By Friedrich von Storch, Enrique Pérez-Hernández and Ties Oudmayer (IE University), Ritu Joseph and Anusha Kaushik (London Business School)
Photo: Anton Maksimov (Unsplash)
Overview of the deal
Acquirer: Silver Lake
Target: Qualtrics
Implied Equity Value: $18.15 per share (73% premium)
Total Transaction Size: $12.5bn
Closed date: 12 March 2023
Target advisor: Morgan Stanley, Barclays (Financial), Goodwin Procter, Sterling LLP (Legal)
Acquirer advisor: JP Morgan (Financial), Latham and Watkins (Legal)
The joint acquisition of Qualtrics by Silver Lake and CPP is till date the biggest PE buyout of the year. Considering the tumultuous interest rate market, the majorly equity financed deal is seen to open doors for new growth investments. This move makes investors see a ray of hope despite the increasing rifts in buyout financing as seen due to the looming threats of recession in various economies.
In an all cash deal, the interesting post-deal funding structure is formed from the 71% stake exit of SAP, its previous owner for $9.15bn. The acquisition is being financed largely with equity commitments from Silver Lake for $9.5bn, the CPP for $1.75bn, and $1bn in debt. The owners are set to receive $18.15 per share summing a 73% premium to the group’s trading price.
Silver Lake is all set to take the company private, retaining Qualtrics’ co-founder Ryan Smith - one of the largest shareholders with a stake worth more than $200mn - as someone with major equity interest in the firm post acquisition. Qualtrics will continue to be led by Chief Executive Officer Zig Serafin, and the company will remain headquartered in Provo, Utah and Seattle, Washington.
With a motive to transform various business processes and expand on the enterprise cloud platform, Silver Lake is looking to leverage its industry expertise and transformational prowess to help Qualtrics scale to the next level. The successful investments of Silver Lake have historically resulted from working in coherence with the founders’ of tech businesses and efficiently utilising its deep-pocketed capital and broad network base to help businesses not just scale to different levels but also horizontally venture into different tech arenas.
The strong management of the combined forces is set to unleash the potential of Qualtrics not just as an experience management platform but also expand user experience by venturing into the booming field of Artificial Intelligence.
“This is a landmark transaction for Silver Lake, reflecting our confidence in the team and their vision. As they shape and continue to grow the next great enterprise software platform, they are the kind of leaders we have been most excited to partner with over many years of technology investing” - Egon Durban, Co-CEO (Silver Lake)
Company Details (Acquirer - Silver Lake)
Founded in 1999, Silver Lake is a global private equity firm based in Menlo Park, California. The firm is known to invest in disruptive technology-enabled growth companies. Founded in the peak of the technology boom of 1999, Silver Lake is a global leader in technology investing, with a portfolio of over $1tn in Enterprise Value. Spanning across North American, European and Asian economies, Silver Lake has a deep understanding of the technology industry and brings a great value additive factor to all its potential investments.
Leveraging its success in past investments such as Dell Technologies, Alibaba Group and Veritas Technology, Silver Lake has developed a brand name like no other. Silver Lake’s portfolio companies collectively generate more than $272 billion of revenue annually and employ approximately 681,000 people globally. With a history of being an active investor, Silver Lake has developed an operational expertise to help management scale up their business, beat competition and multiply their revenue with constant efforts in a rapidly growing market.
Founded in 1999, headquartered in Menlo Park, California, USA.
CEOs: Greg Mondre and Egon Durban
AUM: $92bn
Total Investments: 813
Active Portfolio: 116
Investments (TTM): 123
Exits: 178
Median Round Amount: ~$150mn
Median Valuation: ~$500mn
Recent Transactions: Undisclosed investment in EPI (Milan) (Apr 2023); Undisclosed investment in Easy Street Insurance (Mar 2023); Undisclosed investment in Salem Red Sox (Mar 2023)
Company Details (Target - Qualtrics)
Qualtrics is an American software company that provides experience management solutions to organisations worldwide. Founded in 2002 and headquartered in Seattle, Washington, and Provo, Utah, the company specialises in developing software for online surveys, customer feedback, and employee engagement. Qualtrics' platform enables its clients to collect and analyse data from various sources, such as social media, email, and web analytics. In 2019, the company was acquired by SAP SE, a German multinational software corporation, for $8 billion in cash, however, has been operating as an independent entity since.
Founded in 2002, headquartered in Seattle, Washington, and Provo, Utah
CEO: Zig Serafin
Number of employees: 5,600
Market Cap: $10.8bn
EV: $10.4bn
LTM Revenue: $1.5bn
LTM EBITDA: ($0.9bn)
LTM EV/Revenue: 7.1x
LTM EV/EBITDA: n.m.
Projections and Assumptions
Short-term consequences
This acquisition has emphasised on integrating AI into Qualtrics. These products have immense benefits and are pre-integrated into customers' workflows, making it difficult to replace them with general-purpose generative AI without significant switching costs. However, the acquisition raises concerns about Silver Lake's intentions for Qualtrics. It is unclear whether Silver Lake plans to provide funds for growth or continue Qualtrics' existing trajectory. The press release suggests that AI investment will continue to drive Qualtrics' dominance in the experience sector. The long-term goal of the investment remains uncertain.
Qualtrics generated $1.5bn in annual sales last year, a 36% increase, with more than 80 per cent of those revenues coming from recurring subscriptions. Recurring revenue provides a predictable and stable source of cash flow, thus enabling Qualtrics to leverage its customer base and operational infrastructure to grow without incurring proportionate increases in costs. This scalability will allow Qualtrics to improve its profitability, and with the expertise of Silver Lake, offer upselling and cross-selling opportunities in new technology arenas to existing customers. SAP’s continued role as a close go-to-market and technology partner also cannot be underestimated. Under SAP’s ownership since 2019, Qualtrics’ more than tripled its revenue and increased its number of customers from 10,000 at the time of SAP’s purchase to over 18,000 today.
Additionally, with the majority of the $12.5bn deal value financed with equity, the low leverage capital structure will help fuel Qualtrics’ next stage of growth. Unlike debt, equity financing does not require regular interest payments or fixed repayment obligations. This can relieve Qualtrics from the burden of debt repayment, especially during this period of economic uncertainty, allowing it to preserve its cash flow for growth, and strategic investments in AI and other powerful technologies. The improved creditworthiness backed by a low leverage capital structure will also enable Silver Lake to potentially access additional financing options in the future for Qualtrics at more favourable terms, when interest rates go down.
Long-term Upsides
Silver Lake is famously known for taking large hardware and software providers, such as Dell and Skype, private. Hence, such a deal is nothing new for Silver Lake’s seasoned industry professionals.
Qualtrics’ future owners will be left with a company with over 18,000 customers. It has self-proclaimed that measuring customers’ perceptions of the quality of experiences they consume allows for the improvement of experiences. This is an important feedback loop and will continue to be so in the future given that so many products are now delivered as software.
While a spokesperson for the company has said that there will be no immediate impact on the company’s footprint or headcount as a result of the deal, one specific section of the company’s 10-K raises some concerns and will need to change for its future growth prospects. While the company’s revenues grew 36% YoY in 2022, Qualtrics accounted for operating losses of approximately $1bn. The loss is not hugely surprising, but the fact that Qualtrics spent ~2x gross profit on the operating side of the business is worrying, a trend that has continued over the past 3 years.
Looking deeper into the company’s cash flows, stock-based compensation is the main driver of over half the company’s operating expenses. Qualtrics appears to be compensating its C-Suite with generous payment packages, with the CEO alone receiving ~half of the stock-based compensation.
One key aspect the company has failed to align is the executives’ interests with shareholders, especially if their pay package is so high regardless of stock price performance. For context, the stock price plummeted 70% in 2022. Moving forward, Silver Lake and Qualtrics will have to assure that the company turns profitable whilst maintaining cohesion between the company’s executives and interest holders. Once interests are aligned, Qualtrics’ long-term growth prospects look promising.
Risks and Uncertainties
This deal is noteworthy because it will be financed mostly with equity, with only $1bn of debt, which is highly unusual for a private equity firm. Typically, private equity firms leverage the target company to maximise the Internal Rate of Return (IRR) and returns from the deal. However, Silver Lake has decided to take this approach due to the high cost of borrowing caused by the current high-interest rates. As a result, it will have to rely purely on organic growth from the company to maximise the IRR and exit at a high multiple in the upcoming years. Due to the unconventional financing strategy, it will be a risky and uncertain endeavour for Silver Lake to achieve high returns from this deal in the future. This deal reflects the current economic climate, where private equity firms are forced to be more conservative in their financing strategies, even when making significant acquisitions.
While Silver Lake's conservative financing approach for the Qualtrics acquisition is understandable, it may result in missed opportunities for higher returns in the future. Interest rates may fall in the next year or so, which could provide Silver Lake with the opportunity to refinance the debt at a lower cost. By not taking advantage of this possibility, Silver Lake may be missing out on a chance to maximise its returns. Additionally, financing with equity alone may limit the amount of capital that Silver Lake can put into other companies as well as Qualtrics to help drive growth. This could lead to slower organic growth, which would ultimately limit the potential returns on its other investments. However, the decision to finance with equity may also provide Silver Lake with more control over the company and a longer investment horizon to achieve higher returns.
The deal also poses risks for SAP when floating its stake in Qualtrics. SAP will have a significant capital reserve for future acquisitions or share buybacks after the acquisition closes; it has not yet disclosed the use of these funds.
Ultimately, the success of the deal will depend on Qualtrics' ability to deliver strong organic growth over the long term.
“Silver Lake’s belief in our vision and their amazing track record of helping founders and management teams speaks for itself” - (Ryan Smith, Qualtrics Co-Founder)
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