Thoma / Coupa
Taking a look at Thoma’s acquisition of Coupa earlier this year, anyone know wtf they were thinking valuing this company at 8bn? Even being generous with add-backs EBITDA is around 40mm for 2022 - you’re telling me they threw a 200x multiple, a 77% premium on it and called it a day?
I get that it’s an amazing company and quickly growing but even the most optimistic growth prospects IMO don’t come close to this valuation. I guess if you’re using Rev multiples it comes back to earth a little bit, but still think this is an outrageous valuation. If anyone could chime in here that’d be helpful, probably something I’m not seeing.
I have no info about this just fomenting to follow since 200x sounds insane if true and I’d love to know more
Coupa’s EBITDA profile isn’t mature so would definitely be a revenue trade
They did Coupa at 8.3x EV/NTM Revenue which is in line with the ForgeRock buyout they did two months earlier at 8.0x. Also in line with EQT/Billtrust at 7.8x.
EBITDA margins were around 5% in 2022, not hard to underwrite 30-40% when you own the company and hold the S&M purse strings
Following
I’m fairly close with this asset / deal. With these revenue multiple in / ebitda multiple out deals, you start with the case you underwrite and the exit multiple you think you can get to dictate what you can pay on the way in. In this case, Thoma underwrites very aggressive margin expansion and a more tempered top line growth rate to exit a ~10-15% growth / 40% margin business at 20x Ebitda exit.
I know this one fairly well too.
Supporting Coupa's valuation at 8x ARR is not difficult. The Company is under earning for a number of reasons including obvious corporate bloat (bay area tech company...) and the fact that they've underpriced and under monetized their software for years. Their revenue / value capture is wildly disconnected from their value add. They will pull the pricing lever over the next 3-5 years and all of that growth will drop to the bottom. The Company is sitting on a treasure trove of integrations with ERP systems that make them effectively the #2 system for Enterprise CFOs. They will be the primary system driving digitizing payments and automating clerical tasks, which the national accountant shortage is driving demand for. It's an outstanding asset. In five years, it will realistically generate $1.5bn revenue / $500-700mm of EBITDA. In addition, that sort of software (ERP extension, enterprise / F500 customers that don't go bust) has extremely high retention. Anything short of an outage or breach and the downside case is an extremely high floor where they at least grow MSD-HSD and cut their way to $200-300mm of EBITDA.
Why do you think they can pull the pricing lever? BSM seems like a pretty competitive market w/ Oracle, SAP, etc. all the preferred solutions for a good amount of large enterprises. Feel like the service they’re offering isn’t particularly unique or has any really significant reasons why they’d be able to raise prices given the available substitutes.
I think they will be able to significantly increase pricing due to the relative pricing of their systems compared to Ivalua and Ariba, the relatively high amount of goodwill they have with their customers, switching costs (primarily workflow related for them, which is a plus as other forms of switching costs (cost of building integration to other systems, cost of migrating data) that other database systems have relied on are declining) and the fact that they have yet to tax the supplier side whatsoever.
Disagree with the pricing lever for Coupa. They are priced at a healthy premium to other players in space (Ariba, Ivalua, GEP, Jaggaer) and I don’t think there is significant runway here. Most of these TB/Vista software take privates are underpinned by a highly prescriptive cost out strategy. eg - 30% of Coupa’s sales function booked $0 in 2022 and there is significant bloat in the S&M org. We are seeing massive outflow of talent from RIFs at Coupa the impact of which the market is seeing in both Coupa’s decelerating top line and increasing margins.
Repeating what has already been said - but TB tends to buy on a revenue multiple then cut costs, expanding EBITDA margins on the assumption they can keep sales, then sell on EBITDA.
Looking forward to reading the post mortem on all the comments above saying how easy it is to get to the valuation when in a few years the deal goes sour.
Here is the Thoma / Vista playbook -
1) buy high quality SaaS biz at insane premium
2) RIF 20% across the board, underinvest in product, juice EBITA
3) raise prices 10% a year to show organic growth since you’re now underinvesting in product and S&M. Hope product is sticky enough that no one churns
4) (optional) buy competitors to buy down multiple and raise prices more for “cross sell”
5) sell on EBITDA multiple to a strategic (hopefully) or someone else dumb enough to not understand that the business is a shell of before they bought it
It’s honestly shocking they’ve been able to do this for 20+ years with continued success.
When I was on a few IB buy sides for Thoma/vista companies, every single time the headline growth was basically fake, ebitda adjusted in so many ridiculous ways, and internal company operations were a mess
Super interesting and useful, thanks. Do you have any insights on what the debt structure looks like for a typical TB/Vista LBO?
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