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Vista Equity's acquisition of Duck Creek: An in-depth look

Updated: Mar 7

On 9 January 2023, Vista Equity Partners, an American private equity firm with over $95 billion worth of assets under management, announced a deal to acquire Duck Creek Technologies, a SaaS company which provides intelligent and innovative technical solutions to the issue of property and casualty insurance. It is set to be an all-cash transaction valued at approximately $2.6 billion. Duck Creek went public in August 2020, with an initial public offering of 15 million shares of common stock at $27 per share.

Vista is taking Duck Creek private, whereby Duck Creek shareholders would receive $19 per share, representing a 46% to the closing stock price on 6 January 2023, the last full trading day prior to the initiation of the acquisition, and a 64% premium to the volume weighted average price (VWAP) of the Duck Creek stock over the last 30 days, ending 6 January 2023. The deal includes a 30 day “go-shop” period, expiring at 11:59 PM EST on 7 February 2023. Under the set regulations of the agreement, within this period, Duck Creek is allowed to actively initiate, solicit and consider alternative acquisition proposals from third parties. The Board of Directors shall have the right to terminate the merger agreement with Vista Equity Partners, to enter a superior proposal, however, only within this specified period.

The transaction is set to be completed in the second calendar quarter of 2023, in accordance with regulatory closing conditions as well as to the full satisfaction of the U.S. Antitrust clearance. As and when the transaction is completed, the Duck Creek stock shall no longer be publicly listed and it will become a wholly privately held company, under the aegis of Vista Equity Partners. The transaction is intended to be backed by fully committed equity financing that is not subject to any conditional requirements.

The negotiations of the deal were overseen by a Special Committee comprising of the Duck Creek Board of Directors, all of them independent and uninterested parties. Following the internal discussions within the Special Committee which culminated in a positive recommendation, it was finally approved by the Duck Creek Board of Directors. J.P. Morgan is acting as financial advisor to Duck Creek, along with Skadden, Arps, Slate, Meagher & Flom LLP on board as the legal counsel. Evercore is the financial advisor with Paul, Weiss, Rifkind, Wharton & Garrison LLP acting as legal counsel to the Special Committee. Kirkland & Ellis LLP is representing Vista Equity Partners as their legal counsel.

At Duck Creek, the management believes that the deal is a testament to the true and intrinsic value of the company’s success and vision. Michael Jackowski, the CEO of Duck Creek has put the entire weight of his support behind the deal, saying “Duck Creek is proud to have pioneered cloud-based mission-critical systems for the P&C insurance industry to deliver a best-in-class customer experience. We are excited to enter the next chapter for Duck Creek in partnership with Vista Equity Partners to continue supporting P&C insurance carriers’ move to the cloud.” He believes that the shareholders are receiving a good and substantial cash value, at a massive premium to the stock price, representing a lucrative opportunity for both the parties involved, as well as the shareholders. On the other hand, Jeff Wilson, Managing Director at Vista Equity Partners presents a similar view. To quote him, “Vista has an established track record of partnering with leading enterprise software businesses within the insurance industry and related verticals. We are excited to work with the Duck Creek team as we look to build on their best-in-class platform and solutions, which serve many of the world’s leading P&C insurance carriers.”

After a turbulent period of market uncertainty and stock price volatility since its IPO, Duck Creek has decided to go private with Vista at the helm, and everybody seems to be in a good spirit about it. And it is fair enough to say that despite Duck Creek’s limited size, they are a rising power, on the cusp of promising great returns in the near future, which means that the acquisition not only gives Duck Creek a better capital base and infrastructure to develop their revolutionary P&C insurance practice, but also gives Vista rights to a company that has shown positive recovery since the long drawn 2 years of disturbance. Moreover, these expectations of Duck Creek’s stellar performance are not unfounded but are rather accentuated by internal reports indicating that the company has started off well in the first fiscal quarter of 2023. In November 2022, Duck Creek reported a 10% increase in year-over-year revenue with roughly a $17 million increase in its free cash flow, showcasing signs of overcoming the trauma induced by the nightmare of Covid-19 and the Ukraine war period, which took a toll on the stock market in general and new age tech stocks in particular.

To gain perspective of pre-acquisition financial performance, a look at Duck Creek’s financial results report dated 5 January 2023, would suffice. The SaaS annual recurring revenue (ARR) jumped to $180.6 million, in terms of YoY data. Operating margin for 2022 was negative but was far less negative than the corresponding figures for 2021, indicating better management of costs. According to 10-Q filings for Duck Creek for the period ended November 30, 2022, the total amount of sales and marketing spending was $16.2 million, carried out as against a healthy customer acquisition, with the announcement of new partnerships like CogniSure and the acquisition of Imburse Payments, implying a reduction in the customer acquisition cost (CAC). Additionally, R&D expenditure went up by $4 million for the corresponding quarter in 2021. The company has a leverage ratio of less than 1 and is thus in a comfortable position to satisfy its debt obligations.

Comparably, in the P&C insurance industry, the aggregate transaction value for M&A deals over 2022, was $1.2 billion, meaning the Duck Creek acquisition can be valued in the upper end of deals in terms of size. Alternatively, the second largest insurance M&A deal, Brown and Brown Inc. acquiring Global Risk Partners was valued at $1.79 billion, meaning the Duck Creek acquisition is valued lower than only the Berkshire Hathaway acquisition of Alleghany Corp., sized at a whopping $11.57 billion.

However, the picture is not as perfect as it seems and a technical analysis of the Duck Creek stock highlights an EV/EBITDA ratio of 369.29 and an EV/FCF ratio of 91.86, according to data available after the markets closed on January 20, 2023, showcasing that the stock is grossly overvalued and a red flag against Vista’s intention to acquire Duck Creek thus arises. Why then, would Vista be interested in the first place?

A strategic reason is that Duck Creek announced an intention to acquire Imburse Payments almost immediately before they were themselves set to be acquired. This adds Imburse’s capacities in efficient digital payments to Duck Creek’s SaaS model of P&C insurance. With Vista effectively acquiring both these companies, in addition to an already robust portfolio comprised by cloud computing companies like Citrix and BetterCloud, they could better facilitate efficiency of end-to-end encrypted transactions in a fintech-heavy world.

Additionally with access to other software investments in Vista’s belt, Duck Creek would be in a good stead to increase profitability via acceleration in sales. Therefore, this acquisition is a good decision for both parties involved, while also providing shareholders a substantially enticing exit point, and accommodates the interests of almost all stakeholders. It is truly a step into the exciting future.

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