Tomasz Tunguz - What the New Relic Sale Means for SaaS
Tomasz TunguzVenture Capitalist If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. What the New Relic Sale Means for SaaS
Earlier today, New Relic announced its sale to Francisco Partners & TPG for $6.5b. The acquisition is notable for two reasons. First, it accelerates the momentum within the technology buyout space. At its current pace, technology buyout volumes of venture-backed technology companies will tie or exceed the ten year high, charted in 2022 of about $20b. PE buyouts provide 2023’s slower M&A market liquidity & activity, perhaps will begin to spur strategic/corporate acquirers into action. Second, New Relic’s sale price is close to the recent highs measured on January 1st of each year New Relic benefitted from multiple expansion that pushed its valuation higher - admittedly less than the top quartile. Within 18 months, the company attained a sale price within 5% of the high. New Relic’s financials relative to its peers are important to bear in mind. The company generated similar free-cash flow yield (free cash flow / price per share). This cash pays the interest costs of the transaction debt. In buyouts, the acquirers invest some cash, but borrow 50-75% of the transaction value. The company’s excess cash flows pay those interest payments. In addition, the company operates with lower profitability & worse sales efficiency than its peers. This acquisition is a bet that the company can be run more efficiently. If we are in the nadir of multiple expansion & acquirors expect improved future results, the M&A market should re-invigorate. |
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