Growth Equity Case Study Slides

The Growth Equity Case
Study 2.0: Atlassian

Model
Add-On Acquisitions Are Always Better with
Someone Else’s Money
What is Growth Equity?
This entire tutorial corresponds to an M&I
article on the topic:
https://www.mergersandinquisitions.com
/growth-equity/
We’ll expand on that M&I article here

and show you more of the Excel parts.
Plan for This Tutorial
• Part 1: What is Growth Equity?
• Part 2: Highlights of a Growth Equity Case Study and Model
• Part 3: How to Make an Investment Recommendation

Part 1: What is Growth Equity?
• Basic Idea: Mix of private equity (leveraged buyouts) and
venture capital (investing in risky but high-growth-potential
startups)
• Difference 1: Only tend to invest minority stakes in companies
• Difference 2: Companies must have proven markets and business

models, i.e., have actual revenue, even if they’re not profitable
• Difference 3: Companies use the investment for a specific growth

purpose, such as market/geographic expansion, more sales reps,
factories, acquisitions, etc.
Part 1: What is Growth Equity?
• Other Differences: A few related to the financial characteristics of
deals…
• Targeted Multiple or IRR: Often 3-5x and 30-40%; lower than the
5-10x that VCs target and higher than the 2-3x PE target
• Returns Sources: Primarily growth, whether organic or other, no

debt paydown, and maybe some from multiple expansion
• Leverage: Minimal debt used, but sometimes they use preferred

stock or hybrid securities like convertible bonds to mitigate risk
Part 2: Growth Equity Case Study Highlights
• This one comes from our Excel & Fundamentals course and is based
on Atlassian, a software company that creates tools for programmers
• Financials: < $1 billion in revenue, slightly negative operating

income, 40% revenue growth, and transition to subscription model
• Question: Should we invest $2 billion for a small stake in Atlassian

so they can use the funds to acquire other, high-growth software
companies and get customers and cross-selling like that?
• NOTE: This is a bit weird since Atlassian is far too big for a traditional
growth equity deal, $2 billion is huge, etc., but we’ll go with it
• Revenue: Billings vs. Revenue → Billings represents cash collected
from customers for orders, but isn’t recognized right away
• New Customers: Billings increases by XX% per year (50% to 30%)
• Existing Customers: Certain percentage renew and accept price

increases, so their Billings also increase
• Subscription Billings: New Billings + Existing Billings
• Revenue: % Recognized from This Year + % Recognized from Prev Year

• License & Maintenance Revenue is similar, but Licenses are simple
one-time sales, and New Maintenance Revenue comes directly from
License sales in that year
• Expenses: Some are simple percentages of Revenue or Billings;

others, like R&D, are based on the Employee Count and Cost per
Employee
• Next: We use these assumptions and fairly standard ones for

Working Capital (e.g., Accounts Receivable as a % of Revenue) to
build the financial statement projections
• Add-On Acquisitions: The company spends $700 – $775 million
per year over 5 years to acquire other, high-growth companies
• Problem: Company pays an average 20x revenue multiple for them!

Yes, they’re high growth(~100%), but are they worth that much?
• Setup: We created a mini-waterfall schedule to show the revenue

and EBIT from each acquisition each year, and added them up
• Punch Line: Over $3 billion of spending generates only $600 million

in extra revenue and $100 million in extra EBIT by Year 5
• Tax Schedule and NOLs: Standard setup – create NOLs when
Taxable Income is negative, and use them when it’s positive
• Statements: Ignore NOLs on the IS and account for the book vs.
Cash tax differences on the CFS
• Returns: Based on Atlassian’s historical revenue multiples, in the

10x to 25x range, and we create sensitivities at the bottom
• Why Revenue Multiples? EV / EBITDA ones don’t work here given

the company’s low-to-negative EBITDA initially
Part 3: How to Make an Investment Recommendation
• Goals: 20-25% IRR in the base case, 30%+ in optimistic cases,
and a minimum of 10% in downside cases
• So: This seems to be an easy “yes” since we meet all those targets,
the company is growing quickly and moving to a better business
model, and the market is fragmented but growing quickly
• Biggest Risk: Severe multiple contraction to the 7-10x level, but

we could mitigate some of that with a convertible bond or other
hybrid security for the investment
• BUT: You could take the other side of this as well!

Part 3: How to Make an Investment Recommendation
• Why? The issue is that the add-on acquisitions barely do
anything… remove them, and the IRR only changes by ~2-3%
• They’re too expensive, and their impact on the returns is

questionable; company does well organically, not due to deals
• So: Maybe the answer is “No, because the company needs a better
plan, such as hiring official sales reps or otherwise spending the
money on sales & marketing rather than acquisitions”
• OR: Maybe we need to increase the holding period to see the full
impact of the acquisitions?
Recap and Summary
• Part 1: What is Growth Equity?
• Part 2: Highlights of a Growth Equity Case Study and Model
• Part 3: How to Make an Investment Recommendation

Growth Equity Case Study Slides

Uploaded by

Copyright:

Available Formats

Growth Equity Case Study Slides

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Growth Equity Case Study Slides

Uploaded by

Copyright:

Available Formats

What is growth equity and how does it differ from venture capital and private equity?

What is growth equity and how does it differ from venture capital and private equity?

What are the key highlights of the Atlassian growth equity case study?

What are the key highlights of the Atlassian growth equity case study?

The Growth Equity Case

Study 2.0: Atlassian

We’ll expand on that M&I article here

• Part 2: Highlights of a Growth Equity Case Study and Model

• Part 3: How to Make an Investment Recommendation

• Difference 1: Only tend to invest minority stakes in companies

• Difference 2: Companies must have proven markets and business

• Difference 3: Companies use the investment for a specific growth

• Returns Sources: Primarily growth, whether organic or other, no

• Leverage: Minimal debt used, but sometimes they use preferred

• Financials: < $1 billion in revenue, slightly negative operating

• Question: Should we invest $2 billion for a small stake in Atlassian

• New Customers: Billings increases by XX% per year (50% to 30%)

• Existing Customers: Certain percentage renew and accept price

• Subscription Billings: New Billings + Existing Billings

• Revenue: % Recognized from This Year + % Recognized from Prev Year

• Expenses: Some are simple percentages of Revenue or Billings;

• Next: We use these assumptions and fairly standard ones for

• Problem: Company pays an average 20x revenue multiple for them!

• Setup: We created a mini-waterfall schedule to show the revenue

• Punch Line: Over $3 billion of spending generates only $600 million

• Returns: Based on Atlassian’s historical revenue multiples, in the

• Why Revenue Multiples? EV / EBITDA ones don’t work here given

• Biggest Risk: Severe multiple contraction to the 7-10x level, but

• BUT: You could take the other side of this as well!

• They’re too expensive, and their impact on the returns is

• Part 2: Highlights of a Growth Equity Case Study and Model

• Part 3: How to Make an Investment Recommendation

You might also like