Is $8B too expensive to buy Qualtrics?

Judging from the market reaction on SAP shares, yes.

 SAP share dropped 3.6%, wiping out 4B€ ($4.5B) of market cap following Sunday’s announcement of acquiring Qualtrics

SAP share dropped 3.6%, wiping out 4B€ ($4.5B) of market cap following Sunday’s announcement of acquiring Qualtrics

Following SAP’s announcement yesterday to acquire the Utah-based startup for $8B in cash, its share price opened today on Franfkurt down 3.6%, wiping out 4B€ worth of market cap, which is about $4.5B.

If the market was just expressing its disagreement on the $8B purchase price, then what this drop infers is the market believe Qualtrics should be worth only:

$8B - $4.5B = $3.5B,

which is significantly lower than the pre-money of its overly subscribed IPO:

$5B - $200M (to be raised) = $4.8B,

but still higher than the $2.5B valuation of its last round in 2017.

So is Qualtrics worth $8B or $4.8B or $3.5B?

 Qualtrics Income Statement from its S-1 form

Qualtrics Income Statement from its S-1 form

Note that the company has pretty decent revenue numbers, growing 50%YoY from $190M to $290M. It also looks to grow another 40% this year, which would bring its revenue to over $400M.

About 75% of its revenue are subscription, presumed to be on recurring basis, which is good. COGS is under control so Gross Margin is also a decent 70%.

Sales & Marketing, like any other enterprise software company, accounts for a big part of the operation cost. For the 2 past years S&M is about 50% of the revenue. Even given all this, Qualtrics still managed to turn in a net profit in 2017 thanks to less than proportional growth in R&D and G&A expenditures, as in any healthy enterprise software company.

 Free cash flow trend of Qualtrics from its S-1 form

Free cash flow trend of Qualtrics from its S-1 form

Free Cash Flow already turned positive in 2016 and grew further to $21M in 2017. Based on the 6-month result of 2017 versus 2018, the growing trend will continue, which is great.

So all signs pointing to this being a good healthy enterprise software company, largely subscription-based. Given this, $8B over the revenues of 2017 and 2018e would be

  • $8B / $290M = 27.6x

  • $8B / $406M(e) = 19.7x


These multiples might be on the high end, but they’re nowhere near the ridiculous multiple (of close to infinity) that Facebook paid for Whatsapp.

Maybe Frankfurt is just being conservative but given the size of SAP (>$100B market cap, $23B revenue in 2017) and its global exposure in operation, I would doubt if it’s the German factor.

After all, its CEO could not be more American. So maybe the market is just reacting in a typical Merger Arbitrage mentality against a big-gun cowboy CEO?

BTW, 48% of the company is held through a holding by the co-founder brothers Ryan Smith (CEO), Jared Smith (President & Board Member) and their father Scott Smith (Board Member). This is simply due to the fact that they’re Mormons and family/business ties are very common. Probably nothing conspicuous here. For a 16-year work, a $4B payout is not bad obviously.

 Cap table of Qualtrics pre-IPO

Cap table of Qualtrics pre-IPO

Also, Accel (17.2%) stands to cash out $1.376B, Insight Venture Parnters (16%) $1.28B and Sequoia (10.7%) $856M. The three of them put in a total of only $400M. It’s a big win for every one.

A bit curious, though, how Sequoia did not manage to get as much allocation as Insight despite they came in in Series A already and the other Series A co-investor Accel did seem to manage to double down through Series B and C more so than Sequoia.

Just some random thoughts.

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