In an all-cash transaction valued at $6.4 billion, global customer and employee experience company Medallia has agreed to be acquired by Thoma Bravo, one of the world’s largest software-focused private equity firms, both organizations announced on July 26.

Under the terms of the agreement, shareholders of San Francisco-based Medallia will receive $34.00 per share in cash, a premium of approximately 20% to Medallia’s closing stock price on June 10, 2021—the last full day of trading before media reports started to spread about a possible transaction taking place. The acquisition share price is also higher than Medallia’s closing price of $33.35 on Friday and its closing price of $33.71 on Monday.

The deal will convert Medallia into a private company less than 2 years after going public in 2019. Its common stock will be delisted from public markets when the transaction closes, which is expected to take place later this year. Medallia has been losing money since at least fiscal year (FY) 2018, but the transaction is expected to leverage the deep pockets of Thoma Bravo, headquartered in Chicago with an asset-management portfolio worth $78bn, toward making additional resources available to Medallia.

Taking a company private generally allows a longer-term strategy rollout with less pressure, as management can focus on running and growing a business instead of ensuring compliance with a raft of costly and time-consuming regulatory requirements called for in a publicly traded company.

In cases involving the buyout of a target company by a private equity firm—as is the case with Medallia—the private equity firm often secures the debt it incurs because of the acquisition against the assets of the company being acquired. The cash flow from the business of the acquired company is then used to pay interest and principal payments on the debt.

Go-shop period allows consideration of better deals

Medallia was first approached with an unsolicited acquisition, which led to a review and evaluation from the firm’s board of directors on the company’s viability as an independent entity, along with other strategic alternatives. The board then approved the transaction with Thoma Bravo because of its “immediate and certain value” to Medallia shareholders, according to the news release from Medallia.

The agreement includes a 40-day “go-shop” period expiring on September 4, 2021. During that time, Medallia can consider competing deals or superior proposals.

Leslie Stretch, president and CEO of Medallia, said the company already benefits from a notable portfolio of cloud technology solutions and a loyal customer base. With the acquisition, however, Medallia can begin what he describes as its “next phase of differentiated growth.”

Medallia is known for the Medallia Experience Cloud, its software as a service platform imbued with proprietary artificial intelligence (AI) technology for managing the customer and employee experience. The platform captures experience signals across interactions, including voice, video, digital, the Internet of Things (IoT), social media, and corporate messaging tools.

Profile on Thoma Bravo

Thoma Bravo, meanwhile, has been active on a multibillion-dollar acquisition trail. In April, the investment firm acquired the cybersecurity group Proofpoint in a $12bn deal, and then three months later in early July bought Stamps.com for $6.6 billion.

Thoma Bravo was also the top private equity firm to which pension funds allocated capital in 2020, according to an article in June from Institutional Investor, an international business-to-business publisher. Thirteen funds, including the California State Teachers’ Retirement System, had allocated a total of $2.9 billion to three Thoma Bravo funds, the article said, citing as its source a report from alternative investments technology provider Vidrio Financial.

In a profile of the company, The Wall Street Journal described the business model of Thoma Bravo as one that identifies software companies “with a loyal customer base but with middling profits,” and then transforms them through acquisition into “moneymaking engines.” It does this by shuttering the acquired company’s unprofitable business lines, cutting costs, hiking up or retooling prices, and outsourcing jobs to cheaper labor markets.

Medallia’s financials at a glance

For the quarter ending April 30, 2021, Medallia reported total revenue of $131.4 million, up 17% from the same period last year. Even so, the company posted a net loss of $52.4 million for the quarter, widening by 38% from the $32.5 million loss Medallia recorded at the end of April 2020.

Overall, Medallia reported revenue of $477.2 million for FY 2021 ending in January earlier this year, up 19% from FY 2020. However, the company has not been profitable for at least the last three years. Medallia suffered a net loss of $70.4 million in FY 2018, with losses then widening to $82.2 million in FY 2019, $112.3 million in FY 2020, and $148.7 million in FY 2021.

Would Medallia have enjoyed a higher valuation if the company possessed a healthier balance sheet? And what does Thoma Bravo have in store for Medallia by acquiring the company?

On July 31, the news revealed that Medallia was being investigated by Juan Monteverde, founder and managing partner at Monteverde & Associates PC, a national class-action law firm based in New York City that says it is committed to protecting investors and consumers from corporate misconduct.

The investigation seeks to determine whether Medallia and its board of directors violated securities laws and breached their fiduciary duties to the company on two aspects: by failing to conduct a fair process; and by determining whether the transaction was properly valued. Calls were made by Dash Network to Joele Frank, Wilkinson Brimmer Katcher, the PR contact listed in Medallia’s news release, to obtain comment and clarification on the questions above and on other issues. The calls, however, were not returned.