Just shy of 5pm US Eastern time Avid Technology announced it entered into a definitive agreement to be acquired by an affiliate of Symphony Technology Group (“STG”), a private equity firm based in Palo Alto.
STG will acquire Avid in an all-cash transaction for the price of $27.05 per share. The press release indicates this amount, inclusive of Avid’s net debt, values Avid at an enterprise value of approximately $1.4 billion. The ‘approximately’ in the press release is doing about $31 million dollars of work as the raw figure (based on most recent balance sheet accounts) suggest an amount of $1.369 billion.
Avid’s board of directors has unanimously accepted the offer. Closing of the transaction is expected during the fourth quarter of 2023, though the deal is still subject to Avid stockholder and regularly approval, along with other ‘customary closing conditions.’ Notably, the deal terms include a termination fee of $39.8 million should Avid terminate the transaction, which limits Avid’s ability to entertain alternative proposals.
We published a timely post earlier this week examining the implications of the then ‘rumored’ sale of Avid. The announcement offers us many specifics to update the analysis.
Reactions to the Acquisition Price of $27.05
While there is an inescapable awkwardness to the discussion of the pricing at $27.05 per share, it is important to keep in mind the price was arrived at through a process, as opposed to some coin flip.
“This transaction is the result of a comprehensive review of strategic alternatives for Avid. Upon closing, this transaction will deliver immediate, significant, and certain value to our stockholders. After carefully evaluating a variety of options, the Board determined that this transaction is in the best interests of Avid and its stockholders” stated John Wallace, Chairman of the Avid Board of Directors.
Our earlier post did not anticipate a price this low being practical given the recent trading levels of Avid’s stock price. The press release announcing the deal positioned the $27.05 figure versus the closing price on May 23rd, the day prior to the initial reports of a sale process by Reuters. On such a basis, STG’s price is a 32.1% premium.
It is valid to cite the pricing on the 23rd since the board of Avid could view all subsequent trading levels of Avid as artificially elevated and being fueled by the speculation of an acquisition premium. Using this reasoning, had Avid announced today it wasn’t exploring a sale, it would have ‘pulled the chair’ on the speculation and immediately dropped its valuation back down to May 23rd levels.
Further highlighting this critical context, the below chart illustrates the price premium of $27.05 versus the May 23rd closing and yesterday’s closing of August 8th.
However, some broader context is worth noting. Avid’s stock traded above $27.05 as recently as May 2nd of this year, only 16 trading days before (huge caveat coming) the initial Reuters reporting. Prior to May 2nd, Avid’s stock closed the trading day above this level for all but three sessions (the first three days of 2023). In fact, Avid’s stock closed above the contemplated go-private level in 85 of the 98 days of stock trading on the NASDAQ between January 1, 2023, and May 23rd. This equates to 82% of all trading days in 2023 up until the cited May 23rd date.
For the stockholder of Avid not following the news, he or she might further observe Avid’s stock closed above the contemplated price for 56% of the trading days in 2023. Perhaps the snarkiest way to put the point is to observe the investment banker of record, Goldman Sachs, was almost certainly retained prior to May 23rd and very well began the marketing of Avid at a higher price point then it ultimately delivered to Avid’s stockholders. Such snark ignores much.
Time marched on for Avid the business, Avid the stock price, and Avid’s market opportunity. Of particular emphasis was Avid’s Q1 2023 earnings results and the consequent market reaction.
Avid announced Q1 2023 earnings after market close on May 4th. Avid’s stock opened the trading day at $26.4, it would close the following day at $21.2, down 20%. The reason is found in the Q1 performance versus the guidance offered by management on March 1, 2023.
The below table shows the guidance and variance of the actual performance. It is lower, especially pertaining to the profitability categories of per share earnings and adjusted EBITDA.
The reader may view those variances as minor. Management attributed the misses primarily to ongoing supply chain issues with professional audio hardware product lines. Further, management reaffirmed the full year 2023 guidance.
If you are attempting to reconcile how the magnitude of the earnings miss could elicit such a drop in the stock price, you will find the answer in the valuation level of Avid, and more specifically, in the basis for the valuation of Avid. A separate post is needed to provide a full exploration of the phenomena. A short explanation is Avid’s valuation didn’t allow for much wiggle room in performance versus expectation.
The reaction of the first quarter results reset the stock trading level, even if it was only observable for 13 trading days prior to the sale speculation.
Acquisition Valuation
As relevant to the Board’s deliberation is the valuation of the offer from STG.
The acquisition announcement only slightly preceded the release of Avid’s Q2 2023 earnings. We consider the valuation as a function of those results. In the earnings announcement, management withdrew its full year guidance, but we include the valuation as a function of those figures as well.
For those old-timers interested, the price is 42.4x trailing earnings (remember earnings?). The below table lists the valuation as a function of revenue, EBITDA (management provided), and Annual Recurring Revenue (ARR) (note ARR for 2023 is the figure at the end of the year).
Readers of this blog may recall some of the specifics of Adobe’s Frame.io acquisition at a not dissimilar total consideration level. We are ten days from the two-year anniversary of Adobe announcing its $1.275 billion all-cash acquisition of Frame.io. Measured against that deal, STG is getting a bargain. Consider the inverse of that statement, for an additional two years of patience and $94 million Adobe could’ve had Avid (possibly).
To carry the intrigue a little further, Adobe closed its Frame.io acquisition on October 7, 2021. During Adobe’s fourth quarter fiscal earnings for 2021, Adobe provided an ARR number for Frame.io. Including business closed post-transaction, Frame.io closed the quarter (ending December 3, 2021) with $29 million of ARR. Put more simply, after approximately three months of the Adobe and Frame.io combination, ARR was $29 million. This figure then gives us the following comparison between the Frame.io valuation and Avid valuation (as a function of ARR).
The ARR multiple (to enterprise value) for Avid of 5.5x was rather eclipsed by the 44.0x+ achieved by Frame.io. Take whatever you will from that comparison – we all spend money differently.
Avid Rationale, Transaction Implications
There is no detailed rationale provided by Avid’s management team or board of directors on why this is in the ‘best interests of Avid and its stakeholders.’ Perhaps it will follow in subsequent communications or regulatory filings. Because of the acquisition announcement Avid’s cancelled its previously scheduled earnings call.
Avid’s CEO Jeff Rosica circulated an email to all Avid employees shortly after the press release was issued. The all-hands email amplifies on some of the high-level rationale for the transaction. “It is important to know our Board and management team carefully evaluated potential paths forward for our company and determined that this transaction – and becoming a private company – is the best path forward for Avid and our stockholders” wrote Rosica.
The emails circulated to Avid Enterprise customers and Avid Partners are light on any specifics. The Enterprise customer email begins “On behalf of Avid, I’m very pleased to share the news that our company will be making a leap forward that we believe will accelerate Avid’s strategic vision and our innovation for customers like you today and in the future.”
The release notes that the transaction will be financed through a combination of equity and debt. Debt levels and ongoing interest payments will be interesting data points if ever disclosed.
We can appreciate the conventional view of private equity ownerships is decidedly negative among media technology professionals. Caution is advisable. Just because most people laugh at a lawyer joke doesn’t mean all lawyers are the same. Becoming a private company, under STG’s stewardship, may very well prove beneficial for all stakeholders as Avid’s board believes. And it’s not like the public markets have a perfect incentive structure for long-term planning.
On the capitalist side of things, should this price hold, some Champagne is in order. Avid’s largest shareholder is the investment firm Impactive Capital that started building a position in Avid during the summer of 2019. Impactive paid an average of approximately $6.89 per share or around $47 million in aggregate to build its 15%+ position in Avid. The acquisition price of $27.05 represents a bit more than $186 million, an almost 300% gain (remember deal is all-cash). Avid’s current CEO Jeff Rosica was appointed on February 26, 2018, when the stock price was $4.87. This transaction would represent a 5.5x increase in price.
Almost Final Thoughts
What are the larger implications for the global media technology industry? We hope you will join us in Amsterdam at the annual Devoncroft Executive Summit | Amsterdam to debate and discuss…more to come.
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