$4.75 Billion for Marketo: Perhaps a Smidge High. But Market-Correct.

Is Adobe paying $4.75b for Marketo, just 27 months after it was valued at onlu $1.2b … high?  Maybe, but 2018 is the Best of Times in SaaS.  The price is generally market-correct.

On the face of it, a 3x — and $3 billion — gain in 2 years seems … high.

In May of 2016, when Vista bought Marketo for $1.8 billion, that was with a 64% premium. So Marketo really went from $1.2 billion in value in May 2016 to $4.75 billion in September 2018. Woah! What happened?

A combination of 5 factors:

  • First, Marketo’s revenues grew over those 27 months. Not at a crazy rate, but materially. From $275m in GAAP revenue in 2016, to $320m in 2017 … to more today. Probably a $400m ARR run-rate today is a reasonable guess — Adobe stated “more than 20% growth” in 2018. And add in a now cash-flow positive business today, which makes it more attractive to a conservative company like Adobe. Billionaire Robert Smith’s Vista Equity Makes $3 Billion Selling Marketo

  • Second, the Cloud Has Just Exploded Since 2016. Everyone is just buying more SaaS stuff, especially at the CIO level. So Marketo is an even better bet than in 2016. More CIO-level $$$ are going to SaaS. Even as a 10-year+ old product, Marketo’s #1 market share in certain segments is going to benefit from that trend for years to come.
  • Third, Public Company “Multiples” Have Almost Doubled Since 2016. So market leaders, on average, are worth about twice as much per $$$ of revenue. That alone explains a big chunk of the valuation increase. Top SaaS public companies are now trading for almost 10x next year’s revenues.
  • Fourth, Adobe’s Own Stock and Valuation Has Exploded — up 250% to $130b in 2 years. This makes M&A cheaper for Adobe (albeit in an indirect way for an all-cash deal). Also note they are paying with cash and borrowing, so the acquisition will not be dilutive to shareholders. Getting $400m+ in ARR in a core business for $4.75b without having to issue any shares may be a bit expensive in price, but not a terrible deal for a company with Adobe’s own high revenue multiple. It’s 4% of Adobe’s enterprise value. Adobe ain’t cheap itself, and it’s getting Marketo without one share of dilution.

  • Fifth, given Adobe’s Own Revenue Multiple and Goals in Marketing — It Makes Sense. Adobe’s marketing + Digital Experience SaaS division is at $2b+ in ARR, and adding another $400m+ in ARR from Marketo seems a simple way to bolster that business, for about 4% of Adobe’s enterprise value. That core segment is growing 20% today. Add in Marketo, and that’s a great way to maintain and importantly defend this ~20% growth … and Adobe’s stock price and multiple. Adobe has to keep growing at relatively high rates to keep up its own crazy stock price run. You gotta buy something big to make a big impact here. There just aren’t that many options at Marketo’s scale ($400m+ ARR, right space and customer — and for sale).

So add in 60%-70%-ish GAAP revenue growth in 2+ years for Marketo, plus 80%–100% growth in public multiples, and add in 250% growth in Adobe’s market cap and a strong strategic fit … then 3x the 2016 price (and 4x the 2016 pre-sale to Vista value) … isn’t that hard to get to. Not if you want the deal. Just compound all those growth vectors.

Everything has just exploded in SaaS in the past 24 months. Look at Hubspot, an adjacent player to Marketo. Their market cap has grown 4.5x to $5.7 billion since February 2016 as well:

Everyone in the end that sold soon-ish after the very brief 2016 “SaaS” crash/bump, including LinkedIn, Marketo, etc. — looks like they sold cheap today.

Take a quick look at our recent interview with Marketo CEO Steve Lucas below:

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Published on September 23, 2018

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