Description

Event driven opportunity; SAP has publicly declared its intention to sell Qualtrics. We believe Qualtrics is a category-leading software company, and there will likely be numerous bidders. Silver Lake, which owns ~4% of Qualtrics, filed an amended 13D disclosing that it intends to submit a proposal to acquire all outstanding stock of Qualtrics. Two other category-leading software companies, Avalara and Coupa, were acquired within the past six months for 8x forward revenue. Medallia, one of Qualtrics's closest competitors, was acquired in 2021 for 11x revenue. We believe a deal for Qualtrics could be announced in the next several months, offering potential upside of ~25%-65% from the current share price.

SAP’s announcement

On its earnings call on January 26, 2023, SAP announced its decision to explore a sale of Qualtrics and hired Morgan Stanley as a financial adviser. SAP, which owns ~63% of Qualtrics, intends to use the sales proceeds to reinvest in its core ERP software. SAP acquired Qualtrics in November 2018 for $8 billion at 15x forward revenue. In January 2021, SAP sold 52 million shares of Qualtrics to the public at an IPO price of $30 per share.

SAP acquired Qualtrics during former CEO Bill McDermott’s highly acquisitive tenure. The current SAP management team no longer views Qualtrics as strategic. At the same time, we believe Qualtrics’ management team feels constrained by SAP’s ownership.  It serves as a valuation overhang and impairs the company’s ability to partner with SAP’s competitors. As such, we believe that both SAP and Qualtrics desire a clean break. In addition, we think it’s possible that SAP may have been prompted to make this announcement public after receiving a buyout offer from Silver Lake (more on this below).

On its earnings’ call, SAP’s CFO said the following regarding Qualtrics:

• “SAP believes that this potential transaction could unlock significant value for both companies. For SAP, to focus more on its core business and profitability; and for Qualtrics, to extend its leadership in the Qualtrics category that it pioneered.”
• “I would say, around Q3, Q4, we were sitting together with the Qualtrics management team and said, "Hey, actually, what we are doing, we can continue to do also in the future by embedding Qualtrics and our products go-to-market together, while we can also consider a sale which allows SAP on the one hand side, to free up investments and efforts to double down on our growth in the core, which is super strong."”
• “The process should also be straightforward because Qualtrics is really set up independently already since some time. They have a dedicated leadership team. They have a strong culture across the organization. So it's really straightforward, does not require any carve-out efforts or anything like that.”
• “There is a certain level of overhang of the SAP majority share. I believe that Qualtrics and SAP are not at the moment set up to optimally crystallize the value that is behind the company. And therefore, exploring that sale could be a way to unlock more of this value to the benefit of the Qualtrics shareholders and SAP at the same time.”
• “We will absolutely prioritize getting optimal value for a premier pristine cloud company that Qualtrics is.”

Qualtrics is a category-leading software company

Qualtrics is the leader in experience management software (see Figure 1). Its products help organizations collect and analyze feedback in order to design and improve customer, employee, product and brand experiences. It is approximately twice the size of its closest competitor Medallia, which was acquired by Thoma Bravo in July 2021 for over $6 billion at 11x forward revenue. Qualtrics has been profitable and plans to further expand its operating margin going forward.

Silver Lake’s involvement

Silver Lake, which owns ~4% of Qualtrics, acquired its initial stake around the time of the IPO for ~$24 per share – 15 million shares at a pre-IPO price of $21.65 per share and 7.5 million shares at the IPO price of $30 per share. In connection with the initial purchase, Silver Lake’s CEO Egon Durbon joined Qualtrics’s board. Silver Lake purchased more shares as recently as March 2022 for ~$28 per share, bringing their current total ownership to ~4%. On February 1, 2023, they filed an amended 13D disclosing an intent to submit a proposal to acquire all outstanding shares of Qualtrics. We believe Silver Lake may have approached SAP in late 2022 with a potential buyout offer, which may have prompted SAP to go public to seek out additional buyers and avoid insider-dealing. We think Silver Lake is the most logical buyer of Qualtrics given their initial investment and board membership, but there will likely be additional bidders for this high quality asset. Importantly, we think a potential deal with Silver Lake could happen quickly as its existing board position should help shorten the due diligence process.

Potential takeout valuation

Deal activities in the software sector have been vibrant as financial sponsors are flush with cash and valuations have come down. Two other category-leading software companies, Avalara and Coupa, were acquired within the past six months for 8x forward revenue. As a base case, we think these are reasonable comparable multiples and would imply $21 per share for Qualtrics, or 25% upside. In a more aggressive scenario, Qualtrics could fetch Medallia’s 11x forward multiple, which would imply $28 per share, or 65% upside. Should a deal not materialize, Qualtrics could trade back down to its pre-announcement price of $12 per share, or 29% downside. We think a sale to Silver Lake is the most likely outcome as 1) SAP wants a clean break and the sales proceeds; and 2) Silver Lake already owns ~4% and wants to acquire the entire company.

Risks

No deal: SAP does not receive an offer it deems attractive and terminates the sales process. In the unlikely event that this were to occur, we think the downside would be limited. Qualtrics is the leader in experience management category. It currently trades at a reasonable valuation for a leading software company. Qualtrics is profitable and intends to expand its operating margin.

Catalyst

Deal announcement