When the news hit Monday that Qualtrics was being acquired, it wasn’t exactly surprising. SAP never seemed enamored with the company in spite of spending a hefty $8 billion to buy it in 2018. It took the German software giant just two years before it decided to spin Qualtrics out again as a separate company. After years of expecting it to happen, Qualtrics finally went public in 2021.
While Qualtrics was operating as a separate company with its own board of directors, budgeting and ability to set its own direction, SAP was still the power behind the throne, controlling a whopping 71% of its stock.
SAP always seemed to have some buyer’s remorse when it came to Qualtrics. It was hoping to get a dose of cloud savviness and access to crucial customer data, two things that Qualtrics easily provided, but the two companies never appeared to quite fit. Acquired when Bill McDermott was still SAP’s CEO, it’s possible that his replacement, Christian Klein, didn’t feel the same affinity for the company.
Whatever the reasons, the company began shopping Qualtrics at the end of January. That decision helped boost the value of the controlled company. The best offer it received for Qualtrics came to around $12 billion from a collection of buyers including Silverlake and the Canadian Pension Board. Considering SAP’s 71% stake, its cut of that dollar figure comes out to around $8.8 billion, basically the price it purchased the company for in 2018 and not much more.
Qualtrics filed an 8-K form with the SEC over the weekend, reporting the parameters of the deal, including that Silverlake and its investment partners offered $18.15 per share. That number represents just a 6% premium over Friday’s closing price, per the Financial Times. (Note, however, that Qualtrics already saw appreciation after news of its potential sale was announced earlier in the year; a sale was already priced-in.)
It’s also worth noting that this is not a done deal, although it feels unlikely that anyone will come along and beat the number on the table. Regardless, we wanted to look at this price and determine, is it fair? Is it as low as it feels at first glance? Let’s dig into the numbers and find out.
Fair or unfair
To answer our question regarding the potential sale price for Qualtrics, and whether it’s being sold on the cheap, we’ll need to interrogate its pre- and post-announcement value. While the premium over Friday’s close wasn’t large, it begins to look much better if we extend our time horizon.
Qualtrics saw its value dip under the $6 billion mark in late 2022 per YCharts data. The company’s fortune turned in the new year, rising to around $6.6 billion before it was announced that SAP might sell it. When you explore the sale price through that earlier valuation lens, an exit price of more than $12 billion feels much more generous.
Is it fair? Per regularly published software valuation data collected by private equity investor Jamin Ball, software companies that were growing between 15% and 30% in early January of 2023 — before software valuations warmed slightly, and SAP announced that it might divest Qualtrics — were worth a median of 5.1x their projected next year’s revenue. Per the same data source, the same cohort of tech companies are now worth 6.1x their next 12 months’ top line.
In late January — just before SAP put it up for sale — Qualtrics reported its Q4 2022 results and provided a full-year forecast for the new calendar and fiscal year. The company said that it expects around $1.665 billion in revenue for the year. In January, that would have been worth around $8.5 billion, per the above detailed data. By more recent multiples, the company could be valued at around $10.2 billion before a sale premium is considered.
Qualtrics appeared to be valued below market norms back in January in part because median figures are imprecise, and every company comes with its own nuance. In the case of Qualtrics, its growth is expected to decelerate this year, and it spends heavily on share-based employee compensation.
Slowing growth + steady dilution
The growth issue is affecting the entire sector, as TechCrunch has explored: Many companies in tech are forecasting more muted growth this year. Part of this we suspect is deliberate to allow them to outperform guidance; no CEO wants to overpromise and underdeliver. But even if we presume that Qualtrics is sandbagging by a few points of growth, its deceleration is material.
But Qualtrics had some positive traits as well. The company has positive operating cash flow and a very clean balance sheet. For private equity types perhaps looking to lever the company with debt to help finance its purchase, that could be attractive; whether its cash flow is strong enough to warrant a great premium is a good question.
By our reckoning the Qualtrics sale premium that we might consider to be a fair market value for its equity right now is around 22%. That’s not much in a climate where tech valuations are posting modest recoveries. By our vetting of the deal, the company’s expected growth deceleration is receiving more weight in its sale price than its cash generation. So, the sale price is perhaps a billion dollars under what we might have anticipated, calculating an expected take-private premium to the company’s market-norm valuation mark that we calculated above.
Holger Mueller, an analyst at Constellation Research, thinks it actually worked out better than he expected. “I did not see them getting the [original investment] money back, and they ended up getting more,” he said.
The fact remains that no rival bidder has emerged to offer more. It’s hard to argue that there is a better price to be had when one isn’t in the offing, or that the price that Qualtrics is receiving is unfair, even if it does feel slightly modest.
For startups watching all of this, it’s a tough picture. Qualtrics in a sense has done what investors have asked: get to adjusted profitability while still growing. And its exit multiple is going to be firmly single-digit. The deal is not an incredibly exciting sign for startups hoping to secure the bag by selling whole-cloth to other parties instead of pursuing more venture dollars in 2023. That would leave underperforming startups caught between a rock and a hard place.