What the $6B Coupa Acquisition Means for Software Startups
This morning, Coupa announced its sale to Thoma Bravo for $6.2b. The acquisition is notable for three reasons.
First, the premium to the public price is 31%.
Second, the multiple is 8.4x NTM revenues.
Both of these data points imply public multiples have room to grow.
Third, it’s the most substantive acquisition to announce this year after Figma’s announced its sale to Adobe. The M&A market may be thawing a bit.
|Metric||LTM Value||Average Software Public Value|
|Net income margin||-44%||-19%|
|Cash flow margin||22%||10%|
Comparing it to other public SaaS companies, Coupa grows revenue 9 percentage points more slowly, operates with lesser gross margin of about 12 percentage points, generates twice the loss as a fraction of revenue, but produces twice the cash flow from operations as a percentage of revenue.
The cash flow appeals to private equity because those dollars pay off interest for the leveraged buyout’s debt. Also, strong cash flows indicate a healthy underlying business despite slower-than-average growth & less-than-average profits.
|Segment||Forward Multiple||Growth Rate|
As Michael Mauboussin writes in Expectations Investing, there’s information in price.
Coupa’s 8.4x forward multiple, the premium paid to sell the business, is the output of a bidding battle between Vista Equity & Thoma Bravo. That data point means at 8.4x forward multiple for a company growing 22%, there’s still enough upside to justify a 3x return to a private buyer with active management.
Were the average public SaaS company to trade at the same growth-adjusted multiple as Coupa, the typical multiple would be 11.8x, nearly doubling from today’s marks. (This simple math ignores other financial aspects of a business : profitability, cash flow, etc.)
Coupa’s sale continues a trend of private equity buying venture backed startups, a result of record PE fundraising & depressed multiples.
Startups should expect more private equity M&A both in the public & private markets. Over time, the M&A market activity should begin to inform public valuations. If private buyers are willing to pay premiums above the public market, then overall market multiples should rise.