By Nathan Walemba (University of Oxford), Roshni Padhi (Stanford University)
Overview of the deal
Total Transaction Size: $6.5 billion in stock
Date Announced: March 3, 2021
Expected Close Date: FY2022 Q2
Target advisor: Qatalyst Partners
Acquirer advisor: Morgan Stanley
Okta and Auth0 are two companies in the identity and access management (IAM) market, and they focus on providing authentication and authorization solutions for companies and individuals alike. The all-stock deal integrates Auth0 into Okta’s larger cybersecurity operations while still allowing it to remain an independent unit. The combined entity will provide a more comprehensive set of identity and access management solutions, broadening the customer base. The company hopes to establish identity as a primary cloud, driving the future of identity as what ties together different technology use cases in our daily lives. The primary synergies expected in this deal are revenue synergies that come from cross-selling opportunities and combining target audiences.
“(Together, we can offer our customers workforce and customer identity solutions with exceptional speed, simplicity, security, reliability and scalability. By joining forces, we will accelerate our customers’ innovation and ability to meet the needs and demands of consumers, businesses and employees everywhere.)” - Eugenio Pace, CEO and co-founder of Auth0
Company Details: (Acquirer - Okta)
Okta (NASDAQ: OKTA) provides cloud software for companies. As an enterprise solution provider, it includes customers such as Nordstrom, JetBlue, and the U.S. Department of Justice. It has more than 10,000 customers and has traded publicly since 2013.
Founded in 2009, headquartered in San Francisco, CA
CEO: Todd McKinnon
Number of employees: 2,806
Market Cap: $28.02B (as of March 21, 2021)
EV: $27.40B (as of March 21, 2021)
LTM Revenue: $835.4M
LTM EBITDA: $(175.4M)
LTM EV/Revenue: 32.8x
LTM EV/EBITDA: (156x)
Company Details: (Target - AuthO)
Auth0 is an identity platform for developers. As an easily implementable and customizable authentication and authorization solution, it secures more than 2.5 billion logins per month and has 7,000 customers.
Founded in 2013, headquartered in Bellevue, WA
CEO: Eugenio Pace
Number of employees: 748
Market Cap: $1.95B (as of July 2020)
Projections and Assumptions
Just under two weeks ago, Okta announced that it was going to pay $6.5 billion in stock for Auth0. Okta is a publicly traded identity management company with a pre-announcement market cap of $31 billion and Auth0 is a cloud identity startup valued at $1.92 billion as of its fundraising round in July. The difference between those two prices and similarity between the two companies’ operations made investors think that the deal was severely overpriced without any clear synergies, so Okta’s stock price actually dropped 11% after the announcement.
Following that, Okta CEO Todd McKinnon actually gave an interview explaining the three-part rationale behind the deal. First, he mentioned that Auth0 is actually on track to go public, which explains part of the higher valuation since public companies have to pay a transparency and liquidity premium. Second, he said that they paid a multiple on revenue that was slightly below theirs and that the acquisition would be accretive. Third, he discussed synergies, clearing up any confusion that the acquisition might be redundant. The two companies actually offer complementary platforms, since only 25% of Okta’s revenue comes from the customer identity market, which is one of the two markets that make up the identity and access management industry. So while Okta mostly focuses on the workforce identity market, Auth0 focuses on the customer identity market. Even while considering the two different customer identity platforms, Okta’s tech is more of a pre-built solution and Auth0 is built ground-up for developers. In addition, Auth0 has an international customer base while Okta’s audience is concentrated in the US. Together, these illustrate cross-selling opportunities and revenue synergies more broadly.