Seven Things We Mostly Know About the Planned Instructure Acquisition and Three We Don’t

There is obviously a great deal of interest and speculation about what the Instructure news means for Canvas and the LMS Market moving forward. See this morning’s post for a summary of the announcement. ¹Disclosure: Instructure, Blackboard, D2L, Schoology, and Moodle are all subscribers to our LMS Market Analysis service. I doubt we will get any official answers from either Instructure or private equity firm Thoma Bravo before the expected completion of the sale in January or February of 2020, but we can look at Instructure’s recent history as well as Bravo’s history to get some clues. Here are seven things we mostly know already.

Seven We Know

1. Canvas is the market leader in the academic LMS market in North America and the fastest-growing LMS provider globally, although market activity has slowed significantly since 2018. Our market data shows the Canvas win rate for LMS adoptions has hovered at 80 – 90% for years, but since this summer it has dropped to 60% due to an increase in wins for D2L Brightspace.
2. Before the strategic review process that led to the sale agreement, Instructure had already been making moves to go beyond the LMS, creating Arc as a video platform in 2016, buying Practice in 2017, and MasteryConnect and Portfolium in 2019. Instructure even rebranded the product suite under the Canvas name in spring of this year – Canvas no longer means just the LMS, Arc is now Canvas Studio, etc.
3. Also before the review process, Instructure was making plans to separate out the corporate learning Bridge LMS – both in operations and in code base – into a subsidiary unit or a separate company (possibly as a sale). We don’t know the final form of this separation yet.
4. The agreement is for Thoma Bravo to acquire Instructure for $47.60 / share, above historical prices but 10% lower than this morning’s public market pricing. This share price leads to roughly a $1.79Bn market cap, which interestingly is very close to Blackboard’s $1.88Bn market cap (in 2019 dollars) deal when they were taken private in 2011. Unless I am missing something, the announced “$2 billion” sale seems like a generous rounding [update: I think the issue is net stockholders’ equity of $150 m in addition to outstanding shares.]
5. The deal is not complete, and the agreement includes a 35-day “go-shop” period where Instructure can solicit higher bids. Most investment analyses that I have seen view the $47.60 price to be a good offer and do not expect a bidding war. In either case, the deal is not yet complete.
6. Thoma Bravo is widely know for the “buy and build” acquisition strategy, where a platform company with solid customer base is purchased (often for high price), enabling subsequent acquisitions of smaller companies that have lower price multiples. This is not the same as buying company A and B and combining them; rather, this strategy is based on multiple acquisitions tied to the platform company.
7. Thoma Bravo (or its predecessor) have been involved in education before. They backed the management buy-out of Datatel in 2005 and then sold that company to JMI Capital and Hellman & Friedman in 2009. Bravo more recently bought Frontline Education in 2017, which is an administration management software provider in the K-12 market. Frontline has been on a acquisition spree, similar to PowerSchool and its Vista Equity Partners owner, following the “buy and build” strategy.

Three We Don’t

What does this mean for Instructure’s future? One guess is to expect the Bridge separation with increased focus on the Canvas / academic business to happen quickly. Another guess is to expect Instructure to ramp up their corporate acquisitions starting in 2020. But there are at least three main questions we don’t know and will have to watch.

1. What we don’t know yet includes how long the current management team will remain in place. Instructure made a point in press releases that the “Instructure management team, led by CEO Dan Goldsmith, will continue to lead the Company in their current roles”, but in internal FAQs this is qualified as “for now, our senior management team will remain as is”. It is commonly assumed that most of the current Instructure executive team was brought in primarily to make Bridge work in the corporate learning markets while maintaining Canvas, and this increased focus on Canvas and the academic markets is a change in strategy largely based on investor pressure. CEO Dan Goldsmith, Chief Strategy Office Jennifer Goldsmith (Dan’s sister), EVP of Sales Frank Maylett, SVP Strategy and Operators Amanda Buckley, Chief Marketing Officer Marta DeBellis – all of them come from corporate markets with no apparent education experience. And it’s worth remembering Blackboard’s history upon the 2011 acquisition, with public plans to keep the same management team, but within 15 months there was a mostly new executive team. None of this is to say that you have to have education experience to succeed in the education markets, but I consider this an area to watch closely, as it will impact corporate strategy and culture.
2. What we also don’t know is whether the planned acquisition will lead to price changes for the Canvas LMS. This seems to be one of the most asked questions I’ve heard since the strategic review announcement, but I don’t think the answer is clear. The “build and buy” strategy does not imply maximizing revenue from existing customers on the core platform – the real bet is more often on a combination of organic growth (new customers on existing platform) and corporate acquisition-based growth. Prices could go up more than current annual increases, but we do not know yet. I would expect increased cross-selling of related products, however.
3. One additional question is what impact this sale announcement will have on the LMS market. I suspect that D2L and Blackboard are busy revising their marketing and sales messages, and Instructure cannot just assume the same retention and win rates. Corporate transitions in the academic LMS space tend to cause big market impacts and Instructure has its work cut out for itself.

Disclosure: Instructure, Blackboard, D2L, Schoology, and Moodle are all subscribers to our LMS Market Analysis service.