Description

Momentive (or SurveyMonkey) is decent software company that’s become a special situation with coveted downside protection in today’s market.  MNTV ran a sale process from March - Sept of 2021 that culminated in 3 bids and a stock deal with Zendesk, whose shareholders are going to vote down the deal this week (Feb 25th).  Worse, MNTV didn’t button up the terms and won’t even receive the $150m break fee…

Enter the activists.  Legion has been agitating at MNTV and is clamoring for another sale process.  Jana is upset with ZEN’s attempted deal, and private equity is also trying to buy ZEN.  Clearly, SaaS is more resilient than internet & gig economy stories.  There’s tons of PE and strategic capital looking for targets, and MNTV and ZEN both have bids. MNTV mgmt argues the merits of the ZEN deal here.

At the current $16/sh, MNTV is trading 40% below the $26-27 cash offers received from Party A and Party B in September 2021 (here).  After that filing was released, Legion criticized the board and sale process here. Once this ZEN deal passes, MNTV will very likely be on the block again.  At $16, MNTV trades at 4.5x revenue and should grow in value 15-20% per year (~revenue growth, since all the FCF is SBC, cmon).  We can and should debate the strengths of the business, but we know there were 2 cash bids last September at 7.5-8.5x fwd revenue, and we know that ZEN mgmt team truly believes in the synergies and opportunity here. 

So, even though MNTV isn't a great standalone investment (and is weak on Rule of 40), it seems safe to anchor valuation on a revenue multiple.  Bull case is the stock holds at 4.5x revs despite market turmoil, then the 2nd sale process wraps up in 3Q22 and we get taken out $27/sh or 7x fwd revs, up 70% in 7 months. Sure, any buyer will look to get a better deal and they may. Rumor is that MNTV didn't open up the bidding to competitors last round, so that could change. Plus, this business is growing so a year adds a lot of value compared to the $4bn EV bid for this in Sept 2021.

More on the Business

MNTV remains the leading survey platform for businesses using surveys to get data from various constituents (customers feedback, market research, employee data for HR etc) that can be used in conjunction with existing quantitative data to enhance understanding and improve decision making. 

SurveyMonkey is in the freemium self-serve survey business that was started in the early days of the internet in 1999. In recent years, the company has shifted its focus on going upmarket, growing its business and enterprise products to land larger and more sophisticated customers. The legacy Survey Monkey platform still has leading brand awareness and a  leader in its category with 20 million active users and 888k paying users. They provide a unique set of qualitative data by providing sentiment/opinion data, in contrast to quantitative data that companies collect for most of their operations. These kinds of surveys can be used in various needs including market research, customer surveys, or HR research. Sentiment and opinion data can greatly complement existing platforms like Salesforce and other enterprise platforms that are used to analyze large sets of quantitative data. 

An important growth lever for the business will come from their ability to convert their ~20m active users into paying users (currently just ~5%). They hired their chief sales officer from Adobe in 2017, who has helped with this transition and especially in building an enterprise focused platform & sales team. Their legacy survey business is also still far from entering a terminal growth phase, as it continues to grow low double digits with 80%+ gross margins. 

• The enterprise platform, now about a third of total revenues,continues to grow at 30%+. Today, they have over 8,800 enterprise customers and are used by almost all of the fortune 500. For the last several years the company has focused on moving upmarket, trying to expand their core customer base of individual users paying with their credit card to getting corporate clients when they can expand share of wallet by expanding through different departments like HR, IT, and sales.

• We also understand there are competitive concerns with the rise of Qualtrics in this space, but we think the industry is large enough to support multiple winners and that MNTV should be more than capable of defending and growing its business. MNTV’s close integration with Salesforce will continue to serve as an important selling point to that ecosystem, and customer relationships will continue to be sticky. MNTV also has the legacy surveymonkey business that can be a cash flow engine, which is something Qualtrics lacks.

• Overall, we think it is reasonable to underwrite a high teens to low twenties growth rate and can see margins expanding over time.

Zendesk Bid

Zendisk announced last October that they would acquire MNTV at a fixed exchange rate of .225 ZEN shares per MNTV share, which at the time was ~$28 per share,  impling a ~$4.1B value. ZEN fell 14% and MNMTV fell 8% immediately reflecting skepticism from both the buyside and sellside. Several notable activist funds have come out against the deal, coming from both the ZEN and MNTV shareholder base respectively. Concerns include doubts around the strategic merit of the combination, a large execution risk of integration, lofty post deal synergie projections, and a questionable process that lead to the board’s decision to accept Zen’s proposal among others (including accusations around the close personal relationship the respective CEOs seem to have). It was later reported that MNTV had received several bids, including an all cash deal of $27.25 from an unidentified party. Filings show that they engaged with 18 potential acquirers, three written proposals, and multiple price increases from multiple parties before agreeing on the ZEN deal. 

• We think the fact that MNTV had interests from bidders before ZEN builds a strong case that there will likely be another bid after the pending deal with ZEN is voted down this coming Friday. Factoring the growth of the company since the last bidding process, and the $150m break fee the company will walk away with, even in an environment where multiples are compressed, we think MNTV can still be taken out at an attractive premium to today’s price.

Timeline

• Oct 29 2021  - Zen announced intent to acquire MNTV for .225 ZEN shares per MNTV share, implied value of $28

• ZEN was trading at ~10x sales

• ZEN stock tanks to 7.5x sales.

• Nov 2021 -

• shareholders speak out against it

• Legion Partners (1.4% , MNTV)- letter

• Jana partners (1.96%, ZEN) - letters

• Also wants new board.

• advisory firms ISS and Glass Lewis both came out against the move.

• Largest investor of Zen - Capital World Investors - added in the dip and is now the larges shareholder at 12% of shares outstanding for ZEN.

• rumors that PE firm Permira was a bidder for MNTV. No reference on what the price of the bid was.

• Dec 2021

• Filings show better reality? s4 - "The process led to engagement with 18 potential acquirers, three written proposals, and multiple price increases from multiple parties. Ultimately, the Board was unanimous in support of a transaction with Zendesk – the highest price with the highest intrinsic value for Momentive stockholders."

• Jan 2021

• 10th :PE consortium bids for ZEN at $127-$132 per share. Zen rejects.

• 11th Janus Henderson (4.9% Zen stake)

• Against the deal - "We believe ZEN’s stock was already materially undervalued primarily to ZEN management’s mis-execution,” Janus portfolio manager Jonathan Coleman and his colleagues said in the letter, referring to the company by its stock symbol. “The decision to acquire a company that has its own mis-execution history, with the belief ZEN management will materially execute better, does not strike us as likely.”

• Feb 2022

• Feb 1 zen desk presentation - reveals thorough process that lead to Zen decision.

• Advisory firms

• Glass lewis

• Urged investors in both Zendesk and Momentive to reject the deal so that the companies could pursue other alternatives.

• “A fair read of the primary materials suggests Zendesk entered Momentive’s process late, completed diligence over a questionably brief period and offered a wealth of undervalued equity,”

• ISS

• urged ZEN investors to vote the deal down, but says MNTV shareholders should vote FOR.

• "But in light of the potential downside risk of rejecting the transaction, ISS said Momentive shareholders should vote in favor of it."

Catalyst

More letters and presentations from Legion following the ZEN deal's collapse.

Changes of MNTV's board of directors due to Legion's pressure.

Possible announcement of a second sale process.