Transcript
John Coogan (0:00)
Foreign. We're going to get that sound ready because we got some bad news. Thoma Bravo is taking a massive write down on a software company called Medallia. Thoma Bravo is reportedly handing over the software company Medallia to creditors after restructuring negotiations failed to materialize. This is a $5.1 billion equity wipeout for the firm who bought the business for 6.4 billion in 2021. There's some background in Reuters that I think I should read through and then can you sort of give me your analysis and your and what you're seeing on the timeline around take so from Reuters exclusive. Thoma Bravo nears agreement to turn software firm Medallia over to creditors. That does not sound good. Private equity firm Thoma Bravo is nearing an agreement to hand over software firm Medallia to lenders, wrapping up months of restructuring negotiations. The move will wipe out 5.1 billion in equity. Medallia has struggled in recent months under the weight of $3 billion of debt which it owes to Blackstone, KKR, Apollo Group and Antares Capital. Thoma Bravo, Blackstone and KKR decline to comment. Apollo and Medallia didn't immediately return. Quest for comments to Reuters. So, like other software companies, Medallia's valuation has been hit in recent months over concerns that its services will eventually be supplanted by artificial intelligence. What does Medallia do? Medallia provides software that collects and analyzes customer and employee feedback for companies. We've had some startups, some of them backed by Sequoia Capital, that are using AI to do this exact thing. That's potential disruption. And then there's also.
Brandon (1:33)
So their main rivals, Qualtrics. Yep, but yeah, and maybe you said this already, but you know that Sequoia was one of the big backers at Medallion.
John Coogan (1:41)
I didn't know when they were a private company. Oh, interesting. So, I mean, they're still private, but there's a long history of that with the firm. That was before Zenefits was called like SuccessFactors. Lars Dalgard did that deal. Sequoia is the real winner here.
Brandon (1:55)
They did 35 million in 2012, they did another 50 million in 2014, and then they later led $150 million round.
John Coogan (2:02)
Wow. And then eventually did they take it public or did they sell it for 6 billion to Thoma Bravo directly from the private. Was Medallia ever a public company? That would be interesting.
Brandon (2:11)
I think they were.
John Coogan (2:12)
You look that up and I will keep reading from this to give some more backstory. So private equity firms invested heavily in the software sector when interest rates were low. Following the peak of the COVID 19 pandemic, we all remember 3% interest rates. It was the golden era of startups and growth. All the DCFs were massive and then of course the valuations came down once the interest rates were went up. So investors have become increasingly nervous about the sustainability of high valuations assigned to some of those assets and the debt raised to buy them. If you're on a floating rate, these firms are not necessarily backed by a 30 year fixed mortgage like your house. Your interest rate went up and the debt payments ballooned. And if the cash flow from the business has not also ballooned, you could be in trouble like this company potentially is. Blackstone, KKR and Antares hold some of the debt in traded and non traded funds. FSKR Capital Corp. Marked the debt at 79 cents on the doll in its last quarterly report. And of course debt is senior to equity. So what does that mean for the equity? Not good. And that's why this deal is happening. Apollo Debt solutions market at $0.74 on the dollar. So a question about can they even recover, you know, the full value of that debt? The equity is obviously in deep deep trouble. So Blackstone's global head of private credit, Brad Marshall said on a conference call in February that Medallia had been quote underperforming not because of anything related to AI but due to what we believe to be execution driven issues. So there is a question of well if they restructure and this company gets in the hands of creditors, maybe they can roll out AI features and become an AI winner and accelerate the top line and restructure the debt.