Believes Coupa Is an Excellent Business With a Strong Market Leadership Position and Potential for Future Growth and Value Creation
Asserts That Recent Comparable Transactions – Including Those by Vista – Would Support a Potential Valuation for Coupa of More Than $95 Per Share
States That HMI Would Oppose Any Proposed Deal That Undervalues Coupa – And Believes Other Shareholders Would Do the Same
HMI Capital Management, L.P. (together with its affiliates, “HMI” or “we”) today announced that it has sent the below letter to the Board of Directors (the “Board”) of Coupa Software Inc. (“Coupa” or the “Company”) (NASDAQ: COUP).
December 5, 2022
Coupa Software Inc.
1855 South Grant Street
San Mateo, CA 94402
Attn: Coupa Board of Directors
CC: Rob Bernshteyn, Chairman and Chief Executive Officer; Roger Siboni, Lead Independent Director
Dear Board of Directors,
We are writing to you on behalf of HMI Capital Management, L.P. (together with its affiliates, “HMI” or “we”). HMI is one of the largest shareholders of Coupa Software Inc. (“Coupa” or the “Company”) (NASDAQ: COUP), holding approximately 4.8% of the Company’s outstanding shares.
HMI has built a track record as an investment management firm that prioritizes a long-term perspective in investing and partnering with the high-quality growth businesses that comprise our portfolio. We typically only engage privately with the boards and management teams of the companies we invest in and have never publicly released a letter to any of the companies in our portfolio. However, we believe that the urgency of the current situation requires us to share our perspective more broadly with our fellow shareholders.
As we have conveyed to the Board and management team, we invested in Coupa based on our belief that it is an excellent business. Its management team – most notably Chief Executive Officer Rob Bernshteyn – has done an exceptional job building the Company from a startup to a clear market leader, while establishing business spend management as its own critical category. Perhaps most importantly, Coupa’s outlook for future growth and long-term value creation is bright. As Mr. Bernshteyn himself stated only a few months ago:
“Now near-term scenario aside, we are proudly the clear leader in business spend management. Our total addressable market is massive and under-penetrated and we are excited as ever in our pursuit to revolutionize this market and deliver customer success like never seen before.”1
It’s our view that we speak for many other shareholders when we say that we would be pleased to own Coupa for the foreseeable future and to bet on the team to continue to build momentum and execute its proven strategy.
With this in mind, you can imagine our concern when we read recent media reports that Vista Equity Partners (“Vista”) and Coupa have engaged in talks for Coupa to be acquired by Vista.2 Essentially, our worry is that now is a difficult time to realize the full value of Coupa’s long-term potential as a market leader, given that Coupa’s share price is currently trading at a significantly depressed level and there are near-term sector-wide challenges in the software industry. The future for Coupa is an exciting one, and any sale price or process that fails to appropriately value Coupa’s long-term potential at the expense of seeking to rush into a deal would not be tolerated by HMI. We believe our fellow long-term shareholders would similarly agree.
Now may be a challenging time to realize full value in a sale
Generally speaking, we do not believe this is a good time to sell a software company given the near-term economic uncertainties and multi-year lows in software valuations. Furthermore, we believe the long-term future for Coupa to be as bright as ever, and on behalf of our fellow shareholders, we seek to emphasize that the Board must focus on the Company’s long-term value proposition in its evaluation of any strategic decisions – including a potentially opportunistic bid.
Prior to the news breaking of Vista’s interest and engagement with Coupa, the Company’s share price was approximately 78% lower than a year ago and 88% lower than highs reached in 2021.3 While we appreciate that the Board is evaluating options to create shareholder value, the headline is that doing a deal simply because Vista has expressed interest would be the epitome of “selling low.”
Indeed, CEO Bernshteyn in June noted:
“We continue to deliver solid top-line growth, best-in-class unit economics and strong free cash flows. Keep in mind that we built the foundation for this business during the heart of the financial crisis over a decade ago, and the discipline forged during those years is in our DNA.”4
While we are certainly not facing macro challenges remotely on par with the 2008 downturn, it is reasonable to expect that management could once again tap into this discipline and continue to build the business during this period of uncertainty in the capital markets (especially in the software sector) that is currently weighing on Coupa’s share price. Timing is everything when it comes to successful M&A, and the standalone option simply may make more sense right now than a transaction, and certainly makes more sense than a deal at the wrong price.
Any deal would have to have the right process, and the right price
If ultimately the Board reaches the decision that a sale now is in the best interests of all shareholders, the steps to get to this decision and ultimately select a deal need to be the right ones. To ensure it satisfies its fiduciary duties to all shareholders, the Board would be required to run a thorough process that is deliberate, comprehensive and exacting, taking into account all avenues to best drive long-term value for Coupa’s shareholders.
In terms of price negotiations, the Board needs to stand firm. Given current multiples for the software sector and Coupa’s recent share price volatility, we would expect the Board to push for above-market premiums off six- or twelve-month volume-weighted-average-price (“VWAPs”), which we calculate to be approximately $60 or $86, respectively.5 Too often we have seen boards and advisors (incentivized to do a deal due to their fee arrangements) argue that the premium was in-line with prior transactions. We would wholeheartedly reject that argument here given how unreasonable Coupa’s valuation has been recently.
Looking at two other recent Vista deals is instructive. The acquisitions of Avalara, Inc. and KnowBe4, Inc. were announced at an average of approximately 10.8x NTM revenue.6,7 Having studied both companies, we believe that Coupa is a higher quality asset, and even commanding a similar multiple would value Coupa north of $110 per share. More broadly, recent software sponsor take-privates have averaged approximately 9.6x NTM revenues, which would support a sale of Coupa over $95 per share.8,9
Further, it is important to point out that in the compensation package awarded to CEO Bernshteyn in July 2022, the highest tranche of PSUs vest at $244/share.10 Given the Board presumably awarded a package to the CEO that aligns him with long-term shareholders and renumerates him handsomely for value creation, it is imperative to compare any offer to the long-term plan that underwrote that compensation plan.
We would oppose a transaction that undervalues Coupa – and we believe other shareholders would as well
As we have shared with the Board previously, from HMI’s perspective, any proposed transaction at a price that fails to reflect Coupa’s true long-term value and future growth potential would be a mistake. This is why we would oppose any deal that undervalues the Company.
We believe that we are not alone, and Meritage Group’s recent Schedule 13-D filing indicates that another large shareholder has potentially similar concerns.11 Coupa has a shareholder base comprised of investors who have been willing to be patient and see Coupa through these more challenging times. While we understand the duties of the Board and appreciate that no official announcements have been made, we are confident that many of your other shareholders share our concerns and our conviction in the future value-driving potential of Coupa in its current form.
We would be happy to discuss any element of this letter at your convenience. Thank you for your consideration.
HMI Capital Management, L.P.
About HMI Capital Management, L.P.
HMI Capital is an investment management firm with a long-term perspective seeking to invest in the highest-quality growth businesses globally. Based in San Francisco and backed by long-duration capital from some of the country’s leading endowments, foundations and family offices, HMI has over $3 billion under management. HMI’s team holds deep domain expertise driven by 20+ years of direct experience investing in the software, fintech/financial services, and internet sectors. The firm has a global mandate to invest in best-in-class franchises (both public and private) across the capital structure. Holding a concentrated portfolio allows HMI to focus and provide more effective partnerships with its portfolio companies and their management teams.
This material does not constitute an offer to sell or a solicitation of an offer to buy any of the securities described herein in any state to any person. In addition, the discussions and opinions in this letter and the material contained herein are for general information only, and are not intended to provide investment advice. All statements contained in this letter that are not clearly historical in nature or that necessarily depend on future events are “forward-looking statements,” which are not guarantees of future performance or results, and the words “anticipate,” “believe,” “expect,” “potential,” “could,” “opportunity,” “estimate,” and similar expressions are generally intended to identify forward-looking statements.
The projected results and statements contained in this letter and the material contained herein that are not historical facts are based on current expectations, speak only as of the date of this letter and involve risks that may cause the actual results to be materially different. Certain information included in this material is based on data obtained from sources considered to be reliable. No representation is made with respect to the accuracy or completeness of such data, and any analyses provided to assist the recipient of this material in evaluating the matters described herein may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any analyses should also not be viewed as factual and also should not be relied upon as an accurate prediction of future results.
All figures are unaudited estimates and subject to revision without notice. HMI disclaims any obligation to update the information herein and reserves the right to change any of its opinions expressed herein at any time as it deems appropriate. Past performance is not indicative of future results. HMI has neither sought nor obtained the consent from any third party to use any statements or information contained herein that have been obtained or derived from statements made or published by such third parties. Except as otherwise expressly stated herein, any such statements or information should not be viewed as indicating the support of such third parties for the views expressed herein.
1 Rob Bernshteyn, Chief Executive Officer, September 6, 2022, Q2 FY2023 Earnings Call.
2 Vista Equity Partners Is Exploring a Deal for Coupa Software, Bloomberg, November 23, 2022.
3 Source: Bloomberg.
4 Rob Bernshteyn, Chief Executive Officer, June 6, 2022, Q1 FY2023 Earnings Call (Emphasis added).
5 Source: Bloomberg.
6 Sources: Bloomberg market data and consensus estimates; Avalara to be Acquired by Vista Equity Partners for $8.4 Billion, Avalara, August 8, 2022.
7 Sources: Bloomberg market data and consensus estimates; KnowBe4 to be Acquired by Vista Equity Partners For $4.6 Billion, KnowBe4, October 12, 2022.
8 Approximately 9.6x NTM revenue represents the approximate average of the following announced and/or closed transactions: Vista Equity’s acquisition of KnowBe4, Thoma Bravo’s acquisition of ForgeRock, Vista Equity’s acquisition of Avalara, Thoma Bravo’s acquisition of Ping Identity, H&F and Permira’s acquisition of Zendesk, Thoma Bravo’s acquisition of SailPoint, Thoma Bravo’s acquisition of Anaplan, and Vista Equity and Evergreen Coast’s acquisition of Citrix.
9 Sources: Bloomberg market data and consensus estimates; KnowBe4 to be Acquired by Vista Equity Partners For $4.6 Billion, KnowBe4, October 12, 2022.; ForgeRock to be Acquired by Thoma Bravo for $2.3B, Thoma Bravo, October 11, 2022.; Avalara to be Acquired by Vista Equity Partners for $8.4 Billion, Avalara, August 8, 2022.; Ping Identity to be Acquired by Thoma Bravo for $2.8 Billion, Thoma Bravo, August 3, 2022.; Zendesk To Be Acquired By Investor Group Led By Hellman & Friedman And Permira For $10.2 Billion, Zendesk, June 24, 2022.; SailPoint to be Acquired by Thoma Bravo for $6.9 Billion, Thoma Bravo, April 11, 2022.; Thoma Bravo Completes Acquisition of Anaplan, Thoma Bravo, June 22, 2022.; Citrix to be Acquired by Affiliates of Vista Equity Partners and Evergreen Coast Capital for $16.5 Billion, Citrix, January 31, 2022.
10 Source: Coupa Form 8-K filed August 1, 2022.
11 Source: Meritage Group LP Form 13D filed December 1, 2022.