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Thoma Bravo’s $1.3bn Acquisition of UserTesting

By Mohammad Faisal Zia, Samuel Smith, and Rhodie Ferrer (University of Warwick), and Yair Trachtenberg, Nikita Bezverkhniy, Markus Walter, and Julia Donato (ESADE)

Photo: Minh Pham (Unsplash)


Overview of the deal

Acquirer: Thoma Bravo & Sunstone Partners

Target: UserTesting, INC (NYSE: USER)

Total Transaction Size: $1.3 billion

Closing date: Expected to be completed in H1 2023

Acquirer(s) advisor: Kirkland & Ellis LLP is serving as legal counsel to Thoma Bravo and Goodwin Procter LLP is serving as legal counsel to Sunstone Partners.

Target advisor: Morgan Stanley & Co. LLC is serving as the exclusive financial advisor and Fenwick & West LLP is serving as legal counsel to UserTesting.

Thoma Bravo & Sunstone Partners have announced their acquisition of the customer insight platform UserTesting, Inc. (NYSE: USER) for $1.3 billion. The transaction will be carried out in the form of an all-cash deal. UserTesting’s stockholders will receive $7.50 per share in cash.

Thoma Bravo aims to combine UserTesting with UserZoom (previously acquired by Thoma Bravo) and further integrate and expand the suite of research methods, testing types, and measurement options available. This powerful combination will allow customers to leverage the strength of both solutions to “build better product, customer, employee, and brand experiences”.

The transaction is expected to close in the first half of 2023, subject to customary closing conditions such as the approval by UserTesting’s stockholders and regulatory approval. This would de-list UserTesting’s common stock as the company would be taken private. Furthermore, it is important to clarify that the agreement includes a “go-shop” period expiring on December 10, 2022 (a provision that allows the target to seek out competing offers even after it has already received a firm purchase offer).

“We are excited to bring together the complementary expertise of UserTesting and UserZoom to create a leading, integrated solution that delivers real-time, data-driven feedback to organizations globally” - A.J. Rohde, Senior Partner at Thoma Bravo

Company Details (Acquirer - Thoma Bravo & Sunstone Partners)

Thoma Bravo is an American private equity firm, currently holding more than $122 billion in assets under management, making it one of the largest PE firms in the world. Their focus lies on investing in software and technology companies - they have invested in 400 firms over the past 20 years. Thoma Bravo is known for its “buy-and-build strategy”, where they collaborate closely with the management teams of portfolio firms to drive operating growth, innovation, and fund acquisitions.

Founded in 2008, headquartered in Chicago, United States

CEO: Orlando Bravo

Number of employees: 110 (directly), 45,000 (indirectly)

Revenue: $1bn (2021)

AUM: $124bn

Sunstone Partners was founded in 2015 and holds $1.7 billion of committed capital under its first three funds. The American private equity firm mainly focuses on technology-enabled services and software businesses and invests in both minority and majority transactions. For the past 3 years, Sunstone Partners has repeatedly appeared as a “Founder-Friendly Investor” in Inc. magazine.

Founded in 2015, headquartered in Palo Alto, CA, United States

CEO: Arneek Multani

Number of employees: 43

Revenue: $8mn

AUM: $1.3bn

Company Details (Target - UserTesting)

UserTesting is one of the world’s leading human insights platforms. The firm pioneered a video-first, enterprise-grade SaaS platform, the Human Testing Insight Platform that enables organizations to see and hear the experiences of real people as they engage with products, designs, apps, processes, concepts, or brands. Its platform captures authentic, credible, and highly contextualized customer perspectives from targeted audiences who have opted in to share their thoughts, whether for digital, real-world, or omnichannel experiences. Through the use of machine learning to analyze the tone of voice, facial expressions, and body language, UserTesting is able to offer its clients comprehensive insights to make better customer experience decisions. The firm aims to close the “empathy gap” between an organization’s perception of its customer-centricity, and its customers’ perceptions of their experiences. This helps organizations to free up time and resources and make better customer experience decisions faster using the power of video to drive alignment and action. UserTesting is currently used by more than half of the F100 companies in the world including Microsoft, Samsung, Sony, and Canva.

Founded in 2007, headquartered in San Francisco, United States

CEO: Andy MacMillan

Number of employees: 850

Market Cap: $558.6mn (as of 26/10/2022)

EV: $409.4mn (as of 26/10/2022)

LTM Revenue: $185.3mn

LTM EBITDA: -$61.5mn

LTM EV/Revenue: 2.21x


Projections and Assumptions

Short-term consequences

The acquisition is happening at a time when customer experience is essential for organizations, and companies are always looking for new ways to gain accurate and actionable insights from their customers. As we live in a digital experience-first world, the quality and implementation of user experience will distinguish the winners from the losers. High-quality insights will enable companies to make the right decisions, be innovative and ultimately deliver experiences that their customers love.

SaaS companies typically experience delayed setbacks post-economic downturns. Since inflationary pressures and a high-interest rate environment result in reduced consumer demand, consumer-facing companies will prioritize maintaining liquidity during these turbulent periods. Consequently, the spending on marketing and customer experience insights would shrink, causing the company's growth prospects to be adversely impacted in the short run. However, the firm’s high-profile F500 client base might bring stability during these times.

With Thoma Bravo’s industry expertise and prior acquisition of UserZoom, UserTesting will be able to benefit from operating capabilities, capital support for R&D, and expansion into new markets.

The outcome of the acquisition remains to be seen after the expected close of the transaction in the first half of 2023, but since the IPO just about a year ago, it has had a rough ride in the public markets.

Long-term Upsides

The market for customer experience insights is new and rapidly evolving, fragmented, and highly competitive. Certain features of UserTesting’s platform compete with existing products and services within the overall customer experience market. Some of its existing and potential future competitors are larger and have greater brand-name recognition. Pricing pressures and increased competition generally could result in reduced revenue, reduced margins, losses, or the failure of its platform to achieve or maintain more widespread market acceptance. Due to fears of a recession, this challenge will be accentuated in the future.

As a result of the acquisition of UserTesting and the planned subsequent merger, UserTesting will be able to leverage UserZooms’s operational capabilities, industry expertise, and complementary offerings. Moreover, UserTesting's proprietary contributor network and enterprise-scale experience testing platform will be combined with UserZoom's proprietary benchmarking methodology. Given that the customer experience solutions industry is in its formative years, UserTesting has admittedly not been able to optimally price its subscription models. However, the addition of UserZoom will provide more information to UserTesting about the supply and demand of its enterprise solutions. This will allow them to optimally and competitively price their solutions and capture market share from competitors like dscout, 20|20 Research, and Focusvision. The merged company will pose a grave threat to uTest - the most dominant player in the space.

Despite the fact that all-cash deals are accretive in nature, it is expected that the merger will dilute the EPS for the combined entity for the next couple of years. The reason for this is the large deferred revenue balance arising from the subscription-based pricing model that UserTesting employs. A decline in new or renewed subscriptions in any single quarter may have a minimal impact on its revenue for that quarter. However, such a decline would negatively affect its revenue in future quarters. There is a risk that a flex-based subscription pricing plan may ultimately result in lower total costs to its customers over time or may cause its customers to limit utilization to stay within the limits of their existing flex-based subscription pricing plan, reducing overall revenue. The efficacy of this subscription model will only be revealed in the future.

Risks and Uncertainties

Since its inception, UserTesting has changed its business model drastically. These business and pricing models have not been fully proven, and the company has a limited operating history with these models which subjects it to several uncertainties.

UserTesting has incurred net losses in each fiscal year since its inception. As of December 31, 2021, and 2020, the firm had an accumulated deficit of $203.2 million and $152.5 million, respectively. The firm still plans on making significant future expenditures related to the development and expansion of its business. These efforts may prove more expensive than is currently anticipated, and the firm may not succeed in increasing its revenue sufficiently, or at all, to offset these higher expenses. The high capital intensity of the business may have adverse implications for the planned merger between UserTesting and UserZoom.

UserTesting must comply with all legal obligations relating to privacy and data security protection. However, these obligations are prone to be interpreted and applied in a manner that is inconsistent from one jurisdiction to another. If the security of data is compromised, unauthorized access to personal information or other protected data could result in litigation.

Moreover, any significant change to regulations regarding the disclosure of personal information could require a modification of its platform and subject it to increased compliance costs which may limit its ability to develop new products and features that make use of the personal information that clients voluntarily share. For example, the California Consumer Data Protection Act (CCPA) and the California Privacy Rights Act (CPRA) passed in 2020 require companies to provide new disclosures to California consumers and grant such consumers new privacy rights. The effects of the CCPA and CPRA are potentially significant and may require UserTesting to modify its data collection and/or processing practices and incur substantial costs to comply. This could materially affect its business, operating results, and financial condition.

In addition, Section 203 of the Delaware General Corporation Law (DGCL) imposes certain restrictions on mergers, business combinations, and other transactions between UserTesting and holders of 15% or more of its common stock. This could delay the completion of Thoma Bravo’s acquisition of UserTesting, and the market conditions may not justify the deal in the future.


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