Podcast: Software Buyouts Driving Surge in Take-Private Activity in North America

The Real Deal Podcast

Take-private transactions – the current state and the future

Mark Andress, San Francisco editor for Mergermarket, joins Julie-Anna Needham to discuss what's driving increased take-private activity now and what can we expect next. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this podcast, you’ll hear about:

  • The significance of Thoma Bravo taking Proofpoint private in a USD 12.3 billion deal.
  • Why proofpoint was so appealing to Thoma Bravo.
  • What is fueling the take-private trend.


[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. In this episode, we're looking at the surge in take-private activity. I'm joined by Mark Andrews, San Francisco editor for Mergermarket.



MARK ANDREWS: Hello Julie-Anna.

JULIE-ANNA NEEDHAM: So can you begin by telling me about the blockbuster deal that was recently announced?

MARK ANDREWS: Yes. On Monday the 26th of April, Thoma Bravo took Proofpoint private in a USD 12.3 billion deal. Now, Proofpoint is an email cybersecurity business. It's the biggest take-private transaction that we've seen in almost two years here in the United States, and it signifies an increase in take-private activity.

We are now just a third of the way into 2021. We have already seen private equity firms take 18 public companies private in a combined USD 48.1 billion worth of deals. And that's on pace to beat 2019 when we saw 34 deals totaling USD 91.4 billion. And 2019 was in fact the best year that we have had since all the mega buyouts we last saw in 2007, during the golden age of private equity.

JULIE-ANNA NEEDHAM: So what's prompted this trend? Is it a combination of post-pandemic pent-up demands coupled with the record levels of dry powder that we know private equity have been sitting on?

MARK ANDREWS: Yes, I think you hit the nail on the head. There is a lot of dry powder, a lot of money that private equity wants to put to use. Now, we're in a rising interest rate environment, which means that investors are now looking at floating rate assets. And so they're moving out of the high yield bond market into leveraged loans.

And the syndicated loan market is really-- it's red hot right now. So private equity syndicates have very little trouble in getting syndication. And there is to an extent, there's a real appetite to put money to work, but perhaps not that many opportunities. So that's driving up interest and maybe some valuations as well.

JULIE-ANNA NEEDHAM: So are private equity groups competing with public companies or corporate buyers for technology companies? It's obviously one of the hottest sectors that we've seen in the last few years.

MARK ANDREWS: Yeah. So what private equity is looking at is-- everything is driven by software these days, so they're very much drawn to the software companies. And what they like is they'll either target a software-- what we've seen over the last few years is that they'll target a software company that perhaps has a legacy business model where it's an on-premise business model.

And what the software company likes to do is then transition that business to a cloud-based, recurring revenue model. And so, that has been something that we've seen over the last five years or so. Now, more recently we've seen public companies trying to do that transition themselves from an on-premise software business to a cloud-based as a service business model.

And where those companies have struggled, you tend to see private equity coming in and pouncing. And so for example, we saw Talend in December. That's a data management business that was also taken private by Thoma Bravo. And Talend itself was on that pathway of trying to transition. It was about two years into its pathway of transitioning from an on-premise business to a cloud-based business. But it had not been really delivering, I don't think, on that promise.

And so Thoma Bravo saw an opportunity to come in and maybe accelerate that transition. So that's the playbook, is transitioning to an all cloud or a cloud first future, I guess, because everything's gone to the cloud now. Business applications now pretty much all run on the cloud. And so that's what software-- what private equity firms are drawn towards.

JULIE-ANNA NEEDHAM: And going back to the Proofpoint deal, Thoma Bravo is paying a hefty premium for that. Is that in line with their previous acquisitions? And how does that compare to the strategy of other private equity groups?

MARK ANDREWS: Yeah. Thoma Bravo has been offering richer than average premiums. The average premium we've been seeing this year to date is around 22 percent. But Thoma Bravo is consistently offering around 30 percent premium to the previous trading day's close. And the significance of that is I think Thoma Bravo wants to avoid any kind of a bidding war, because typically, these companies-- they will go into a go shop period after agreeing a deal with Thoma Bravo. There'll be like a 45-day period in which they can see competing offers.

And Thoma Bravo, by offering a rich premium around 30 percent, is trying to evade or is trying to avoid any -- is trying to minimize the chances of that happening. The other thing it's trying to do is trying to get the selling shareholders on board as well to agree to the transaction. Now, in the case of Proofpoint, they're offered a 32 percent premium to the previous trading day's close.

In the case of Talend, it was a 29 percent premium. And in the case of RealPage, which is a real estate software company back in December, that was a USD 10 billion deal, and they offered a 13.8 percent premium. So those bids, they're above, I think, the average. And certainly, we see other companies, other private equity groups perhaps not offering quite as rich of premiums and then having to go back to sweeten the deal a bit later.

So Vista Equity is an example of that. They put in an offer for IT training company Pluralsight, I think just 6.7 percent above the prior day's close. And the selling shareholders weren't happy with that. They voiced their displeasure, and Vista Equity had to come back and sweeten the deal before they got it done.

JULIE-ANNA NEEDHAM: So why is Proofpoint so appealing to Thoma Bravo?

MARK ANDREWS: Well, first and foremost, it's a cybersecurity company. And we have seen during the pandemic an accelerated need for cybersecurity, particularly with workforces working from home. And there are so many more vulnerabilities in the network now with people working from home and companies needing to secure all those different endpoints now.

And so cybersecurity is now really front and center of-- I would say every company in the world has to think about that. And that's why you have a private equity firm like Thoma Bravo which already has made investments in the space, why they are drawn to Proofpoint. Email is still-- a lot of people have talked about the demise of email, but it's still the number one form of communication in business. And so that isn't going away, and I think Thoma Bravo recognizes that and it wants a piece of that.

JULIE-ANNA NEEDHAM: And so cybersecurity, obviously a very attractive sector. Who else is likely to be an acquisition target for private equity?

MARK ANDREWS: There's a couple of places to look. Firstly, look at companies that are on this pathway from either a hardware — either from hardware roots, and are trying to transition to a software, cloud-first world, or companies that have more of a legacy software offering that's on-premise and are trying to make that same transition to a cloud-first, software as a service world. Any companies there that are struggling with that transition are prime targets.

Now, for example, we've written on a couple of companies, Nutanix and Pure Storage. Pure Storage, they have a storage hardware background, and Nutanix also has a hardware background. Both of those have been acquiring companies in software as they try and transition. But if they struggle in their performance, I think we might see some private equity interest in those companies.

A second place to look is at the-- there is a cloud index of companies. the Bessemer Venture Partners has a NASDAQ Emerging Cloud Index that includes 58 companies that are primarily focused on cloud software. And any of those companies that are trading below the median would be potentially companies that private equity would be interested in.

And the interesting thing is that Proofpoint was actually on that index, and they were trading below the median. Other companies that were trading on that that were actually on that index include Talend as well, another company that was taken private by Thoma Bravo recently. Companies on that list that are trading below the median are companies like Box or Dropbox, New Relic, Zuora, [INAUDIBLE] and Mimecast.

Mimecast, in fact, is a direct competitor to Proofpoint. And so I think they will definitely be considering their options in light of the Proofpoint transaction. And if you look at those names, they all have lower growth rates and are trading at lower revenue multiples relative to the indexes mean. So I would expect private equity to take a really close, hard look at some of those names.

JULIE-ANNA NEEDHAM: Great. Well, some good ones to keep an eye on. Thanks very much, Mark.

MARK ANDREWS: Thank you, Julie-Anna.


JULIE-ANNA NEEDHAM: That was Mark Andrews, San Francisco editor for Mergermarkets. Thank you for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and subscribe to the podcast. You can find us on Apple podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out the show notes. Join us next week for another episode.