OVERVIEW OF THE DEAL
On the 6th of May, the Norwegian education technology company announced the intention to acquire Clever, an American start-up that developed a platform for educators, students and their families to engage in digital classrooms for up to $500 million. That would be its third acquisition this year, after the one of Norway’s Motimate ($25 million) and Finland’s Whiteboard ($6 million).
This announcement came in the context of the global pandemic which has forced schools to close and students to learn from home last year. In this period, companies like Clever have been critical. The company says that its platform is used by 65% of school districts from kindergarten to 12th grade. Kahoot also had an important growth (revenue quadrupling year-on-year for Q1 of 2021), driven by the demand for online learning tools during the pandemic, and the company intends to sustain this growth, notably by entering in the US market with this acquisition.
“Through this acquisition we see considerable potential to collaborate on education innovation to better service all our users and leveraging our global scale to offer Clever’s unique platform worldwide” Kahoot chief executive Eilert Hanoa said.
Company Details: Acquirer – Kahoot!
Founded: 2012
Headquarters: Oslo, Norway
CEO: Eilert Hanoa
Status: Public
Number of Employees: 200+
Market Cap: $4.180 billion
Revenue: $31 million (FY20)
EBITDA: (15.9) million (FY20)
Kahoot is an Edtech company founded in 2012 that has built a global learning platform. The platform helps students learn through games and multiple-choice quizzes. It was built around the concepts of social learning, in which learners gather in front of the screen, to make learning more interactive. Kahoot has more than 1,5 billion users in 200 countries. Kahoot is used by teachers, students, parents and companies all over the world. It proposes both free and paid subscriptions to its wide variety of services. It has more than 550,000 paid subscriptions.
The company largely benefited from the Covid-19 pandemic, as online teaching surged and has established itself as a leader in the fast-growing Edtech industry, demonstrated by a strong organic growth (+170% from 2019 to 2020). However, comparing to the number of users, the revenue remains quite low at only $31 million. Then, Kahoot’s biggest challenge seems be the monetization of its activities (various offers, advertisements…), converting use time into cash inflows.
The company went public on Euronext Growth in October 2019 and then transferred to Oslo’s Euronext main market in 2021. Kahoot’s main shareholders are SoftBank (15.9%), Datum Group (11.6%), Microsoft (5%) and Disney (3%). Institutional investors hold 26% while the management and employees own a significant stake of 15%.
Company Details: Target - Clever
Founded: 2012
Headquarters: San Francisco, CA, US
CEO: Tyler Bosmeny
Status: Private
Number of Employees: 200+
Revenue: $44 million (FY21E)
Clever is a company that provides a simplified, digital platform bringing schools, students, and application developers together. It facilitates online learning thanks to a digital class, a messaging app and a database for the learning resources. The company mostly sells its services in the US, where 65% of the schools use their platform. A total number of 20 million students log in with Clever monthly.
The company has also benefited from the pandemic and the surge of digital teaching. But the company is on a steady growth path: revenue grew 25% per year over the last three years.
Main shareholders of Clever include well-known investment funds such as Paul Graham and Sam Altman, GSV, or Sequoia that have invested approximately $60 million in several series fundings since 2012.
SYNERGIES
• Expected Synergies
Kahoot! expects synergies linked to the further penetration of the US market thanks to Clever’s network. Clever would also benefit from Kahoot!’s global position - established in over 200 countries - to increase its international presence. The companies’ Edtech tools are also expected by both parties to interact and complement each other in order to foster growth and to reach new consumers. In addition, Kahoot!’s financial position will be all the more reinforced by adding more Annual Recurring Revenue to their quickly growing ARR.
• Synergies analysis and outlook
The transaction’s announced synergies are mainly made up of Revenue synergies as they would mutually benefit from each company’s historical geographical coverage and from their offerings’ combination, they can also be defined as collaborative synergies. The achievement of such improvements relies on a mid-to-long term plan to integrate one firm’s learning to help the other to develop itself in areas where it lacked presence compared to the former. However, it may be easier to achieve such synergies in Edtech than in other industries because many competitors rely on offering’s distinction to gain market share, hence partially avoiding the risks of overlapping products.
Optimism regarding this type of synergies in the sector is a key driver of Edtech’s consolidation trend, hence the fact that Kahoot! motivates its offer with these expectations is rather positive. Kahoot! and Clever should not struggle at first to achieve an efficient integration as digital platforms need less time to adapt to changing circumstances than others. In the long term, it is realistic to expect at least some synergies to be realized if not all of them.
RISKS AND UNCERTAINTIES
Main risks and uncertainties are related to the highly competitive nature of the Edtech sector with many disruptors. This is a reason why this industry is knowing a very strong consolidation trend. Most of Kahoot’s direct competitors were either acquired or acquired others themselves. For instance, Socrative was bought by Showbie in 2018 and recently, Quizlet, a unicorn since May 2020, made its first acquisition with the Slader one.
The sector is engaged in a race for consolidation in order to propose platforms that would regroup every type of possible offering. Until then, it could be difficult for any of these companies to develop a paid-for content that could enable them to become truly profitable.
In short, the main risk for Kahoot! is not about this deal in particular, it is that Kahoot! must keep on growing, either organically or externally, in order to be the first ubiquitous EdTech platform.
FINANCIAL CONSEQUENCES
Kahoot! is offering $500 million to Clever, including a performance-based earn-out clause of $65 million. The special condition is not revealed in the official press release. The mixed offer comprises an 82% cash component, the remaining part (18%) being paid through the issuance of new Kahoot! shares.
Our analysis led us to the conclusion that 98.1% of the new group will be kept by Kahoot! shareholders, including SB Management Ltd, Jan Haudemann-Andersen and Eilert Giertsen Hanoa who currently hold respectively 15.9%, 11.6% and 8.99%. Clever's shareholders will therefore hold 1.9% of the new group through the issuance of approximatively 8.57 million shares. Thus, the dilution of Kahoot’s shareholders is minimal. For the cash payment, Kahoot will use its $250 million of cash in its balance sheet and should finance the $105 million remaining part through a debt issuance (term-loans or bonds).
Kahoot’s leverage ratios should not be highly impacted the $105 million of new debt issued is substantially offset by the $80 million capital increase reserved to Clever’s shareholders. Anyway, Kahoot! has a current net cash position of $252.8 million and does not face any solvency issues with this acquisition.
IS THIS DEAL FAIRLY PRICED?
Kahoot! is willing to pay a total bid of $500 million, which values Clever at 11.36x its expected revenue for 2021 fiscal year ($44 million according to Kahoot! estimates on Clever future performance). Kahoot! is currently trading at around 37x its sales and will then acquire a “cheaper” company. Although there is not any available public data on Clever, we can reasonably anticipate a slight EPS accretion from this operation. Bloomberg’s comps list for Kahoot! shows an EV/Sales median of 5x, then much lower than the 11x paid.
Overall, we can say the bid reflects relatively well the valuation of an outperforming pure player in the EdTech industry. The timing seems to be right, given the fact that Kahoot! already acquired two other similar companies this year, proving its capacity to properly manage integration and leverage synergies. Clever, such as other actors in this industry, are also targeted by some SPACs seeking to acquire promising fast-going tech companies especially in the education sector as it has been boosted by the pandemic. Then, awaiting too much for such acquisitions could have been a mistake for Kahoot! as those start-ups could have gone public through SPAC reverse mergers, meaning higher valuation and new shareholders not willing to sell their stakes. Once again, this strategic move seems to be smart and well-thought, considering the high potential of Clever in the unconquered US market for Kahoot!.
Authors: Gabriel Bouvet, Victor Godfrin, Léo Clément, Martín Palomar, Nathan Eido, Julie Lin, Paul Guérin, Thomas Chamonin, Alexis Bernet
Contact: alexis.bernet@hec.edu
Date: 22-May-2021