Why Thoma Bravo Bought Anaplan for $10.7B

What's a few $B amongst friends

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On March 20, 2022, Thoma Bravo announced they were taking Anaplan private at $66 per share in an all cash transaction representing an acquisition price of $10.7B in one of the largest software PE transactions ever.

Anaplan did $592M of ARR in 2021 (FY22) growing 32% YoY with 118% net retention. If we use the “85% revenue growth rule” for SaaS then next year’s growth rate is forecasted to be 27% YoY or $750M of ARR in 2021. By the way, all these rules of thumb are of course imprecise and given NRR of 118%, Anaplan may grow faster in new account lands (or slower). However, just for kicks let’s say 14x FWD ARR is the revenue multiple (not perfect since using market cap not enterprise value but who cares).

Needless to say that is quite a hefty multiple and shows that PE is increasingly willing to pay a few years ahead in growth for what they perceive to be durable products.

Given this large acquisition, I wanted to step back and look at Anaplan’s history to understand how Thoma Bravo is getting so comfortable with this acquisition. For background, at a previous fund, we had the pleasure of co-leading Anaplan’s $1.4B valuation pre-IPO round. To show you how much times have changed from then till now, here was my quick comp table in late 2017 to assess the potential multiple at IPO.

The above table seems laughable now. With the recent pullback, Anaplan’s NTM multiple dropped below 10x but before that since the IPO over the last 4 years, the multiple has consistently been comfortably above.

Why Thoma Bravo is paying 14x FWD ARR for Anaplan

1) ServiceNow playbook

ServiceNow has been consistently growing revenue 20%+ YoY for the past 10 years since IPO. They’ve done this by utilizing their beachhead of IT Service Management (ITSM) and leveraging that into adjacent categories like People Operations, IT Operations, Customer Operations, and much more. As each new product is created, ServiceNow leverages its distribution channel to upsell existing customers and to sustain durable, compounding high growth.

It’s no surprise that this is also Anaplan’s playbook. From starting with a beachhead in Financial Budgeting & Forecasting, Anaplan has expanded across the Finance & HR, Sales & Marketing, and Supply Chain categories with tailored planning solutions for everything from compensation and workforce modeling to sales forecasting and supply & demand scenario analyses.

The benefit to this strategy is that now instead of landing with just the first product developed, Anaplan can now land within a customer across various categories. “Are they already using Hyperion for financial planning? That’s fine let’s sell them sales planning or comp planning and get the users trained and certified on our platform so then we can expand out from there.”

Hence, you can similarly see that given the right focus and execution, Anaplan has a long runway ahead to expand into adjacent categories.

2) Embedded Distribution

One may ask, sure Anaplan has lots of products but its complex to use and can take a long time to learn/implement. Why would anyone buy the product? While in many cases this can be detrimental, in Anaplan’s case this is actually part of the gtm model.

Anaplan has a comprehensive field sales team that targets the Global 2000 companies and is selling a company wide transformation solution. In order to do that, Anaplan has built out a robust channel partner ecosystem from McKinsey, Bain and Deloitte to smaller boutiques like ZS Associates. These consultancies get money from clients to implement Anaplan AND help show the enterprises how to get value from Anaplan. This allows Anaplan to focus on higher margin software while the consultancies get fully utilized staff and high billable hours. This strategic alignment allows new products to be developed and quickly embedded into the existing customers through the help of the strategic implementation and advisory firms.

One of the key verticals for Anaplan is the CPG vertical. Companies like Heinz and Kraft were bought by massive PE funds like 3G and even Berkshire Hathaway. The model that was used for these acquisitions was zero-based budgeting. How do you cut costs as much as possible matched with precise planning and delivery of goods in the exact amount and at the exact time needed. Anaplan built out zero-based budgeting tools custom for the consultancies, opened up a marketplace to allow them to build their own tooling as well, and then enabled these consultancies to become heroes to their CPG clients in helping them implement zero-based budgeting to stave off activist investors and remain competitive with other competitors in pricing.

Furthermore, by being a “heavier to use product” end users receive weeks of training and enablement on Anaplan and even get higher salaries upon receiving Anaplan certifications which further embeds Anaplan into these large enterprises.

3) Familiar Top Down Sales Model

Historically and still at scale to large enterprises, most software has been sold in a “top down” model. Readers of this newsletter have heard me talk about it before, but this traditional model leverages field sales, enablement, geo divided sales orgs, channel partnerships, and industry customization to be able to continue winning larger and larger customers in various verticals.

Because this model has been around for a long time, PE funds have tons of operational expertise that they can leverage from past acquisitions to focus the business on key areas of growth. This usually results in faster growth and expanded margins which leads to a higher multiple down the road.

What’s the Catch?

Clearly Anaplan has a lot going for them so why sell? 1) Being private allows the company to reorg and refocus on core verticals without having to worry about the stock crashing if a change takes longer. 2) $10.7B for $592M ARR is 18x which is a nice near term multiple for most companies. 3) Recent multiples in public markets have contracted so Anaplan shareholders are getting paid for future growth ahead of what the market is valuing them at right now.

For Thoma Bravo, the roadmap to increase margins and focus growth is clear. Leverage the channel, utilize industry modules to sell further into certain verticals, and focus product development on the adjacent areas that resonate the most with customers. They key area to watch for is if the PE fund will be able to successfully continue to push R&D forward into new areas to follow the ServiceNow playbook that was run so well. It’s one thing to continue investing in R&D driven by founders or operators who can focus on the long term like Frank Slootman, but quite another when you have the pressure to create a good multiple for your investors in a short period of time. Typically this can lead to short term tradeoffs at the expense of the long term (i.e. new product development which also has a lot of risk). We’ll have to keep an eye out and see what happens to Anaplan in the future.

Congratulations to the whole Anaplan team on the acquisition! It’s truly a remarkable valuation and amazing to see the execution over the years. Even from the table I made above in 2017, the growth from $206M in 2018 subscription revenue to $750M in 2022 ARR expected is mind blowing.