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Unpacking The $6.5B MuleSoft-Salesforce Deal

This week, Salesforce agreed to buy MuleSoft for around $6.5 billion in a cash-and-stock deal that sent the shares of the smaller company skyrocketing. On Monday, MuleSoft, a 2017 IPO, was worth around $32 per share. It’s now worth more than $44.

The $6.5 billion price tag “represents a 36% premium over MuleSoft’s closing share price on March 19, 2018” according to the companies’ joint release. It’s a nice pop for a company that went public at $17 per share just over a year ago.

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But that forces us to ask a simple question: what was so special about MuleSoft that Salesforce was willing to pay a premium for it, even after it had dramatically appreciated from its IPO price?

There are two answers to the question. On the product front, ZDnet has the must-read, arguing that the acquisition gives Salesforce “an integration cloud and a way to connect to more hybrid cloud deployments.” Fair enough.

However, we’re going to examine the company from a financial perspective, as that’s what we do around these parts. So, let’s unpack the second answer to our question and see how close it can get us to comprehension.

A Healthy IPO

MuleSoft’s debut was the SaaS-ish IPO that every modern software company hopes for. The firm had it all: rapid subscription revenue growth, strong gross margins on its recurring revenue, declining GAAP losses, minimal and declining negative free cash flow, and a 117 percent dollar-based net retention rate for its subscription revenue.

All that and the firm’s blended revenue growth rate across its most recent (then) years showed 70 percent expansion.

Unsurprisingly, it priced above-range and had a massive first-day pop. The company was hot and performed like it. Essentially, MuleSoft showed that, in 2017, if your SaaS-ish company was doing super well, there was ample demand for its shares.

Continued Ramp

Let’s fast forward a little bit. The firm’s most recent quarter, the fourth of 2017, included its full-year results. That means that we have a large traunch of data from MuleSoft that we can directly compare to the data contained in its various S-1s, as those detailed data through the fourth quarter of 2016.

In the fourth quarter of 2017, MuleSoft’s revenue totaled $88.7 million, up 60 percent from its year-prior tally of $45.0 million. The company’s 2017 revenue total of $296.5 million was up 58 percent compared to its prior-year result of $187.7 million.

Two other things happened in that year that are worth noting in our context. First, MuleSoft’s net loss grew from $13.1 million in Q4’2016 to $25.1 million in Q4’2017. Yuck. However, the firm managed to flip from negative operating cash flow to positive (-$8.6 million in Q4’2016 to $8.9 million in Q4’2017) and negative investing cash flow to positive (-$1.5 million in Q4’2016 to $7.5 million in Q4’2017). The firm’s aggregate free cash flow was $7.6 million in the quarter.

The firm managed a very strong growth from its IPO-era base while improving its cash profitability. From a SaaS perspective, that’s very impressive. And it implied that the firm could keep expanding its sales and marketing budget without damaging its profitability ramp.

Taking all that together, the same strengths that made MuleSoft attractive at the time of its IPO were still attractive at the time of its sale. MuleSoft was solid as hell, in other words, which meant that it wasn’t going to sell for anything less than a large premium, which it got.

But we still have more work to do. Let’s examine a few multiples to understand how much Big Tech is willing to pay for (some) SaaS companies.

Lessons

All that preceded was a general note about how MuleSoft was financially healthy, and thus sufficiently robust to command a premium compared to its prior value. However, that argument is more relative than absolute, so let’s do some division.

To better understand MuleSoft’s exit, let’s use its trailing revenue (calendar/fiscal 2017) and its forward guidance (calendar/fiscal 2018) to calculate how much money Salesforce spent on the firm’s top line.

  • MuleSoft 2017 revenue: $296.5 million
  • Mulesoft trailing revenue multiple: 21.9x
  • MuleSoft 2018 revenue forecast: $410 million (midpoint of forward guidance of $405 million to $415 million)
  • MuleSoft forward revenue multiple: 15.9x

Hot damn.

What’s notable here is that our usual paths of analysis get sticky. We showed without working too hard that MuleSoft has a history of strong operating results. But SalesForce is paying Atlassian or Alteryx-level revenue multiples for the company. That is far higher than Dropbox is hoping to land for example—by a factor of more than two, really.

MuleSoft’s price may be reasonable in your view. Making that point, MuleSoft grew more rapidly than Alteryx last year, despite having a higher revenue base. And, MuleSoft grew more rapidly last year than Atlassian, albeit from a far-smaller revenue base. But at some point, you cannot merely point at contrasting trailing multiples and expect them to fully explain a situation. This is one of those moments, as there is no clear line through comparable market data to give us an answer.

Instead, to correctly grok why Salesforce paid very high multiples for MuleSoft we have to consider the product over finances. It’s annoying, but a trailing revenue multiple of over 20 is simply staggering. At that multiple, Dropbox would be worth over $20 billion, not the $8 billion or so it’s currently shooting for.

However, the health of MuleSoft’s recent performance was likely a factor in its value. But that SalesForce bought it now, and for the sum that it did, feels more strategic from a use scenario than a simple financial calculation. Before we lean too far over our skis at this point, we’ll let ZDnet have the last word as to why Salesforce may have been market-hunting rather than trying to buy reasonably-priced accretive revenue.

From the ZDNet piece on the tie-up of the firms:

Salesforce’s $6.5 billion acquisition of MuleSoft gives the company an integration cloud, a new market and an entry into hybrid deployments and on-premises software.

With the move, Salesforce also starts to look a bit more like legacy software vendors too. MuleSoft’s platform is used to connect software via application programming interfaces. Think of MuleSoft as the glue that makes enterprise software a bit more nimble.

If that is worth the premium that Salesforce was willing to pay will become clearer in time. For SaaS-ish companies out there, it’s a good omen.

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