VRNT - Momentive Global: Buyout Is Likely

Summary

• Recently, rumors appeared that Momentive Global has received acquisition proposals and the company's management is now weighing a sale.
• The reports follow MNTV's sale process - which the company ran in late 2021 - involving numerous acquisition interests.
• Acquisition seems likely here given cheap valuation, expected operational performance rebound and reputable activist's involvement.
• My conservative SOTP valuation suggests MNTV might be worth at least $8.57/share or 14% above current prices.

Momentive Global ( MNTV ) is a $1.1bn market cap SaaS company developing survey software/platform (owns Survey Monkey). 36% of revenues come from enterprise customers and 64% from individual customers. In late 2021, the company ran a sale process, involving discussions with numerous potential acquirers. MNTV’s previous proxy mentioned engagement with 9 strategic + 9 financial parties, involving “numerous price increases” and with some offers coming at $26-$27/share. Eventually, talks culminated in merger agreement with peer Zendesk (NYSE: ZEN ). However, the deal - valuing MNTV at $28/share - fell through after being denied by ZEN shareholders. Recently, takeover rumors resurfaced as MNTV has received takeover interests and is now weighing a sale. Subsequently, analysts stated that the company might be a target for PE firms given numerous previous interests.

While no price target was mentioned, valuation closer to comps would imply a price of $8.57+/share. MNTV trades at 2.3x TTM revenue - below 4.1x for Qualtrics International (NASDAQ: XM ) and below the recent UserTesting (NYSE: USER ) acquisition at 5.2x. Both are enterprise customer-focused and similar gross margin peers. My conservative SOTP valuation (see below) - valuing MNTV’s enterprise segment in line with XM and the remaining business at the current 2.3x multiple - results in a price target of $8.57/share or 14% upside. The company’s management seems to agree that at current levels the company is cheap - $69m worth of stock was repurchased from February through June at an average price of $13.8/share.

Besides the apparent cheapness, its strong balance sheet, and operational prospects make it an attractive acquisition target for a PE buyer. Leverage-wise, MNTV currently has no net debt with $8m of net cash. Operationally, the business has suffered from macro headwinds as seen from the lower revenue growth in both segments. MNTV has recently initiated cost cuts expected to curtail rising expenses and increase operating leverage. At the same time, the growth of the enterprise segment remained at a healthy 29% YTD and continued to expand as % of total revenues. Management has highlighted the segment's large growth runway given favorable fundamentals, recurring revenue base, and cross-selling opportunities. While MNTV's true earnings power is likely to remain suppressed for the foreseeable future, the company seems on track to return to strong growth once the headwinds dissipate. Potential suitors might see this as a good opportunity to acquire the company.

Worth noting that ever since the failed merger with ZEN, the activist Legion Partners has held one board seat at MNTV. Legion previously argued that ZEN deal undervalued the target and estimated the company could fetch as much as $40/share in a sale back then. While tech company valuation multiples alongside investor enthusiasm have clearly dropped, the presence of an activist seems like a positive for the company sale thesis, potentially indicating that management might be under pressure to at least consider reasonably-priced acquisition offers.

Peers and Valuation

NTV trades below both XM and USER (recently acquired by Thoma Bravo) as well as a slightly larger peer Verint Systems (NASDAQ: VRNT ) - with lower gross margins and much slower growth in recent years. MNTV has maintained similar gross margins as XM and USER, yet revenue growth has been slower. That said, MNTV’s enterprise-customer segment has grown at a more comparable 29%-95% in recent years, suggesting the enterprise business valuation at 4.1x - in line with XM - is reasonable. Valuing the remaining individual customer business at the current 2.3x multiple and deducting corporate overheads results in SOTP target of $8.57 share or 14% upside.

Note: Corporate overhead estimate includes G&A for 2021 less stock-based compensation and Zendesk merger related expenses.

Momentive Global Business and Recent Performance

MNTV provides solutions across five major categories which the company refers to as Market Insights, Brand Insights, Product Experience, Customer Experience and Employee Experience. MNTV sells three primary package types - individual subscriptions purchased over the web, subscriptions for small groups over the web and more sophisticated solutions to enterprise customers through sales channel. The company has significantly shifted its revenue base in recent years, with expanding revenue share of the enterprise segment from 21% in 2019 to 36% on a TTM basis. As of Aug’22, teams and sales-assisted subscriptions made up 55% of revenues. 88% of revenues come from annual or longer term subscriptions.

Operationally, both of MNTV’s segments have underperformed this year. While enterprise segment’s growth slowed to 29% from 60%+ growth in recent years, individual customer segment sales have flattened. The enterprise segment slowdown has been driven by softer customer demand, particularly in the market research segment, which being largely project - rather than subscription-based - has suffered from budget reductions in financial services and marketing firms. Meanwhile, MNTV noted that, in addition to the macroeconomic backdrop, weak top of funnel marketing has been the main reason for underperformance of the individual customer segment. To this end, MNTV has recently initiated several steps aimed at reinvigorating the segment’s growth, including new content, SEO strategies and search engine marketing investments.

Legion Partners

Legion Partners is an activist investment firm with numerous previous and ongoing activist campaigns:

• Since 2016, Legion has been involved in the activist campaign at Vonage. In 2019, Vonage appointed Legion’s nominee as part of an agreement between the companies. Eventually, Vonage was acquired by Ericsson (ERIC) at $21/share (all-time high price) in Nov’21.
• In 2021, Legion acquired a 6% stake in OneSpan (OSPN), highlighting the management’s incompetence and company’s undervaluation. Eventually, both parties reached a settlement , involving two board seats for the activist’s nominees. Since then, OSPN has initiated a new strategic plan, which involved significant cost cuts. Notably, the company has displayed improving operating performance since the strategic shift with revenue growth picking up from negative growth trends in 2020-H1'21. The activist currently has an 8% stake.
• In 2018, Legion appointed two of its nominees to SPS Commerce’s board after reaching an agreement with the company. SPSC share price has performed very well since, rising more than 250% to-date.
• Legion has recently issued an open letter to Nutanix (NTNX), arguing that the business - an enterprise subscription software company similarly to MNTV - is undervalued as rumors of company sale talks appeared .

Reuters reported that Legion Partners’ fund returned 35% in 2021.

Interestingly, the activist purchased $5.5m worth of MNTV’s stock at $7.15/share - close to current prices - in Aug’22. Legion currently has 0.5% ownership stake in MNTV.

Conclusion

MNTV presents an interesting investment opportunity with a potential company sale at a premium to current prices. Given expected operating performance recovery, cheap valuation and activist’s involvement, a company sale might be in the cards here, with an upside of at least 14%.

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