SAP plans to IPO Qualtrics

One of Europe’s leading tech companies is planning to spin off a business which it bought just two years ago. SAP subsidiary Qualtrics has formally filed for an IPO with an indicative price range of between $20 and $24 per share. Using the top end of that price range it’s believed that this would value the operation at almost $14.50 billion.

An interesting marker for the value of the business was set down earlier this month when co-founder and former CEO of Qualtrics Ryan Smith (now the company’s Executive Chairman) agreed to buy 6 million shares in the business at $20 per share on December 8th, according to filings lodged with the US SEC.

Qualtrics, which is not a household name outside of tech or marketing circles, makes its living from experience management which is effectively the science of customer satisfaction. Qualtrics software allows a business to track and monitor their customer experience as they interact with the organisation.

As part of that process, customers are encouraged to leave feedback and answer questions. Qualtrics then feeds that data, supported by recommendations, back to decision-makers within the business allowing them to drive continuous improvement in the business. Qualtrics offers similar systems to employers to capture and monitor staff feedback allowing a business to get a 360-degree view of itself.

Qualtrics has more than a dozen offices across North America, 8 in Europe and another 10 spread across APAC and South America and more than 11,000 brands use its software and recommendations to manage their brand performance and their user and customer experiences.

German database giant SAP bought Qualtrics back in 2018 as the business bulked up to allow it to compete with rivals such as Salesforce.com. Qualtrics was acquired for $8.0 billion in what was then SAP’s largest-ever deal. SAP ultimately spent around $26.0 billion in total on acquisitions to push the business into new areas such as cloud-based services and software.

SAP is not looking to sell out of Qualtrics completely and intends to retain a significant and controlling interest in the business post IPO. As part of its IPO filings, Qualtrics provided some details on profitability or in this instance the lack of it. The business lost $258 million on revenues of $550 million over the first 9 months of 2020.

That was, however, a marked improvement over the comparable period in 2019 when Qualtrics lost $860.0 million on revenues of just $418.0 million. The excess costs incurred in 2019 were attributed to buying out the original shareholders of Qualtrics in cash rather than equity.

Those losses haven’t deterred private equity investors, however, as the IPO filings show Silver Lake Management agreed to buy $550.0 million worth of Qualtrics class A shares in a private placement conducted on December 23rd. Half of that stock will be secured at the IPO price whilst the balance has been acquired by Silver Lake at $21.64.

Why Silver Lake wants to be a minority investor in a business in which SAP could control 70% or more of the equity is not clear to me. However, the fund manager has a twenty-year track record of co-investment and cooperation and a portfolio full of well know tech names and must presumably believe that there is an opportunity in buying into the business at the pre IPO stage.