Q2 2022 - (released August 2022)
SA's quarterly Private Equity & Venture Capital magazine
Mimecast’s $5,8bn private equity deal before tech rout, a perfect time to build
by Michael Avery
If, as someone once said, “the early bird gets the worm, but the second mouse gets the cheese”, then Mimecast CEO and co-founder, South African born and raised, Peter Bauer, must be particularly pleased with the December timing of his private equity buyout from US-based private equity GP, Primera.
The storm clouds in the market were gathering as the US Fed was still sticking to its ‘inflation is transitory’ narrative, while signs were emerging that a regime change was imminent.
We’ve seen growth powerhouses in technology fall hard and fast since December 2021, from household names to the speculative COVID year winners, and so, with the benefit of hindsight, the $5,8bn deal announced right at the peak speaks of prophetic insights from Bauer and his team, or a little bit of really good luck and timing, or both.
Catalyst caught up with Bauer to talk about the deal and how he grew Mimecast into a global household name in cyber security.
It was a massive deal, which officially closed towards the back end of May this year. Mimecast is private again after a six-year run trading on the NASDAQ. And after reporting a 17% increase in top line to a shade over US$500m and net earnings of almost $30m, one can see the sort of multiple that Bauer secured for the take private.
Bauer is in a philosophical mood as he reflects on the transaction.
“I think, firstly, for me as a founder in a business, what a privilege it is to be able to found and then lead an organisation at this kind of scale, over an enduring period like this. So many people set up and start companies. And then through the course of time, the destiny of those organisations is impacted by various things. Founders often have to step off or step away, or companies don't always reach their full potential. And so, we feel incredibly blessed and fortunate to have had such fantastic investors and team members over the years, with a strong business model, in a marketplace where there's real need; and to continue to innovate and be here today, to enjoy this milestone.”
It's a great South African success story as well, because Mimecast is a household brand name in email security and now, cloud security. How many people are actually aware that this global giant was founded by a South African?
Bauer left South Africa with his family in 2002, shortly after the Dot.com bubble burst. And he stresses that at the time he wasn't so much moving away from South Africa, as towards the opportunity, to work in a bigger economy.
“Having built a tech company in South Africa and sold it in the 90s, I really wanted to go and experience a little bit of international business,” says Bauer. “And so, I initially went over to go and sell some South African software, and try to develop sales channels for a couple of South African software products.
Through that, I met my co-founder, Neil Murray. He and I both felt that the model of selling somebody else's software was suboptimal, relative to what we felt we could do together. And he's a fabulous software architect, and a really, really bright guy. As a co-founding team, we had gently overlapping but very complementary, differentiated skills from each other, with very similar values and philosophy about how to build and grow a company.
And so, in the UK, in early 2003, Peter and Neil put together the core ideas for Mimecast and started together with a small team.
“Fortunately, we both had some personal financial flexibility from having sold previous tech companies. We were able to start, what, with hindsight, was a fairly unreasonable journey, on our own terms, and to prove out some of the early concepts that we thought would be useful.”
They say that, in every startup, you need someone who always wants to get stuff done, someone who obsesses over numbers, someone who's honest about the stuff that doesn't work, and someone who's eternally optimistic, and Bauer doesn’t hesitate to credit optimism as the key to unlocking Mimecast’s success.
“I think optimism has really got to be at the core, because technology is hard to build,” explains Bauer. “Unique technology is hard to build; next generation technology is hard to build. It requires real imagination, and persistence. And with my co-founder, we spoke about optimistic initiation. If you really knew what was coming your way, you would probably never start. So, to grab hold of that optimism and take it to its extreme, it's actually sort of a fairly delusional mindset. It's not a reasonable position to be in. But it’s through disciplined pursuit and, as you say, those other ingredients, those other capabilities: worrying about getting things done, getting the numbers right, all those multifaceted pieces. And the core is optimism; the belief that there's an issue in the world that we could make better. And that we could make it better by applying our time and our effort and our resources consistently over a period of time… knowing that it's not going to be a quick fix, but that it's worthwhile doing.”
And fortune did favour the bold and optimistic. From the UK, Peter moved to Boston, Massachusetts in 2011, to lead Mimecast’s aggressive push into North America. And since that time, Mimecast has been one of the strongest performers in its market segment, in terms of customer acquisition and top line growth, and Peter is now one of only a handful of CEOs who have led a pure ‘software as a service’ (SaaS) company for 15 plus years. That experience has provided peerless insights into how to grow and scale a SaaS business into new markets.
Of the key ingredients, Peter places people right at the top.
“You’re just never going to get this perfect. There are always going to be mistakes. There are always going to be people who let you down. But the success story of Mimecast is one of persistence by a core group of people that has expanded considerably over time, that have been very committed to a few principles.”
And one of those core principles, says Bauer, is taking care of customers and making sure that customers are at the centre of our business.
“That doesn't necessarily mean just listening to everything customers want and doing it, it's really thinking about what's threatening our customers, what's creating risk for our customers, and what is our mission in that equation. And our mission has always been to focus on this most attacked area for organisations, which is email and communications; it is the most interesting point of contact for a cyber adversary,” says Bauer.
The other side of it, the economic engine of the Mimecast business, as Bauer puts it, is something that he believes has given the organisation resilience to overcome setbacks, and the time and space to correct errors.
“And what I mean by that is this subscription business model that we have; I often say I wouldn't survive a day as a CEO of a perpetual licence software company. And that's the environment I grew up in. We used to sell software to two companies, and then you'd have a maintenance stream of maybe 10 or 20 per cent. But it was this big licence hit one after another. The subscription business model is really powerful in that it compounds and it builds over time. And it takes patience in the beginning, because it builds slowly. But eventually, if you're looking after your customers and you're offering something compelling to new customers, there’s that staircase of layering every year's revenue, so you're just constantly standing on the shoulders of the giants that came before in building it. And the cash flow profile of the business is really, really strong. So, if you have a bad year or a tough situation or whatever it is in the business, you are never falling back behind a certain point.”
And it is sure to have been an integral part of that cash generation profile that attracted private equity. It's often what they look for in businesses, beyond, obviously, the right jockey and the business model and timing in the market.
Permira is a major private equity fund in the US tech space, having previously backed and helped scale some of the biggest and fastest growing software, cybersecurity and consumer tech businesses globally – the likes of McAfee, Adventina, ABB Technology, and Genesis. Permira has raised 17 buyout and growth equity funds since 1985.
As Bauer tells it, he was enjoying running a public company, with its pressures and intensity, as he refers to it, and Plan A was always to continue running a successful listed company.
“But what happened in 2020 is that we started to be approached periodically by private equity organisations, and one in particular had approached us a couple of times and put offers in front of our board. But our board wasn't enthusiastic about them and declined them. That firm then moved on from us and acquired our biggest enterprise North American competitor firm, called Proofpoint. And they paid a really strong multiple for Proofpoint.”
Bauer is being extremely diplomatic with that last point as, even with private equity firms spending record amounts of cash for software in recent years, Thoma Bravo trumped them all, announcing the biggest cloud buyout ever in April 2021, when it unveiled its acquisition of Proofpoint in a deal valued at US$12bn.
“And what that did, almost overnight, was drove our stock price up because it began speculation that we were undervalued, and that there was a lot more to this Mimecast story than people had been appreciating. And so that started to drive interest, which coincided with us being added to an index called the S&P 400. It's a sort of mid-cap company index. And that also drove a lot more attention and interest around our stock.”
It was around that point that Bauer decided to get on the front foot to ensure that Mimecast was in a position to make a deal, rather than have to take a deal, if it came to it.
“Private equity can be very powerful and very forceful,” explains Bauer. “And not all private equity firms are made equal. Different manager/management styles fit better with different types of private equity; different company cultures fair better with different private equity firms. And some are very spreadsheet driven. I mean, they all have a spreadsheet back in the Batcave. Some of them just have different tones in those relationships. And for me, that tone really matters. How people feel about their work at the company has a huge impact on long-term outcomes. So, we spent some time really getting to know folks, and we met Permira quite early in our process. We had some really great bankers working with us, advising us, and a terrific law firm. Permira was definitely head and shoulders a good fit for us, culturally and values wise. The interest that they took, they've been a customer of Mimecast for quite some time.”
But Bauer learned quite quickly that it’s complicated taking a public company private, especially in the US, when you’ve got competing private equity firms trying to gain any form of advantage by muddying the waters.
Thoma Bravo used the US’s “Go Shop” provisions to try and drive the price up and gain some advantage for its recently acquired competing portfolio company, Proofpoint.
“The regulations over time have just grown to be very, very complex,” explains Bauer. “So, at the core of it, you've got a whole bunch of public company shareholders who, in a worst-case scenario, can have a company stolen from them by another investor and management colluding with each other. To prevent that from happening, there is a very complicated set of criteria that has to be gone through to make sure that the process is well governed, that the decisions are being made, and the ideas are being evaluated in a structured, transparent, documented way.
“And then, of course, we had to live with the reality that when you go into these deals, part of protecting your public shareholders is that the deal is structured within this idea called a ‘go shop’ – I don't think we have that sort of law in the US or South Africa, where someone can come in after you've agreed a deal and say, well, here's a better offer.”
“But it's built in for the protection of the public shareholders, and, frankly, for the protection of the board, to be able to demonstrate that it is an open process. There's this idea that, for a 30 or 40 or 45 day period, you can go and look at other offers. So, this drags out over quite a long period of time. Everybody knows what you're doing. So, you're managing staff communications and expectations, you've got customers, you've got partners, you've got competitors, and you're saying, ‘Well, this could be bad’; so it's complex.
“And then to make it more complex, the party that had acquired our competitor decided to jump in during the go shop period and put in a competitive bid to see if they could disrupt the process with Permira and gain some benefit for themselves through that exercise. So, it's long, late night calls with lawyers and bankers, and it went on for months.”
Proofpoint, backed by Thoma Bravo, made an offer for Mimecast that was 16% higher than the Permira agreement, but Proofpoint declined the higher offer inquiry amid antitrust concerns.
But now, with the benefit of hindsight, Bauer can barely hide his satisfaction at concluding the deal when he did.
Global equity markets have sold off heavily since December last year, with the Nasdaq down over 32% at the time of writing, as the market rotates away from the growth tech names that have boomed since the 2008 Global Financial Crisis and during COVID, to value, in a rising interest rate and inflation-spooked world.
“Obviously, we feel very good right now, having pulled the ship into a safe port. If one looks at what's going on in the broader market, I've got friends who are CEOs of public companies in the Boston area, and I can see their share prices. I mean, these are great companies, but the share prices have fallen, 40, 50, 60 per cent.
And that's never a lot of fun.
“And there's no shortage of news right now over the past few weeks of companies having to make, let's say, short-term decisions; laying off staff, cutting costs, because the sense is that the economy is changing. It's turning. And the one thing that I think venture-backed firms and these guys appreciated, based on lessons learned in the Dotcom crisis, and lessons learned in the crisis of 2007 and 2008, and even a little bit in 2014, when things got a little bumpy, was that it's easier to cut costs early than to postpone and procrastinate. There's a lot of pressure in the system that's almost pre-empting a recession in the tech space and, I mean, the weather has literally changed in the last few weeks.”
“And a lot of this is because these are companies that are burning cash and are concerned about the next fundraising round, and so on.
“If you asked 10 tech CEOs whether they would prefer to be private during this storm, I’m sure all 10 would say yes. Mimecast can see out the storm in a safe, private harbour, not subject to the fluctuations of the stock market, and deal with public company shareholders angry at the board because they bought at 75 bucks, and now it's 65 bucks.
“We're a very profitable, cash-generative business, with a patient backer with a long-term perspective on the company, and that means we can continue to lean in and invest,” says Bauer. “Warren Buffett has this approach. In terms of stock market investing, we believe the same in terms of investing in human capacity, investing in building technology. And Permira came into this with what I found to be a very refreshing perspective, relative to some of the other private equity firms that I've interacted with. They have a mantra; it's ‘product first, growth first’. And that's very different from our, sort of, ‘cash flow first, margin first’, or whatever you could imagine is in the back of the minds of many others.”
Bauer is adamant that he’s still got plenty more time in the tank to ensure that it won’t be through a lack of imagination or ambition that might leave him wondering, when the exit does arise, whether he gave it a full shot to build the biggest and best business he could.