 million) against its $10.7 billion purchase price to get a revenue multiple of around 16.4x for the transaction.
Recall that we’ve seen declines in software company valuations to the point where SaaS companies growing at more than 30% today have had their revenue multiples cut to the 12x mark when we compare forward revenue projections against their present-day value. Compared to that number, the Anaplan deal price seems to be full-fat.
Indeed, with Thoma Bravo paying a roughly 46% premium ($66 per share) for the software company’s shares when compared to pre-deal prices, the PE firm is coughing up close to a Q4 2021 price for Anaplan. To be precise, Anaplan shares peaked at just over $66 a share over the past six months, right in line with the Thoma Bravo offer.
This provides a neat little framework for us to work with: Software companies that are trading at depressed prices today could perhaps sell to private entities for their Q4 2021 valuation high-water mark.
If that’s the case, we’re quite curious about who else could be in line to surrender their status as an independent company. And we have more than a few names in mind.
Who could be next?
Our takeover target list is full of possibilities. Let’s start with DocuSign, which was in the right place at the right time in recent years with its electronic signature software. When the pandemic struck and we couldn’t go to offices to sign documents in person, the value proposition of a tool like DocuSign went through the roof.
Given its propitious market positioning and resulting tailwinds, you might think that it’s the kind of stock that Wall Street would stay in love with.
Not quite, it turns out. DocuSign’s stock is down over 65% over the last six months, despite the company doing well even with the pandemic tailwind fading from its results. We’re talking about a company that announced $580 million in revenue earlier this month, inclusive of 30% growth. There’s apparently a gap, though, between those results and market sentiment, which has sent its value plunging in recent months.
Indeed, in Q4 2021, DocuSign was selling for $260 to $280 per share; today it’s worth $95 and change. Returning to what we learned from the Anaplan deal, would DocuSign investors sell the firm for the prices it set in the last three months of 2021?
If we apply the same premium that Anaplan is commanding, DocuSign would be worth around $140 per share. That’s still a huge bump from where it’s trading today, and perhaps could be enough to take the company private.
DocuSign is the most obvious example of a SaaS company with great potential but a stock in the doldrums. Keep in mind that Anaplan’s stock was down a more modest 22% over the past six months and 7% over the past year, and it still looked attractive to private equity. DocuSign’s steep declines could make it an even more likely takeover target.
Expanding our list, consider the following software companies. The numbers next to their name represent how much their shares have fallen over the last six months:
- Dropbox: Down 24%.
- PagerDuty: Down 25%.
- Okta: Down 31%.
- Nutanix: Down 34%.
- Five9: Down 39%.
- Zoom: Down 58%.
You could argue that because many of these firms saw their shares surge during the pandemic before falling back to earth, the drops we are seeing are just a market correction. But remember: Whatever the cause, we’re in a world where PE is rich and software companies are, compared to recent prices, cheap.
We’re not just talking small deals, either. The Anaplan price indicates that deals worth $10 billion and more are very much in the realm of possibility. Okta is worth around $27 billion today, making it a big bite to swallow. But Five9 is worth just over $7 billion, and Nutanix is worth less than $6 billion. PagerDuty is worth a comparative song, with a valuation of just over $3 billion.
So we have a number of companies enduring depressed market valuations that are smaller than Anaplan, and often feature similar growth rates.
Assuming they could be acquired is a bit more than idle speculation, though.
Private equity firms look for strong market positioning, and a large and valuable customer catalog with room for growth, all of which modern cloud companies have in surplus. In fact, quite a lot of the world’s IT spend is still locked in on-premises deals and processes. All that spend has to migrate to the internet eventually, and SaaS companies would love to absorb those customers.
So if you are private equity and need to deploy huge sums, it’s a no-brainer: Why not pick the software space with companies that have oodles of potential market to conquer and are growing at a decent, albeit not spectacular, rate?
We saw a lot of IPOs in 2021 that brought a wave of liquidity to the technology market. Perhaps in 2022, we’ll see a mirroring wave of acquisitions. If we do, it’s quite likely that cheaper startups could find themselves swept up in the currents along with more expensive public software companies.