SAP agrees $12.5 billion Qualtrics sale to Silver Lake and CPP Investments

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SAP has announced that it has entered into a definitive agreement to sell Qualtrics, an experience management company, to private equity firm Silver Lake and Canada Pension Plan Investment Board (CPP Investments). It was revealed last week that an offer was on the table - but SAP has now said that it has agreed to the all-cash transaction that values Qualtrics at approximately $12.5 billion. 

Silver Lake currently owns a minority stake in Qualtrics, with SAP owning the majority of the company’s shares. SAP bought Qualtrics for $8 billion back in 2018 to help improve its customer experience efforts, but later IPO’d the Utah-based company to pay down some debt, whilst retaining a majority stake. 

The deal this week comes after months of SAP trying to find a buyer for the company, as the German software giant undergoes fresh restructuring plans. 

Egon Durban, Co-CEO of Silver Lake, said: 

We are strong believers in the amazing technology platform that Ryan [Smith, Qualtrics founder], Zig [Serafin, Qualtrics CEO] and their phenomenal engineering and sales teams are building, and we’re thrilled to support the continued efficient growth of Qualtrics into a generational, highly profitable platform company by enabling further investment across all aspects of the business, including areas such as AI and other powerful new technologies.

This is a landmark transaction for Silver Lake, reflecting our confidence in the team and their vision. As they shape and continue to grow the next great enterprise software platform, they are the kind of leaders we have been most excited to partner with over many years of technology investing.

Under the terms of the agreement, Qualtrics shareholders, including SAP, will receive $18.15 per share in cash. This represents a 73% premium to the 30-day volume-weighted average price on January 25, 2023, the last full trading day prior to SAP’s announcement to explore a sale of its stake in Qualtrics, and a 62% premium relative to the unaffected closing price on January 25, 2023.

The transaction is being fully financed by equity commitments from Silver Lake and co-investors together with $1.75 billion in equity from CPP Investments and $1 billion in debt. The transaction is expected to close in the second half of 2023, subject to the satisfaction of customary closing conditions, including the receipt of the requisite regulatory approvals.

Qualtrics CEO Zig Serafin will remain in place and continue to lead the company. We interviewed Serafin last week and got his thoughts on the vendor’s current strategy, where he argued that the future blueprint for a digital business is ‘experience’. 

Commenting on the deal, Serafin said: 

Qualtrics is becoming central to how businesses make mission critical customer and employee decisions that increase revenue and operational efficiency. With our AI-powered platform and automated actions, we help companies deliver exceptional experiences and build deep relationships with their customers and employees at scale. 

We are incredibly excited to partner with the team at Silver Lake, who deeply understand our business and will help us continue to build a high performing company, invest in our innovation and expand our ecosystem to help our customers succeed.

In Qualtrics’ most recent Q4 earnings, the company turned in a loss of $256.4 million on revenues of $389.1 million, up 23% year-on-year. For the full year, losses were $1.06 billion on revenues of $1.46 billion, up 36% year-on-year. Subscription revenue for Q4 was up 26% year-on-year to $327.6 million, while for the full year it was up 41% to $1.224 billion.

Christian Klein, CEO and Member of the Executive Board of SAP, said: 

Silver Lake has both the operational expertise and the track record with software companies to help Qualtrics extend its leadership in the XM category it pioneered. 

Since we acquired Qualtrics in 2019 the company has more than tripled its revenue while delivering profitability. SAP intends to remain a close go-to-market and technology partner, servicing joint customers and continuing to contribute to Qualtrics’s success. The number of companies and brands using Qualtrics software has risen from 10,000 at the time of SAP’s purchase to over 18,000 today.

My take

My colleagues at diginomica long raised suspicions about whether the cultural fit between SAP and Qualtrics would work out long term - but this was probably even more pertinent when Christian Klein took over as CEO of SAP, given that the original deal was done under then-CEO Bill McDermott. SAP also has effectively recovered its initial costs, which given the current macroeconomic climate of high interest rates and limited buyout financing, isn’t a bad deal. 

After my time with Qualtrics last week at their user event in Salt Lake City, it was clear to me that this is a company that is just getting started - and I don’t mean that in a negative way. It had a roster of buyers that were publicly singing its praises at the event, but it feels like there’s still momentum there in terms of product innovation and the company is methodically thinking about where the high value ‘experience’ wins are for buyers. 

Being privately held while it captures this growing area of the market is no bad thing, particularly given the market volatility. There’s something to be said for taking a longer-term view without having to worry about the quarterly pressures. It feels like this is a good deal for everybody involved.