By Felix Hooper, Gonzalo Riera-Ripoll, Rafi Glass, Yana Zharkova (Durham University), Haozhe (James) Huang, Friedrich von Storch, Yujia Bao (IE Business School)
Photo: Sigmund (Unsplash)
Overview of the deal
Acquirer: Thoma Bravo
Target: SailPoint
Implied Equity Value: $65.25 per share
Total Transaction Size: $6.9 billion
Closed date: Announcement: April 11th 2022 Go-Shop Expiration: 17th May 2022 Expected Closed Date: Second half of 2022
Target advisor: Morgan Stanley
Thoma Bravo, a leading software private equity firm with more than $103 billion in AUM as of the end of 2021, has announced an all-cash acquisition of SailPoint Technologies Holdings, the leader in identity security, which values SailPoint at approximately $6.9 billion. SailPoint’s erstwhile stockholders will be in receipt of $65.25 per share following the closure of the deal; a 48% premium on SailPoint’s 90-day average stock price.
SailPoint automates identity security protocols, utilising automated intelligence and machine learning. SailPoint thus poses an attractive acquisition for Thoma Bravo, which typically invests in innovative technology companies. This expertise in developing software brands is an apposite prospect for SailPoint. Indeed, maintaining SailPoint’s preeminence in the sector will be a task with which Thoma Bravo is well acquainted.
“The transaction will also allow us to pursue our long-term growth trajectory with greater flexibility and effectiveness to support our customers, expand our markets, and accelerate innovation in identity security with the backing of a strong financial partner with deep sector expertise” - Mark McClain, CEO and Founder of SailPoint
Company Details (Acquirer - Thoma Bravo)
Thoma Bravo is one of the leading private equity firms investing in software and technology companies. The firm is headquartered in Chicago and has offices in Miami and San Francisco. As of December 31, 2021, the private equity firm has an AUM of more than $103 billion. Thoma Bravo’s current portfolio includes 60+ companies that generate over $23 billion of annual revenue.
Founded in 2008, headquartered in Chicago, US
CEO: Orlando Bravo
Number of employees: 75,000
AUM: $103 billion (as of 31/12/2021)
Company Details (Target - Sailpoint)
SailPoint is the leading provider of enterprise identity security solutions. It offers both software as a service (“SaaS”) and software platforms, which provide organisations visibility and the intelligence required to both seamlessly empower users and securely manage their access to systems, applications, and data across hybrid information technology environments, spanning on-premises and cloud applications and file storage platforms.
Founded in 2005, headquartered in Austin, US
CEO: Mark McClain
Number of employees: 1676
Market Cap: $6.06 billion (as of 01/05/2022)
EV: $6.01 billion
2021 Revenue: $439 million
2021 EBITDA: $-37 million
LTM EV/Revenue: x13.7
Projections and Assumptions
Short-term consequences
The acquisition is happening at a time when the identity and access management (IAM) market is gaining traction due to increasing regulatory compliance, security concerns, and growing cloud adoption. Owing to disruptions caused by the pandemic, Sailpoint will see a continuous short-term growth because of an increase in cybercrimes and identity frauds as organizations try to adopt the work-from-home culture and cloud technology.
Upon the acquisition, SailPoint will become a privately held company. Going private could assist the company with transitioning from selling licensing to selling SaaS. Such a transformation is likely to be less risky with the financial and expertise backing of a private equity firm. Another goal for SailPoint is to expand into new markets at the least cost, which could become possible with the expertise that Thoma Bravo and its ventures have operated across the globe. Being owned by one of the largest private equity firms will help SailPoint concentrate on R&D, reducing the costs of dealing with the risks associated with the expansion beyond the US. Likewise, with Sailpoint’s rich heritage in identity security, ThomaBravo further strengthens its existing portfolio in security technologies.
Long-term Upsides
The acquisition of SailPoint by Thoma Bravo represents the elevated interest among private equity firms in capitalising on the growth in the security software market. The increasing need by companies to secure their cloud computing infrastructure was only reinforced by the shift to remote working as well as a surging number of cyberattacks globally following the war in Ukraine. Research company MarketsandMarkets estimates that investments in identity and access management (IAM) will almost double to $25.6 billion in 2027, up from a forecasted $13.4 billion in 2022.
SailPoint will use the funds to exploit both organic and inorganic growth opportunities. On the one hand, Thoma Bravo intends to accelerate SailPoint’s transition into a SaaS business, relying on subscriptions instead of licenses. In addition, Thoma Bravo aims to expand SailPoint’s in-house development and extend the current product portfolio to offer a more compelling platform to its customers. By going private, SailPoint will have greater flexibility to invest in product development without the scrutiny of investors and the public. On the other hand, SailPoint is looking to leverage the financial resources provided by Thoma Bravo to fund more frequent and greater acquisitions to play an active role in the consolidation of the identity access management market.
Risks and Uncertainties
SailPoint has experienced stable growth over the past few years, and Thoma Bravo has high stakes in a few other cybersecurity companies (Proofpoint, Sophos, Barracuda Networks), which makes the acquisition very promising.
One of the risks of an acquisition is overpayment. However, while the price tag for the acquisition represents a nearly 32% premium over SailPoint’s closing stock price on Friday and is also 48% above the company’s 90-day VWAP, it does not pose a high risk of overpricing. Recently, private equity firms have been offering premiums of up to 70%, averaging over 40% in both the UK and US markets.
Another risk is that as the company shifts from licensing model to the SaaS model, it might initially recognize less revenue and hence less cash flow. The success of the SaaS model will largely depend on its ability to retain its customers and update its offerings.
Furthermore, as of 2021 Sailpoint generates 18% of revenue from EMEA and 13% from APAC region. As Sailpoint continues to expand beyond the US market, the investment in sales and marketing operations in the international market could hurt its profitability margin. It also means that the company might face risks that are uncommon in the US, such as political instability, currency fluctuation, restriction on data usage, and limitation of protection for intellectual property rights. Sailpoint’s R&D spending has increased 38% and 27% in the last two years, the R&D cost is expected to grow as it develops new cloud and on-premise solutions, which would also increase operating expenses.
Investors are increasingly more cautious about the economics of high-growth enterprise software companies. According to Hg, one of the largest European software investors, EV/Sales multiple for public software companies have halved in the last 12 months. If Sailpoint could not improve its profitability level, it might not fetch a favourable valuation in an exit scenario.