With Reuters’ story last week that Blackboard is putting itself up for sale through an auction, one question to ask is ‘why now?’. As Michael has pointed out, Blackboard is in the midst of a significant, but incomplete and late, re-architecture of its product line.
Bottom line: If you think that Ultra is all about playing catch-up with Instructure on usability, then the company’s late delivery, functionality gaps, and weird restrictions on where the product can and cannot be run look pretty terrible. But that’s probably not the right way to think about Ultra. The best analogy I can come up with is Apple’s Mac OS X. In both cases, we have a company that is trying to bring a large installed base of customers onto a substantially new architecture and new user experience without sending them running for the hills (or the competitors). This is a really hard challenge.
On the surface, it seems to be a high-risk move to try and sell a company before the changes are solidly in place and customers have demonstrated that they will move to new architecture rather than “running for the hills”.
Assuming that the Reuters story is accurate, I believe the answer to the question on ‘why now’ is that this move is about market timing – Blackboard wants to ride the current ed tech investment wave, and Providence Equity Partners (their owners) believe they can get maximum value now. This consideration trumps the otherwise logical strategy of waiting until more of the risk from the new user experience and cloud platform roll-out is removed by getting real products into significant number of customers’ hands. VC investment and M&A activity are at high and potentially unsustainable levels. 2U has shown that ed tech companies can go public and be a success. Lynda.com has shown that relatively mature companies can be acquired for very high valuations. Instructure is likely to go public in early 2016. If you want to get a high price, sometimes it’s worth going on a hot market before addressing most of the re-architecture risk.
There was one piece of information from the Reuters story that has gotten very little attention in follow-up reporting and analysis.
Blackboard has annual earnings before interest, tax, depreciation and amortization of around $200 million, some of the people added.
Two of the people said that Blackboard could fetch a valuation between 14 times to 17 times EBITDA, up to $3.4 billion, based on current multiples of subscription-based software companies.
Moody’s placed Blackboard’s EBITDA at roughly $180 million based on $1.4 billion of total rated debt and a 7.8 debt to EBITDA ratio. I suspect that the $200 million figure is based on forward-looking estimates while the $180 million is actuals. This Moody’s rating does give rough confirmation of the Reuters’ numbers.
For non startups, one of the most common valuation metrics is Enterprise Value / EBITDA.1 Based on Blackboard’s earnings reports when it was publicly traded as well as financial analyst estimates, the company’s EBITDA was $96 million in 2010, estimated $120 in 2011, and was expected to rise to $154 million in 2012. Current EBITDA of $200 million would indicate a 30% increase in profitability in the past three years. That increase is far less than the 60% EBITDA growth in the previous two years, but it is healthy.
Blackboard’s revenue in 2010 was $447 million, and the current EBITDA estimates would indicate current revenues between $600 – $700 million.
Financial or Strategic Buyers
Industry medians for financial buyers (e.g. another private equity firm buying Blackboard from Providence) and subscription-based software companies is over 10x EBITDA (let’s say 10x – 13x, but likely not the 14x – 17x mentioned in article), even in the ed tech market (the company got just over 12x in 2011). This would lead to an expected valuation of roughly $2 – $2.5 billion, far less than the desired $3 billion but more than the $1.64 billion price paid in 2011. If Blackboard really thinks they can get up to $3 billion based on the Reuters quote above, then I would assume that they are thinking more of a strategic buyer (e.g. another, larger, company buying Blackboard for some strategic asset such as installed customer base or rapidly growing international presence). The challenge is that $3 billion is a big price tag, and there are not that many education-related companies that could afford this purchase. Pearson, Google, Microsoft, and LinkedIn are example companies with some foothold in education and the financial ability to make a purchase (speculation alert, as I am not saying I think any of those companies will make a bid).
To get a sense on the bet that Blackboard might be making, consider the case of Lynda.com being purchased by LinkedIn for $1.5 billion. Founded in 1995, Lynda.com’s 2014 revenues were only $150 million with EBITDA of $7.5 – $15 million. That’s an EBITDA ration of at least 100x. Only a strategic buyer could justify those numbers.
My suspicion is that Blackboard’s investment bankers have already done their research and have a rough idea of who has enough money and who might make a bid. This also leads to a question of timing.
How Would This Affect Customers?
Unlike 2011, we are not seeing the potential of a publicly-traded company going private, which was a far greater risk for customers worried about change. This time, the relative risk depends on who, if anyone, acquires Blackboard. If Blackboard settles for far lower price in auction and goes with a financial buyer, I would assume that the new owners would be betting on the same strategy that the current ownership and management team has in place (remove silos, streamline operations, grow internationally, re-architect product line), but they would plan to subsequently take Blackboard public in a few years.2
If, however, Blackboard is able to find a strategic buyer willing to pay the higher price, then the effect on current and prospective customers would largely depend on why that company is making the purchase. This scenario would lead to greater chance of significant change for customers, whether for good or bad (or both).
It will be interesting to find out if the Reuters story is indeed accurate and if Blackboard does get acquired. We’ll keep watching.
Update 8/4: Clarified language on EBITDA multiples for software industry.
By Phil Hill
- From Wikinvest: EBITDA, which stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization”, is a way of evaluating a company’s profitability which excludes items that make comparisons across companies difficult and which are viewed as not central to the company’s core operations. [↩]
- Credit to Michael Feldstein for the thought process in this paragraph. [↩]