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Francisco Partners’ $1.7bn acquisition of Sumo Logic

Updated: Oct 30, 2023

Acquisition Overview

Francisco Partners, a private equity firm headquartered in California, have agreed to purchase Sumo Logic in an all-cash deal valued at $1.7bn. Despite impressive revenue growth, Sumo Logic has struggled to turn a profit since its IPO two and a half years ago. It is hoped that taking the company private will enable longer term planning that, when combined with Francisco’s extensive sector expertise, will allow the firm to achieve sustainable profitability. A depressed valuation, strong team, and market-leading technology made Sumo Logic an attractive target for bargain-hunting private equity firms, with as many as 10 firms reportedly considering a move. The deal could be indicative of the private equity landscape in 2023, with low valuations and increased borrowing costs driving heighted competition among firms for deals, particularly in the software sector which is anticipated to be resilient throughout the year.

Deal Structure

The capital required for this deal was made available during Francisco’s recent round of fundraising across two funds in 2022, the largest contributors being the New York State Common Retirement Fund and the State of Wisconsin Investment Board. Francisco will pay $12.05 per share, representing a substantial premium of 57% compared to Sumo Logic’s unaffected stock price at the close on January 20th, 2023. This high premium may have been necessary to outbid competitors. The deal is expected to be complete in either the second or third quarter of 2023, following which Sumo Logic will be taken private.

Francisco Partners are being advised by Kirkland & Ellis LLP, while Morgan Stanley and Wilson Sonsini Goodrich & Rosati LLP are advising Sumo Logic.

Francisco Partners Overview

Francisco Partners is a California-based private equity firm that focuses exclusively on technology investments. The firm has established a strong reputation for its expertise in complex carve-out transactions, such as its recent acquisition of IBM’s healthcare data and analytics assets. With offices in San Francisco, New York, and London, Francisco operates as a lean and effective organisation. The $17bn raised in Francisco’s recent round of fundraising has been deployed in acquiring and providing debt financing to technology companies on both sides of the Atlantic. One notable success for Francisco was its acquisition of Smart Bear, a software development and testing company, which was purchased for just $410m in 2017. Three years later, in October 2020, Francisco sold a 50% stake in the firm for $1.7bn.

Sumo Logic Overview

Sumo Logic is a cloud based data analytics company that boasts impressive capabilities in processing big data. One of the key selling points of Sumo Logic’s platform is its included ability to check for security threats. This has become particularly appealing in recent years as desires for data protection have increased, with companies like TikTok notably coming under scrutiny. Sumo Logic’s subscription-based business model has allowed for consistent income streams from clients, including the likes of the Pokémon Company. However, Sumo Logic was not immune from recent technology sell-offs, causing a significant drop in its share price from $39.64 to $18.13 between February and March 2021, and its price has failed to rebound to IPO levels of $25.05. The confirmation of Francisco’s acquisition has helped to mitigate the fallout from the collapse of Silicon Valley Bank, previously a significant source of credit for Sumo Logic, resulting in a short-lived share price drop of 3%.

Previously backed by venture capitalist firms, at present 75.94% of Sumo Logic’s equity is held by institutions. The largest individual shareholders are Vanguard (8.99%) and BlackRock (6.73%).

Founded: 2010

Number of employees: 983

LTM Revenue: $300.67m

LTM EBITDA: -$110.48M

Market Cap: $1.47bn

EV: $1.16bn

Industry Insight

The COVID-19 pandemic had a significant impact on Software as a Service (SaaS) companies, as the global economic slowdown forced technology firms to implement cost-saving measures, including staff cuts, and most had to shore up funding to weather economic challenges. Sumo Logic’s share price tumble was not unique, as many competitors faced similar challenges. That said, amidst the pandemic, there were some advantages for SaaS providers, like Sumo Logic. The increasing desire for digitalization resulted in a higher demand for SaaS products, expanding the customer base.

Despite the challenges, the potential for future gains in the SaaS industry is enormous. Most SaaS firms remain unprofitable, including Sumo Logic’s most significant competitor, Splunk, with an EV of $17.6bn but EBITDA of -$126.04m. Nonetheless, Wall Street analysts anticipate a strong year for software in 2023, as technology can be used to streamline business operations, reducing costs in a challenging macroeconomic environment. The key to profitability lies in outgrowing the necessary base costs. Whichever firm is able to effectively tap in to the market, worth upwards of $50bn, will be healthily rewarded.

Private equity firms, meanwhile, face a year of intense competition. The consensus seems to be that the pace of fund deployment and exits will be considerably slowed down. High interest rates have limited the feasibility of leveraged buyouts, and fundraising has been constrained across the board. As a result, the competition for attractive acquisition targets has increased, potentially leading to overpayment. However, historically, private equity-backed firms have tended to fare better during times of turbulence. Hence, acquisition targets that would have otherwise been reticent may be more open to being taken private in the current market conditions. Those private equity firms that are successful in locating and executing opportunities will be able to reap the rewards, at the expense of competitors.

Strategic Rationale

Sumo Logic’s depressed valuation, combined with strong revenue growth in an expanding market, made it an attractive target for private equity firms. At its IPO, Sumo Logic positioned itself to tap into the fiercely competitive data analytics market, which they valued at around $50bn. While its financials may not be the immediate standout factor, Sumo Logic’s technology is highly regarded in the industry, and it has a series of competitive advantages, including having been ‘born in the cloud’ unlike firms, such as Splunk, that are slowly moving away from on-premises work. Additionally, as mentioned, its subscription-based business model provides more predictable revenue, appealing for potential investors.

Taking Sumo Logic private has obvious advantages. Without the myopia inhered by quarterly reporting, long term planning and business operations will become the focus. Growth may initially be stunted, yet, in the long term, Sumo Logic’s vision and expansion targets, outlined at IPO, may become much more realistic. Streamlining the business and expanding will allow Sumo Logic to outgrow its inexorably high base costs. Francisco’s experienced team, with an impressive track record of success, will be indispensable in guiding the firm towards profitability.

Clearly, for Francisco any gain for Sumo Logic translates to value for their investors. The technology space in which Sumo Logic operates is widely regarded and therefore, despite generally impaired exit pace, it is unlikely that Francisco will be restricted from cashing in on gains. Moreover, this deal represents another foray into SaaS, for Francisco, an area of strength for competitors such as Vista Partners. Hence, this acquisition furthers Francisco’s long term goal to become the partner of choice for firms across the full breadth of technology in the US and Europe. Success with Sumo Logic will open the door to potential future SaaS acquisition.

Long-Term Prospects

Francisco’s acquisition of Sumo Logic may raise some concerns over potential overpayment. However, considering Francisco’s track record of success in identifying and investing in promising companies, combined with Sumo Logic’s competitive advantages, there are few reasons to believe that the private equity firm will be unable to deliver value to its investors on this transaction. Big data analytics is a large, and growing, market and there is no reason to believe that Sumo Logic, with Francisco’s backing, cannot tap into it.

Written by Thomas West (St John’s College, University of Oxford)

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