Francisco Partners & Evergreen Coast #LeverUp to take LogMeIn Private
LogMeIn to be acquired for $4.3B by Francisco Partners and Evergreen Coast (Elliott Management), because Cohn is nothing if not persistent
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LogMeIn, one of the dozens of companies thriving on Microsoft’s inability to turn Remote Desktop into a user-friendly commercial product, is in talks to be acquired by Francisco Partners and Evergreen Coast (the tech arm of Elliott Management).
Target
LogMeIn is a provider of cloud SaaS solutions spanning communication, remote access, collaboration, and IT management. The company has over 30 million freemium users and over 2 million subscribers. Today the company product portfolio covers three segments:
Unified Communication & Collaboration (UCC): GoTo products for virtual meetings and presentations, Grasshopper and Jive for web-based telephony solutions, and adjacent virtual meeting offerings
Identity Access Management (IAM): LastPass for password management, Central for IT management, and GoToMyPC for remote work
Engagement and Support (CES): tools for remote troubleshooting, including self-guided (chatbot) and helpdesk (remote access) solutions
Annoyingly, for SaaS business, the company doesn’t provide customer-level data or even the customer count. Forget a detailed LTV / CAC analysis (it would probably get skewed by adjustments anyway), but at least some guidance on the number of customers per segment would have helped public investors do their diligence.
The company has a history of M&A, having acquired LastPass ($110m) in 2015 and GetGo ($1.8B) in 2017, and Jive in 2018, among other smaller add-ons. The GetGo acquisition was pretty transformational, in the sense that GetGo contributed ~2/3 of the pro-forma revenue and Citrix shareholders got over 50.1% of the equity in the go-forward entity.
Par for the course, LogMeIn encountered some “missteps” in the GetGo acquisition (technically a merger, where LogMeIn acquired the GoTo___ family off assets from Citrix). A large chunk of the customer base decided not to renew their contracts after LogMeIn decided to change the terms, duration and renewal process.
The internal memo on GetGo probably went something like this:
Merits
Actionable opportunity for revenue synergies through cross-sell, up-sell, and repricing.
Improve retention rates by rolling out new features and integrating products into a seamless customer experience
Execute on the above points, while also achieving $100m cost synergies through reduced S&M spend (okay), low cost R&D environments (okay…), G&A/avoiding stand up expenses (ha!), optimizing IT infrastructure overlap (what do you expect happens when you offboard from the old infrastructure? That’s right - you have to pay for more licenses/seats on your current infrastructure, which you would have been doing already during the transition, incurring duplicate costs (see also: standup expenses))
Risks
Competitor Webex going strong, and Zoom is catching up with no legacy bloat, but we think we got it covered
Unlike GetGo, other acquisitions worked out more favorably. LastPass has seen formidable growth with the ever-increasing number of passwords I have to remember, while Grasshopper (part of GetGo) and Jive are disrupting the old-school phone systems and enabling small businesses to have a professional front-end at an affordable price.
Buyers
Francisco Partners (FP) has been an active investor in cloud-based software, including investments in cybersecurity, DevOps enablement, and pricing analytics. The firm has a bench of operating partners (FPC), former industry execs who deliver operational expertise to its portfolio companies. FP previously invested in the secure remote access space through Bomgar/BeyondTrust. For the uninitiated, FP was started by two tech partners at TPG in 2000 and currently manages over $10B in assets. Not much to else to be said for Franciso, other than they came back strong after the lackluster performance in the early 2000s and the team amendments have been impressive. They are seemingly building out credit capabilities, having brought on folks from GSO and AG, so I’m hopeful they will execute some creative capital structure plays that will prove fun to dissect in this blog.
Evergreen Coast Capital Partners, a relatively new player to the buyouts space, is the tech-focused private equity arm of Elliott Management. After getting rejected from consortiums to bid on buyouts of assets in which Elliott had an activist stake, Jessy Cohn set out to launch a private equity strategy under the Elliott umbrella. So far, Evergreen seems to be continuing Elliott's strategy of making minority investments, albeit in private companies. Among other deals, the fund has invested in Dell Software (alongside Francisco), Gigamon (alongside Veritas), Travelport (alongside Siris), WorkForce (alongside Insight), and Coveo (late-stage venture), ASG (alongside KKR, but apparently now the lead investor). Way back in 2006, Elliott invested alongside Francisco in Metrologic. I'd like to think that Cohn's experience [FN:1] as a senior analyst on that deal (FN:2) planted the seeds for collaboration over a decade later, though my gut feeling is that after going through a buyout process, he was so traumatized by the experience that it took him over ten years venture back into that abyss.
As an aside, Elliott previously took an activist stakes in LogMeIn in early 2017 and late 2018, however, the stock did not seem to appear on its 13d/f reports in 2019. Cohn was also on the BoD for LogMeIn from 2017 (from the GoTo acquisition) through April 2018. After taking a break to ruffle some feathers at AT&T, it seems Cohn just can’t let LogMeIn go.
Market, sort-of
As I hinted on Twitter, I’m working on consolidating my notes on what some call “proprietary research.” While this covers only a sliver of work that goes into understanding the trends and dynamics in a given market, I found it’s also the one with which people and firms struggle the most. So here is an incomplete, biased, and fully anecdotal (read: colorful, insightful, drawing on decades of relevant experience, conveying the sentiment of LogMeIn’s target customers) account of the situation from someone who has deployed tech solutions through large and small organizations.
“Product pricing has become impossible … it used to be $24 for up to 12 [users], now that tag is $120. Their competition [is charging] $40.”
“IT world is in a ‘post-replacement cycle’ for equipment and software tech… Sine the market saturation is near, we are slowly entering a cycle of cost-cutting - this si where IT admin priorities shift, as dictated by the upper floors. For [IT vendors] this means growth stagnation. For [commiditized] subscription services … this means battle damage unless they stop the customer bleed by modifying their pricing. Or they come out with another revolutionary product.”
“[Vendors are] betting on brand loyalty when the IT admins have one.”
“[The idea of LogMeIn investing in new features and adjacent offerings] made me perk up with interest. Like ‘Oh..! Here comes something they will be doing [that leverages their] brand capital and [existing customer base.]’”
Deal
Price per share: $86.05 (25% premium to the price before reports of a potential deal started to appear in the news)
Equity Value: $4.3B
Enterprise Value: $4.6B (11.2x 2019E EBITDA)
Acquisition Debt: $3.3B (though I can’t find the source, SA reports $2.7B 1L + $600m 2L, and claims 6x total leverage; by my math, based on consensus estimates (aka company guidance) of $412m 2019E EBITDA, total leverage would be 8x; assuming the reporting is accurate, this leads me to believe the banks/sponsors “identified” $130-140m of EBITDA Adjustments and I am extremely curious as to what they may be, see below)
A back-of-the-envelope LBO suggests LogMeIn will have to grow revenues at 6% and maintain EBITDA margins at around 30% to generate a 2.0-2.5x MOIC and 20+% IRR.
(Note on EBITDA Adjustments & Leverage: LogMeIn analyst portal guides to $412m Adjusted EBITDA for 2019, this includes add-backs for restructuring charges, acquisition costs, and stock-based comp, so TBD on the accuracy of the debt levels/multiples. Concerning leverage, NIC investment memo for FP V noted “[FP’s] process to complete deals with low purchase price multiples and modest leverage (approximately 3x for purchases)” so I’m assuming there are a handful of 1x debt deals in FPs portfolio to drive the median down. What kind of collateral do you think is available for the banks here?)
The business model comes down to (i) converting freemium users to paid subscribers and (ii) going after enterprise clients. There is little in terms of defensibility, or a moat, as the switching cost for most of the company’s business solutions remains low (maybe add customer segmentation analysis to my data wishlist). The company enjoyed impressive growth in its early years, but that seems to have all but fizzled out as competition has intensified from larger players, newer entrants, and even (in select product lines) Amazon.
(Note on Earnings Quality: I’m not sure where to stick this, but I recently attended a lecture by Howard Schilit (and subsequently read the Financial Shenanigans) so this is very much at the top of mind. LogMeIn boasted accurately forecasting its performance in 38 of 39 consecutive quarters which I now understand to be a yellow flag(?))
Although a key part of LogMeIn’s story has been its roll-up strategy, the acquisition may catalyze a reshuffling of the parts which may ultimately result in a piecemeal sale of the assets. Notably, LastPass has been a crown jewel in the company’s portfolio but more recently is facing competition from both free and commercial competitors. Why not saddle the cash-cow assets with debt/milk them for IRR, and sell the high-growth assets to groups who will invest in future growth?
Of course absent improved conversion rates, future growth means one thing - “pricing optimization.” That usually goes over well with users…
What makes this a potentially attractive investment is that LogMeIn has been generating a boatload of cash and returning it to the shareholders through buybacks and dividends. This means that they should, in theory, be able to service the debt and accrue some value to the investors. Most of the investing cash outlays were for acquisitions, so it appears maintenance CapEx is limited (which begs the question - shouldn’t they be investing for all that growth in all those growth segments?). I also anticipate there is some “low-hanging fruit” in cost management from the acquisitions, including GetGo (I’m certain this was a bullet point in the memo).
In short, there does not seem to be much margin for error here.
Footnotes:
Investing alongside another lead sponsor (co-investing) is often a thankless job. It is occasionally associated with (i) LPs seeking to “average down” fees on fund commitments and (ii) adverse selection (if the opportunity to compound returns is so great, why would the lead GP take less than all of the equity check). Only the latter applies to Evergreen/Elliott, as evident by traditional PE bidders refusing Elliott to join their consortium in the bid for Riverbed Technology. Process-wise, information sharing, aligning incentives, and governance are the things I spent a lot of time on when co-investing. Strategic fit and “value add” were the biggest overlooked opportunities in my experience.
Cohn joined Elliott in 2004, so I initially assumed he was an associate and maybe tangentially touched the deal at some point but I figured I’d try my best to fact check this. Possibly romanticized for the PR effect, the Forbes article linked above claims that Cohn brought in Francisco and was instrumental in putting the deal together (when he was 26 years old).
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