The Twilio-Segment acquisition was the biggest story of the weekend, and in our current IPO lull, it is the most discussed deal of the moment.
So it hasn’t been a surprise to see folks working to figure out if the $3.2 billion price tag Twilio expects to pay for Segment is cheap, reasonable or expensive.
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We had the same question.
The all-stock transaction is another big deal from Twilio, which previously scooped up SendGrid. Some expected Twilio to be picked up by a larger company after it went public, I’ve been told. Instead, Twilio has become the acquiring entity, boosting its size and adding to its total addressable market (TAM) through deal-making.
But a smart company can still overpay while executing a generally intelligent strategy. So, does the Segment deal look cheap, or expensive? While we don’t have all the data we’d like, a few useful VCs dropped hints about the size of Segment in my DMs.
Our hunt begins with Twilio’s own release on the matter. From there, we’ll bring in some historical data from the deal that Twilio compares the Segment transaction to, compare the resulting multiples to today’s market norms and close with a discussion of the acquiring company’s rising share price. The synthesis of all the elements will give us an answer. And we’ll have some fun at the same time.
The deal
A quick refresher on the deal: Twilio will spend $3.2 billion in shares of itself to purchase Segment. Per the company, the transaction is worth about 6% of the combined entity.
Twilio confirms it is buying Segment for $3.2B in an all-stock deal
So, what do Twilio shareholders get for their dilution? A company that the parent company reports has 50%+ growth, ~75% non-GAAP gross margins, SaaS revenues and a “similar [revenue] multiple [as] paid [for] SendGrid in 2019.”
In English: Segment is growing nicely. Greater than 50% growth at what we’ll see are likely nine-figure revenues is a strong pace of expansion. The gross margins in question are slightly less good, given that Segment’s GAAP gross margins are under 75%, placing them into the lower deciles of at-scale SaaS. Still, they are not bad.
It’s on the revenue multiple point that our work begins. If the multiple that Twilio paid for SendGrid was high, we can imply that the revenue multiple that Twilio will pay for Segment will also be high, and thus some of its lesser metrics could make the deal appear pricey. But if the SendGrid deal was low-priced in multiple terms, then perhaps the Segment deal will appear cheap.
So what revenue multiple did Twilio pay for SendGrid? I was told about 20x by a few folks, but let’s fact-check that number:
- Twilio-SendGrid deal announced on October 15, 2018: $2 billion.
- SendGrid revenues in Q3 2018, announced November 8, 2018: $37.2 million, up 31% on a YoY basis.
- Implied run rate for SendGrid when the deal was announced: $148.8 million.
- Implied revenue multiple at announced deal price: 13.4x.
However, the deal took a while to get done and Twilio shares appreciated in the interim. By the time the deal closed, the numbers had changed:
- Twilio-SendGrid deal completed: February 1, 2019, for $3 billion.
- SendGrid revenues in Q4 2018, announced via the Twilio earnings call: $41 million.
- Implied run rate for SendGrid when the deal was finalized: $164 million.
- Implied revenue multiple at final deal price: 18.3x.
The 20x number, then, appears to be the Q3 2018 run rate applied to the early-2019 final sale price, with $3,000 million ($3 billion) divided by $150 million to yield the figure. The 18.3x metric uses the final revenue count and the final deal value, making it a more accurate number.
Of course, it’s not clear which number Twilio is referring to, as the company only says that the multiple for its current deal is “similar” to the old transaction multiple. So let’s not get too caught up on how to parse the SendGrid number more finely.
Instead, we can add a little padding around the range of SendGrid-related numbers that we know, to give us a revenue multiple range for the Segment deal. That works out, say, 17x to 21x for Segment’s current run rate, or ARR, depending on how you want to consider its revenue mix.
Are those expensive prices?
Not really. For two reasons. First, the median public SaaS company — Segment was nearly big enough to go public, mind — is worth around 17.4x its revenue (according to the Bessemer cloud index), and is only growing at 27% with gross margins of around 74%. Segment is growing much more quickly, and has similar margins.
Unless we’ve really done some math wrong above, the Segment deal is reasonable in terms of the price paid; perhaps Segment should have held out for another few hundred million. Which Twilio could have afforded, because of what has happened to its value in 2020.
Twilio is buying Segment with house money, effectively. Twilio was worth around $100 per share at the start of the year. Today it’s worth $329.72 before the markets open. That share price values it at around $49 billion. To carve off some if its appreciation and use it to buy Segment and all its TAM is not a bad choice.
And that Twilio didn’t overpay by current norms at the same time is icing on the cake. Twilio continues to execute well.
Perhaps we’ll see more deals like this one? Lots of SaaS and cloud stocks are richly valued today. Why aren’t they out there dropping checks like bombs on smaller companies with complementary customer bases? Fear?
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