Naver buying Poshmark for $17.90 per share is a fascinating deal, featuring elements of cross-border M&A, a sector on its back foot and stock-market dynamics making some formerly expensive companies perhaps cheaper to pick off than they may ever be again.
TechCrunch+ asked yesterday why we weren’t seeing more software M&A in light of depressed technology share prices and the mountain of cash sitting on the sidelines today, looking for a deal. What we might have stressed slightly more was the possibility of corporate M&A over private equity acquisitions.
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Today, let’s chat through the Naver-Poshmark deal’s numbers and ask what we can glean from the transaction. After all, we’re seeing a public company snatched from independence, which means we have a rich dataset to parse. Thanks to data from other transactions in the same space, comparative data paints a somewhat brutal picture of the new valuation climate.
If you are a Poshmark fan, today might not be an incredibly fun day. But the deal is going through and we deserve to know why— and what it might mean for others. To work!
The deal, briefly
Naver, a South Korean internet company, will buy all Poshmark stock for $17.90 per share in cash. The deal values the smaller company at an enterprise value of around $1.2 billion.
In equity terms, how TechCrunch tends to consider corporate worth, that value is around $1.6 billion, given what the two entities described in a press release as the assumption of “$436 million of unrestricted cash on balance sheet as of June 30, 2022,” at Poshmark.
I don’t bore you with valuation nuance simply to remind you that it’s important to grok the difference between enterprise and equity pricing. Instead, it’s important to understand that the gap is so large because Poshmark had so much unrestricted cash relative to its market cap. (Poshmark reported “cash and cash equivalents were $581.2 million,” or “$7.41 in cash per share,” at the end of the second quarter.)
A large chunk of the value of Poshmark pre-deal was, in fact, cash. Poshmark was worth around $1.2 billion before the deal was announced, meaning that around a third of its value was simply its checking account. That fact means that the market didn’t think much of the company, despite the fact that it was miles away from running out of money.
Why was the company’s value so depressed even though it was so cash heavy by the time the deal was announced? Slow growth and profitability issues.
As Poshmark noted in its second-quarter earnings, revenue growth at the company was just 9% ($81.6 million Q2 2021 revenue to $89.1 million this year), which led to a net result that fell from -$2.4 million in the year-ago quarter to -$22.9 million this year. Throw in the fact that the company was forecasting revenues of $85 million to $87 million in Q3 with $9 million to $11 million in adjusted EBITDA losses, and you have a good vibe for why Poshmark wasn’t terribly favored by the market.
This brings us to our first point.
Wounded companies are takeover targets
We were right in our SaaS argument that depressed share prices of public tech companies that flew high amid the early parts of the pandemic are creating takeover targets. We just got the sector wrong to start.
As we’ll see below, the Poshmark deal was far cheaper than it might have been a year ago, which means that the deal might not have happened — and indeed did not happen! — at those prices. It came together during a very different valuation window. That tells us something useful.
Given our firm belief that SaaS M&A could kick off in short order, and the fact that Poshmark is getting taken off the board, perhaps we could see a lot more activity in more spaces than we thought.
Timing is everything in M&A
While we’d love to see a wave of deals, if for no reason other than that we’d learn a lot, the news that deal-making could pick up will only bring some comfort to potential acquisition targets.
Here’s why:
Some of the difference between the prices and multiples comes from growth rate differences, but not all. A chunk of the multiples differential we see above is simply market timing. Mid-2021 was a different world compared to late 2022.
If you have to sell your company, you’d really rather have done it last year. You would have gotten a damn sight more cash. And that’s because:
You can get a premium, just not an attractive one
Per the deal announcement, Naver is paying:
[A] premium of 15% to Poshmark’s closing stock price as of October 3, 2022, a 34% premium to the 30-day volume weighted average price, and a 48% premium to the 90-day volume weighted average price of Poshmark’s shares.
Great, right? Only if you are excited about a company that has a 52-week high of $27.34 and an all-time high of more than $80 per share selling for less than $18 per equity unit. As noted above, the purchase price is a premium if we measure up from recent lows (shares of Poshmark bottomed out at $8.97 in the last year). But if you measure down, however, the premium looks more like a pity kill than an endorsement.
Companies that do sell from depressed share prices are going to get some juice, but not enough, if Poshmark proves indicative of future transactions’ heft. There’s just no way to get from where we are today to prior levels of investor pricing hype with M&A premiums alone.