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The Remarkable Turnaround in Instructure’s Position on Future Growth

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The Instructure sales process 1Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. has devolved into a public battle between Instructure and Praesidium, a large Instructure investor. As described in early January, Bloomberg reports that up to a third of Instructure investors are against the Thoma Bravo acquisition at $47.60 per share, and this is apparently significant enough that Instructure has come out with new message that essentially says they’re in trouble if the sale doesn’t go through.

Fighting Back

On January 13th, the lead independent director of Instructure, Lloyd “Buzz” Waterhouse, wrote a public letter directly attacking “dissenting investors” and specifically calling out Praesidium as “an activist investor” [emphasis in original].

However, we believe a certain activist investor is attempting to deprive all Instructure stockholders of the opportunity to realize this substantial return by deliberately perpetuating a false and misleading narrative about the Board’s deliberations, intentions and strategic transactions process, despite having publicly pushed for a sale process. The Board urges our stockholders to reject the opportunistic tactics being employed by this investor to derail the Thoma Bravo transaction by voting your shares in favor of the $47.60 per share Thoma Bravo merger proposal at the February 13, 2020 Special Meeting of Instructure stockholders.

I was surprised with this tactic, as it risks alienating those investors who agree with Praesidium’s argument but do so based on their own research. The letter is worth reading in full.

Today Instructure released an investor presentation that argues the same point but with lots of graphics.

The presentation even goes so far as attempting to refute Praesidium claims, point by point. See slides 16 – 18 to see the arguments and counter-arguments.

Shareholder Value

There was one other quote in the letter that surprised me with its direct and off-putting tone.

The Board of Directors has one priority: maximizing value for our stockholders.

I get the point that Waterhouse is arguing to other shareholders that the board has their back, but what about the message to Instructure clients? This trend of Instructure harming its brand by its consistent focus on monetization and shareholder value is concerning, despite some the recent blog post by the CEO.

A Reversal of Arguments

The second big point being emphasized in both of these public releases is that Instructure has reversed their narrative on the company’s growth prospects. On October 29th, I wrote about Instructure’s public counterargument to the LMS market slowdown described independently by us and by Raymond James analyst Brian Peterson. CEO Dan Goldsmith started the Q3 earnings call with this statement [emphasis added]:

Now I would like to share details on how key areas of our business are performing. Domestic Canvas is progressing nicely, on track to deliver results in line with our outlook for the year. So while some analysts have been reporting a sharp slowdown in Higher ED LMS switches we are not seeing that trend in our domestic Canvas bookings. In fact our high ED domestic bookings are on track to be up this year over last year.

Reading that paragraph above, the overall sentiment is that the Canvas business is strong and growing. “we are not seeing that trend in our domestic Canvas bookings”

Now, Instructure is arguing what appears to me as the opposite case, that Instructure’s growth is rapidly declining and they face some real challenges if the Thoma Bravo sale does not go through.

From the Waterhouse letter:

There is significant ongoing risk to Instructure’s core business and its long term prospects, and the price offered by Thoma Bravo exceeds what our Board, in consultation with its financial advisors, believes can be achieved on a stand-alone basis at this time.

The investor presentation today goes even further with this argument, describing “serious headwinds” should Instructure remain a publicly-traded independent company.

Investor slide showing big headwinds for Instructure

Slides 6 – 10 of the presentation flush out this argument even further. I do have a real disagreement with Instructure’s claim that “we had been warning the market” about the slowdown. It is true that the company’s guidance for future years included slower growth, and that the annual report quoted in the slide mentioned a slowdown, but their narrative and statements described a strong and growing Canvas business without “serious headwinds”.

The LMS Market Slowdown is Real

The obvious goal of the new Instructure argument is to influence investors to fear the alternative to the Thoma Bravo acquisition, and to get them to vote on Feb 13th to close the deal. Michael Feldstein wrote about an alternative possibility (based on long-term market potential and not based on share price) here – it’s worth a read, including the comment thread.

However, it is good to have Instructure acknowledge what we have been writing about. The growth of their education business, which is predominantly built on the Canvas LMS, is slowing. And this “rapid deceleration” is largely based on the LMS Market Slowdown. The data below is an update from the MindWires LMS Market Analysis service with our partners at LISTedTECH.

LMS Market Slowdown for higher ed markets in four global regions, from fall 2017 - end of 2019

The Future is Coming Fast

There is obviously some real concern at Instructure that the shareholder vote to accept the Thoma Bravo acquisition is not a done deal. Feb 13th, 2020 will be a big event to watch, although I have no real insight beyond reading the Bloomberg article on which way the vote will go.

Beyond the shareholder vote and whether or not Bravo buys Instructure, this news will likely impact the LMS market in other ways that are more important to schools. I will admit to having too much of a recent focus on corporate finances, and in the next LMS post I’ll describe how much of the recent news is pointing to a new era for the LMS market, with new dynamics.

Update 22 Jan 2020: Changed description of Praesidium from “activist private equity investment firm” to “large Instructure investor. While Instructure calls them an activist investor, the company self-describes as “a value-oriented investment firm that applies a private equity approach to investing in the public markets”. The private equity label was a mistake on my part.

Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.

Instructure Sale Update: No bids received, a third of investor shares now against sale

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At midnight last night the Instructure 1Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. “go-shop” period, where the company could solicit and accept a superior bid to Thoma Bravo’s bid, ended with no new bids and a revised proxy statement. At the same time, there is much more investor protest against the sale, both from named investors and anonymous ones. A third of investors appear to be against the sale.

Revised Proxy Statement

As part of the process, Instructure has revised the proxy statement that is used to inform shareholders of relevant details leading up to the vote. They have also filed details about the end of the go-shop period.

To date, no party has submitted an alternative proposal to acquire Instructure.

At the direction of Instructure’s Board of Directors, representatives of J.P. Morgan, Instructure’s financial advisor, broadly solicited and contacted third parties that Instructure and J.P. Morgan believed might be interested in a possible alternative transaction, approaching a total of 24 potential buyers during the go-shop period to determine their interest in exploring a potential transaction with Instructure, including 9 parties with whom Instructure had discussed a potential strategic transaction prior to the execution of the merger agreement. Instructure and its financial advisor engaged with a total of 55 parties regarding a possible transaction.

The revised proxy also describes details on the shareholders’ vote:

  • The vote is scheduled for February 13, 2020.
  • The Directors and Executive Officers control approximately 10.1% of outstanding share and have already indicated they will all vote FOR the merger agreement (technical nature of the acquisition) and FOR the executive compensation plan.
  • The vote for the merger agreement is binding – they must get a majority of shareholder votes to complete the acquisition, but the vote for the executive compensation plan is non-binding (advisory).

More Investors Come Out Against Sale

At the same time, a fourth large investor (this one with a 1.5% share) has come out against the sale. As described by Bloomberg:

Thoma Bravo’s agreement last month to buy Instructure for $47.60 per share sharply undervalues the company, Lateef Investment Management said in a letter to the board. Instructure is worth at least $60 per share — and that’s before factoring in the value of deductions it can make to lower its taxable income, Lateef said in the letter, a copy of which was obtained by Bloomberg. [snip]

“Goldsmith staying on as CEO seems like a conflict of interest where he’s putting his own interests ahead of shareholders,” Tran said. “We don’t think Dan has done a good job with Bridge and this deal rewards him rather than hold him accountable.” Bridge is Instructure’s employee development software division.

It looks like the protest goes beyond even the big four, again according to Bloomberg:

At least four stockholders — Praesidium Investment Management, Rivulet Capital, Lateef Investment Management and Oberndorf Enterprises — have written letters to the board expressing concerns about the sales process and possible conflicts of interest in the deal. Several other investors expressed their dissatisfaction with the deal to Bloomberg on the condition of remaining anonymous because their corporate policies prevent them from discussing their views with the media.

“The number of large, long-term, diligent shareholders which have expressed opposition to the proposed merger speaks for itself,” said Oberndorf Chairman William Oberndorf, whose firm owns a 3.8% stake in Instructure. “The management and the board have lost the trust of shareholders and now face the prospect of a failed shareholder vote.”

This is just the second time in his 40-year investing career that he has written a letter to express concerns about a management team or board for what he said was a failure of their fiduciary duties.

Additional Details

If approved by shareholders, the deal is expected to close before the end of March, 2020, allowing for final regulatory approval (anti-trust, primarily) and filing of final legal paperwork.

The big differences in this new no-shop phase are that Instructure may not actively solicit new bids and that the termination fee, should Instructure walk away from the Bravo agreement, rises from $29 million to $63 million.

The deal is not dependent on securing financing. This doesn’t mean that Thoma Bravo will not get debt financing for Instructure, but it does mean that their bid is secured with cash funds.

This one is still worth watching.

For more details on the information disclosed in the proxy statement, see the posts “Insights From Instructure Preliminary Proxy Statement” and “Instructure Sale: Two large investors against deal and claiming conflicts of interest (update – Three)“.

Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.

Insights From Instructure Preliminary Proxy Statement

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On December 23rd, Instructure 1Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. filed a preliminary proxy statement as part of their process to be acquired by Private Equity firm Thoma Bravo. This document is part of the formal SEC process to disclose relevant details to shareholders of the company prior to a formal shareholder vote on the acquisition agreement (technically called a merger agreement, but it’s an acquisition). There will be a definitive proxy statement after SEC approval and prior to the vote.

This proxy statement gives us one of our last looks into Instructure’s financial plans, assuming the deal goes through, as it will no longer be a publicly-traded company with public filings. And the document is quite interesting, giving indicators on such items such as whether Canvas pricing will go up or not, as well as providing an extensive history of the sales process over the past year.

The Proxy Basics

When the proxy was released, I shared a Twitter thread with the basics, shown below unrolled. Afterwards I’ll analyze some of the details.

1/ Instructure ($INST)’s preliminary proxy statement is out, which is doc describing upcoming shareholder vote on whether to accept the Thoma Bravo acquisition. sec.gov/Archives/edgar…#LMS#Canvas#edtech 

2/ Doc has a lot of new details, including total price of deal (adding in stock options, etc): $1.959 billion 

3/ Fees that Instructure would owe Thoma Bravo if deal does not go through: $29.3 million if superior bid comes in before Jan 8 (go-shop period) from party who had not already given bid, or $63.5 million otherwise. Instructure would get $136.9m if Bravo walks. 

4/ Board of directors unanimous recommendations 1) to approve acquisition (technically called a merger), and 2) to approve executive compensation agreements tied up with acquisition. 

5/ Timeline estimated for vote and completion of agreement in Q1 2020. 

6/ Extensive “background of the merger” starting p 26, including initial informal offer of $53-$55 / share, subsequently reduced to $49-$51 / share after some due diligence; Bravo initial bid of $50, subsequently reduced to $47.60. 

7/ No other bids have come in during go-shop period (thru Jan 8). Bank contacting 24 parties (9 had already been in talks, 15 new) to gauge interest, signed one new confidentiality agreement. 

8/ Executives other than CEO Dan Goldsmith getting 6-month severance + 80% bonus package if terminated not for cause; CEO gets 12 months. 

9/ Executives (Goldsmith, Kaminsky, Kaminer, DeBellis) and directors full packages (RSU = restricted stock units, basically compensation issued in form of stock); CEO Goldsmith getting $25m – not sure of conditions on $22m of RSUs. [note – see section below for clarification on Goldsmith and Kaminer forfeiting half of their unvested RSUs].

Equity interest of Instructure's executive officers and non-employee directors.

10/ Revenue, earnings (EBITDA), and free cash flow projections from management (p 56):

Management projections of the Canvas business line financials from 2019 - 2033.

11/ Will read in more detail; add blog post with analysis. 

Process Details

The proxy is unusually detailed, compared to your typical proxy statement, in its description of the sales process over the past year. The process started January 8, 2019:

On January 8, 2019, a financial sponsor (“Sponsor A”) requested a meeting with Joshua Coates, the Executive Chairman of Instructure. In response to Sponsor A’s inbound inquiry, Mr. Coates had a call with Sponsor A that same day during which Sponsor A expressed an interest in acquiring Instructure for $53.00 to $55.00 per share. On the same day, the Board of Directors held a meeting to discuss Sponsor A’s expression of interest.

What follows on pages 26 – 42 is a description of 40 separate financial sponsors (i.e. private equity firms) in contact with Instructure, with 19 of them signing non-disclosure agreements to get financial information, leading to two formal proposals – one from Thoma Bravo and one from another firm. In addition, there were five industry participants (i.e. other technology firms) contacting Instructure as part of the sales process with none of them making a proposal.

The bids ranged from $47 to $53 per share, with two best-and-final proposals in $47.50 – $47.60 range. It is interesting that prices consistently dropped upon further diligence, and several financial sponsors dropped out due to concerns over bookings trends (likely from the LMS market slowdown and even changes in the overall win rate).

Strategic Plan, With or Without Acquisition

The document makes clear that Instructure’s board had already been making plans to become a “Rule of 40” company, whether the acquisition goes through or not. On September 23rd (p. 30):

Following such presentations, the Board of Directors discussed the timeline for Instructure to achieve profitability, an education focused strategy, cost-realignment plans, and changes that would need to be implemented for Instructure to achieve status as a “Rule of 40” software company with a combined growth rate and profit margin of at least 40%.

What this likely means, in essence, is that Instructure needs to reduce expenses and increase revenue. On November 25th we learn of concerns from financial sponsors on this plan [emphasis added] (p. 37):

On that same day, each of Sponsor E and Sponsor K declined to further pursue a strategic transaction with Instructure. In declining to pursue a transaction, Sponsor E indicated concerns about new bookings performance, the ability of Instructure to increase prices and the consequences of implementing cost reductions. Sponsor K indicated that Instructure did not fit within its investment profile.

Bridge LMS as Schrödinger’s Cat

A lot of the discussion about Instructure over the past year has centered on the fate of the corporate learning Bridge LMS product line, with strong hints provided in November that Bridge would likely be divested, sold, or just shut down. What I find strange in the proxy statement is that there is no view of Bridge, one way or the other. This proxy document is meant to inform shareholders of relevant details before the vote, yet there is no view to show whether Bridge is dead or alive. No inclusion in the management projections of the costs or revenue from a potential Bridge sale or shutdown. I realize that this is a minor part of the Instructure business, but it’s strange to see Bridge disappear from discussions when that topic dominated the earnings call questions over the past four years. By subtraction we can see that Bridge generates roughly $20 million in revenue with losses in the low tens of millions.

Big Paydays for (Mostly) New Executive Team

The size of payouts for the executive team seems remarkable, especially as most of that team was hired in the past year or two to improve the Bridge corporate learning market more than the Canvas academic market. Yet the company’s future is all about Canvas.

Josh Coates with his potential $105 million payday is different. The company started with a project in a class he taught at BYU, he was the first investor, and he was CEO from 2010 – 2018 while taking a $1 salary.

A Bloomberg article today described some of the payout for other executives.

Two weeks after the suitor made a nonbinding offer in January, directors on Instructure’s compensation committee enacted a new policy for rewarding the company’s most senior employees, turning their cash bonuses for 2018 into a package of restricted stock units that was 25% larger, according to the company’s filings. The panel also discontinued cash bonuses through 2022 in favor of new, long-term stock grants for executive officers. And it gave all staff the option of receiving 20% of their base salary in equity.

The shift — which the company says was in the works months before buyers began circling — positioned Chief Executive Officer Dan Goldsmith, Chief Financial Officer Steven Kaminsky and General Counsel Matthew Kaminer to receive more compensation in the form of stock at a time when it could surge in value. Since the policies were adopted Jan. 23, shares of Salt Lake City-based Instructure have outperformed the broader market, gaining 23% as it reached a deal to sell itself. Some of the stock has already vested, and when combined with what’s left, the trio is set to reap a cash windfall of more than $25 million, even as Goldsmith and Kaminer give up half of the unvested portion of their RSUs in light of the accelerated payout.

Matt Kaminer has been with the company for years, as has retiring CFO Steven Kaminsky. CEO Dan Goldsmith joined Instructure a year and a half ago and became CEO on January 1, 2019. CMO Marta DeBellis joined 11 months ago, EVP / Head of Sales Frank Maylett joined five months ago, and the Bloomberg article notes one other payday of relevance.

In May, Instructure hired Goldsmith’s sister as chief strategy officer, awarding her a long-term stock incentive of $3.59 million, according to a filing. The appointment was approved by the audit committee. She reported to Kaminer, not her brother, the person said.

Last-Minute Change to Financial Projections

One other detail that jumps out at me – Instructure changed their financial projections in terms of free cash flow (FCF, how much available money the company will generate each year) on December 3rd, the same day that Instructure was finalizing the agreement with Thoma Bravo. The changes are noted in the document, but the details are buried in a footnote and provided with no explanation of why these numbers changed, increasing forecast FCF up to $7 million per year. This information was not shared with other financial sponsors prior to Instructure signing the agreement with Bravo, at least based on the proxy statement. From the footnotes on p. 55:

Footnotes to management projects, describing changes to Free Cash Flow as of December 3rd.

Overall Thoughts

This proxy document offers considerable detail to the Instructure sales process and insight into the Canvas future (financial projections, efforts to become Rule of 40 company). We’ll have to wait and see, however, what happens in terms of potential new bids during the go-shop period (through January 8, 2020) or in terms of influencing shareholders before the official vote. I would note that while the document describes what happened in terms of interactions with potential acquirers, it does not describe the nature of those interactions. The Praesidium and Rivulet statements described claims that the process has been “designed to result in a sale to management’s chosen buyer at a low price…in order for management to save their jobs and enrich themselves in the years ahead”. The proxy seems to show that the process was not rushed, but it is not clear whether the interactions with financial sponsors were done in a manner leading to a chosen buyer that fit the interests of the executive team. There is much to watch in January and February before the sale is finalized.

What I do not see from Instructure in any official SEC filing or blog post since the sales process became public is a meaningful description of why the Thoma Bravo acquisition might benefit its customers. In the section “Reasons for the Merger” (starting p. 42), Instructure lists:

  • Attractive Value
  • Best Alternative for Maximizing Stockholder Value / Thorough and Well Publicized Sale Process
  • More Attractive Value Than Alternatives
  • Greater Certainty of Value
  • Likelihood of Completion
  • Opportunity to Receive Alternative Proposals and to Terminate the Transaction in Order to Accept a Superior Proposal

In a November press release when Instructure first went public with the sales process, it was all about maximizing shareholder value:

“Consistent with its duties and in response to interest from several parties, our board of directors has determined that it is prudent to undertake a review of alternatives to identify the best way to maximize shareholder value,” said Josh Coates, Chairman of the Board at Instructure.

A December letter to customers , however, comes the closest to addressing customer needs.

Reflecting this year on our goals and path forward revealed that operating in the public spotlight wasn’t fueling innovation and was starting to get in the way of customer success. Partnering with Thoma Bravo opens the opportunity for Instructure to focus even more on accelerated innovation and our customers.

Working with Thoma Bravo over the past weeks, it is apparent that they support our strategy for focus on continued investment in Canvas LMS, expanding our impact in education, positioning Bridge to be more successful, and being a well-run business.  As a private company, we will be able to better control our future and execute on these strategic imperatives.  That future looks bright and there is much work to do.  However, I am more confident and excited than ever for the difference we will make together and the journey ahead.

I realize that the proxy statement is primarily driven by SEC rules, but Instructure is harming its brand by its consistent focus on monetization and shareholder value with no meaningful communication to customers or prospects (I do not consider the letter above meaningful). The academic LMS market deserves better from its market leader.

Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.

Insights from Thoma Bravo and Frontline Education for Instructure’s Possible Future

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While the Thoma Bravo acquisition of Instructure 1Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. is not a done deal, it would be useful to look at the relevant history of Thoma Bravo to get insight on likely behavior should the deal go through. Academics might not have a deep interest in public markets and private equity buyout firms, but they do tend to care about whether their favorite system will offer reduced services based on layoffs, whether prices will increase, and whether there will be additional EdTech buyouts affecting choices in the market. tl;dr – history probably answers the first and third questions much better than the second.

Profile of Bravo

Just two months ago Forbes ran a profile of Orlando Bravo, the leader of private equity firm (PE) Thoma Bravo, which provided some useful insight into the nature of this company’s buyout activity. First of all, Bravo is a successful and growing company.

In February, the French business school HEC Paris, in conjunction with Dow Jones, named Thoma Bravo the best-performing buyout investor in the world after studying 898 funds raised between 2005 and 2014. According to public data analyzed by Forbes, its funds returned 30% net annually, far better than famous buyout firms like KKR, Blackstone and Apollo Global Management.

Thoma Bravo has a broad portfolio in different markets, but the firm only deals with enterprise software companies, as described in Forbes.

But the failure [of losing almost $100 million invested as the dot-com bubble popped] led to an epiphany that soon made Bravo and his partners billions. He realized his mistake was in backing startup entrepreneurs, an inherently risky move, when for the same money he could buy established companies selling niche software to loyal customers.

Frontline Education as Case Study

Logos showing Thoma Bravo has bought Frontline Education, from 2017.

The closest comparison to Instructure in Thoma Bravo’s portfolio is Frontline Education, which has long provided K-12 HR school administration software. Frontline was founded in 1998, and their core product, originally known as Aesop, handles absence management and substitution replacement for teachers.

Frontline’s Aesop, now called Absence Management, is hugely popular in the US K-12 market, with more than 4,000 of the 14,000 school districts as users as of 2014.  EdSurge described the company’s growth and subsequent acquisition by Thoma Bravo in a 2017 article.

After private equity group Insight Venture Partners acquired a controlling stake in 2014, Frontline has gone on a shopping spree for companies whose offerings range from hiring and recruiting tools (Teachers-Teachers) to professional development providers (School Improvement Network and Teachscape) and special-education software (The Centris Group).

Altogether the company says it serves more than 12,000 education organizations, with more than 5 million school employees and 1.2 million substitute teachers using its tools everyday. No doubt the acquisitions helped Frontline expand its footprint. Its revenue, according to Clifford, has been growing at 50 percent annually for the past several years.

Frontline currently numbers 650 employees in five offices across the U.S., a headcount will continue to grow. Insight Venture Partners will retain a minority stake in the company.

It should be pointed out that Frontline made some bold claims in that article, given the department of education’s estimate of ~3.6 million K-12 teachers in the US, for both public and private schools. I don’t know that it’s realistic to have “5 million school employees” in US & Canada K-12 schools, so take some of the corporate numbers with a grain of salt.

Months before the Bravo acquisition, Frontline introduced its Insights Platform as a data aggregation and insights play, as described in its press release in January 2017.

“Frontline Education continues to raise the bar in responding to the evolving needs of the education community,” says Tim Clifford, CEO, Frontline Education. “We’re driving industry innovation through both the Frontline Insights Platform and Frontline Central that will empower education leaders to use data and analytics like never before. The connectivity of technologies and processes in an intuitive and seamless way delivers the insights necessary to make informed decisions that have significant bearing on district outcomes.

In 2017 Thoma Bravo acquired Frontline from Insight Venture Partners in a deal reportedly worth $1.3 billion. Bravo viewed Frontline as the centerpiece in a platform buy-and-build, another name for an enterprise software roll-up strategy. In this strategy, a platform company with solid customer base in a particular vertical market (K-12 education in this case) is purchased (often for high price), enabling subsequent acquisitions of smaller companies that have lower price multiples, called tuck-in.

The Bravo acquisition, which the relatively new Frontline executive team actively started working on in early 2017, has not worked out as planned, however.

The forced upgrade caused by the Insights Platform appears to have caused significant customer pushback, according to comments on company review sites such as Glassdoor and Indeed, although it is not clear how much this was based on associated price increases.

What we do know, however, is that the company’s growth seems like it stopped. Prior to 2017 the company was growing 50% per year in revenue, but after the Bravo acquisition that growth seems to have stopped according to company interviews. 660 employees as of 2017, and 650 employees as of summer 2019, despite acquiring Prologic and its 60 employees in 2018. It remains to be seen how this past summer’s acquisition of Perennial EdTech and its 150 employees will change their business.

By summer 2019 the majority of the Frontline executive team, including its CEO, had turned over, with ex-Blackboard executive Mark Gruzin taking the helm in July.

An analysis of Glassdoor reviews includes consistent themes of corporate layoffs, company culture changes since the Bravo acquisition, and poor company performance in product integration. I’d like to avoid reading too much into these reviews, but I have found that you can find themes worth considering by looking at this feedback.

Similarities and Differences with Instructure

There are some interesting similarities between Frontline Education and Instructure worth considering, with Frontline:

  • Growing company with loyal customer base, at least until 2017;
  • Founders depart and new executive team takes over with few having education market experience, followed by formal sales process and Thoma Bravo acquisition under planned buy-and-build strategy;
  • Through acquisitions, company moves beyond best-of-breed product core to promise broad product suite, with associated rebranding; and
  • Company introduces a data platform as the core of its strategy at roughly the same time as it formally began soliciting and evaluating buyout offers, leading to an acquisition by Thoma Bravo.

But there are also some differences to keep in mind:

  • Frontline founded 10 years before Instructure and never went public; and
  • Frontline had longer history of acquiring companies prior to Insight Ventures Partners investment or Thoma Bravo acquisition.

Does this mean that Instructure’s fate will be directly tied to Thoma Bravo’s and Frontline Education’s past? No. But there are insights from this history that might inform what could happen with Instructure.

I’ll note that what follows is conjecture – more than I typically provide on this blog – based on research on Thoma Bravo and its holdings, as well as broader PE involvement in EdTech markets. If I find any of this analysis and conjecture are wrong, look for updates here.

Layoffs

The probability of a layoff within the first few months of the Instructure acquisition being complete is very high. This is part of what PE firms do, buying underperforming companies and making cuts to improve profitability – just ask Blackboard, Ellucian, McGraw-Hill Education, Cengage, University of Phoenix, etc. Even beyond Frontline Education, Thoma Bravo is well-known for having layoffs, as seen at Ellie Mae, Riverbed, Qlik, and Imperva. Significant layoffs. Further, Orlando Bravo makes no excuses for layoffs, as described in the Forbes profile.

There are also layoffs. Those can total as much as 10% of the workforce, for which Bravo doesn’t apologize. “In order to realign the business and set it up for big-time growth, you first need to take a step back before you take a step forward. It’s like boxing,” he says. “These are unbelievable assets with great innovators, and they are usually undermanaged.

While layoffs are almost a given, we don’t know yet how this would impact services and product delivery. Frontline’s experience is not encouraging, but perhaps Bravo has learned about the education market, and Instructure is a different company.

Price Increases

This section, unfortunately, will be short as there is no clear pattern in Thoma Bravo’s recent acquisitions with price increases. Frontline Education raised prices within a year of the Bravo acquisition, in combination with the Insights Platform required upgrade, but Riverbed seems to have waited three years for modest price increases.

It is worth noting that Bravo’s strategy relies on a loyal customer base. This should cause Instructure to be very cautious on price increases, but we just don’t know much.

M&A Strategy in 2020

Another point in the Forbes profile is that Thoma Bravo does not acquire a company and then figure out what other companies to tuck-in or combine [emphasis added].

Like a good tennis player who’s worked relentlessly on his ground strokes, Bravo has made private equity investing look simple. There are no complicated tricks. He figured out nearly two decades ago that software and private equity were an incredible combination. Since then, Bravo has never invested elsewhere, instead honing his strategy and technique deal after deal. He hunts for companies with novel software products, like Veracode, a Burlington, Massachusetts-based maker of security features for coders, or Pleasanton, California-based Ellie Mae, the default system among online mortgage lenders, which the firm picked up for $3.7 billion in April. His investments typically have at least $150 million in sales from repeat customers and are in markets that are too specialized to draw the interest of giants like Microsoft and Google. Bravo looks to triple their size with better operations, and by the time he strikes, he’s already mapped out an acquisition or turnaround strategy.

Instructure fits into this playbook, and I suspect that we won’t have to wait long to see the next move. It could be tuck-ins in the vein of Portfolium, Practice, or MasteryConnect, or it could be something bigger and market-changing. It is worth noting that Bravo raised $12.6 billion in January of this year – the stakes are getting higher.

The latest fund is two-thirds bigger than its $7.6 billion predecessor, Thoma Bravo Fund XII, which was raised in 2016, and more than three times the size of Thoma Bravo Fund XI, which totaled $3.65 billion when raised in 2014.

Forbes noted the higher stakes as well.

With a fresh $12.6 billion war chest for its 13th fund raised in 2018, Bravo is eyeing $10 billion-plus deals and expects to begin buying entire divisions from today’s technology giants. But thanks in part to the success of his firm, he now faces more competition. Heavyweights like Blackstone and KKR are increasingly sussing out software deals, not to mention his longtime rival Vista Equity. And he’s not immune to mistakes. Bravo’s $3.6 billion 2015 acquisition of San Francisco-based digital network tracker Riverbed Technology is currently struggling because of slowing sales and too much debt. He isn’t worried. “There are bigger and better companies to fix than there were ten years ago,” Bravo says.

Higher Ed to Follow K-12?

In the K-12 market, the Bravo-owned Frontline Education’s roll-up strategy is mirrored by the Vista Equity Partners-owned PowerSchool. Two PE-owned firms working to buy and consolidate around a data integration and insights platform play. We have seen PE activity in higher ed, but it looks as if the consolidation part of PE ownership might become an emerging theme into the future. I have already written about Ellucian’s possible sale and the wave of EdTech acquisitions, and the pending Instructure sale to Thoma Bravo, as well as the McGraw-Hill – Cengage merger, are signs of the future.

We’ll keep watching for news over the next few weeks and share it in the blog.

Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.

Instructure Sale: Two large investors against deal and claiming conflicts of interest (update – Three)

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Most corporate acquisitions, particularly when a company is taken private (acquired off public market by private equity or strategic acquirer), lead to multiple complaints from shareholders about whether the deal is fair. But what is happening with Instructure 1Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. seems much more serious based on recent SEC filings from two investors with a combined 12.7% position, where they both come out against the deal and complain about conflicts of interest and inconsistent public statements. The sale is not a done deal, and these filings also give useful insight on Instructure value and strategy.

Rivulet Capital 13D

For quick background, Rivulet Capital, a hedge fund that owns more than 5% of Instructure’s outstanding shares, filed a 13D SEC form with their position on Dec 5th, as reported by Reuters.

We “strongly oppose the proposed going-private transaction” where Thoma Bravo would pay $47.60 a share for the company, the filing said, adding that it “significantly undervalues the Company.

Moreover it was wrong to run a “rushed, 3-week strategic alternatives process over the Thanksgiving holiday” and have a proposed 35-day go shop period that would include more holidays, Christmas and New Year’s, the hedge fund wrote in the filing.

Instructure 8K

Instructure then filed with the SEC on Dec 6th an 8-K form about their acquisition process, in an apparent effort to refute these Rivulet claims, describing that the process started on January 20, 2019. In that filing, Instructure described that it has been formally working with an investment banker and considering buy-out options since January.

Instructure initially signed JP Morgan as its formal advisor in January, entertained 19 separate financial firms or strategic companies “that expressed interest in a possible acquisition of, or investment in, the Company”, and received several offers before announcing the agreement with Thoma Bravo.

The Company conducted a comprehensive and deliberate process, lasting eleven months and ultimately involving 40 parties, 19 of which signed non-disclosure agreements and engaged with the Company, before entering into the Merger Agreement. In order to ensure that the transactions contemplated by the Merger Agreement maximizes value for its stockholders, during the period that began on December 4 and will continue until 11:59 PM (Pacific Time) on January 8, 2020 (the “Go-Shop Period”), the Company will be actively soliciting acquisition proposals and will consider any proposal that the Board determines in good faith, would, if consummated, be more favorable, from a financial point of view (after considering all legal, regulatory and financing aspects of the proposal), to the stockholders of the Company (in their capacity as such) than the transactions contemplated by the Merger Agreement.

This filing, however, seems to have made matters worse with at least two large investors, not better.

Rivulet Capital 13D/A

On Dec 9th Rivulet sent a letter to the Instructure board (also filed with SEC), pointing out that they are not activist investors and have never filed a 13D before in their eight-year history. In addition, Rivulet calls out how unique Instructure was with its “compelling alternative” in the market.

We invested in Instructure because we admire the company, and we see plenty of opportunity for continued growth and success. With Canvas, Instructure has developed the market-leading learning management software product for the higher education market. The Canvas story has provided an incredible lesson about the success that comes from a focus on innovation, putting students first, and offering a compelling alternative to a greedy incumbent that was run for the enrichment of management and shareholders. Unfortunately, with the announced sale of the company to Thoma Bravo, Instructure is providing a different sort of lesson to its customers and shareholders. Here, it appears that the company has run a rushed strategic review process that was designed to result in a sale to management’s chosen buyer at a low price…in order for management to save their jobs and enrich themselves in the years ahead. It is outrageous.

Rivulet then argues that Instructure does not have an “urgent need to sell” and could be patient, even questioning the motives for a quick sales process.

Instructure does not need additional capital. There is no urgent need to sell to private equity unless they are willing to pay a particularly attractive price. And yet, the proposed take-private transaction appears to be a wonderful deal for Thoma Bravo. They are buying a great company, at an attractive price, and they will spend the next few years focusing the business on the education vertical, growing market share, and increasing margins. It is likely to be an even better deal for senior executives. These executives will be executing the exact same strategic plan that many shareholders have been encouraging the company to pursue in the public markets. However, they could personally end up making substantially more money executing this plan ‘in partnership’ with their chosen private equity sponsor, depending on the terms of their future employment agreements.

Praesidium 13D/A

Late yesterday (Dec 12th), activist investor Praesidium wrote a letter to the Instructure board (also filed with SEC) that they, like Rivulet, plan to oppose the proposed sale and have serious concerns with the process and potential conflicts of interest. They first pointed out that they own approximately 7.5% of outstanding shares, then described the Instructure potential.

As you are aware, Praesidium has been an investor in Instructure and has been constructively engaged with the Company and the Board for almost a year. Prior to and during this period, the Praesidium team spent countless hours analyzing Instructure’s financials, its competitive positioning and the broader education market. Our original and ongoing work has led us to believe, and we continue to believe, that the Company’s education business is a unique and valuable asset. Canvas’ technology is best-in-class resulting in high competitive win rates and near-perfect customer retention. This has allowed Canvas to garner close to 38% share in the US higher education market. The continued runway in the US and abroad should allow Canvas to grow in the mid-teens for the next few years. In addition, Canvas’ positioning as a trusted partner presents a tremendous opportunity to create an unrivalled [sic] education platform with the opportunity to expand into adjacent areas organically and roll-up smaller companies in what is a currently fragmented market. As we have presented to you in the past, this dominant position in a single vertical should allow for the business to be run very profitably and generate significant free cash flow.

Praesidium then called out that Instructure publicly claimed they had commenced the sales process in November, which directly contradicts the 13K filing that they started in January, and that Instructure “rebuffed” several large PE firms with claims of no process.

The Company recently filed an 8-K (described in more detail below) in which it claims to have “conducted a comprehensive and deliberate process, lasting eleven months” (emphasis added). We believe this is inconsistent with certain public statements made and actions taken by the Company over the past year, which cast doubt on the validity of such claims. On November 14th, the Company stated in a press release that “[t]he previously scheduled financial analyst day on December 3 has been canceled to allow management and the board to explore these strategic alternatives for the company.” However, if the Company felt the need to cancel the analyst day in order to focus on running a process, why would it have even scheduled an analyst day in the first place if it was actually engaged in a process since January? Casting additional doubt on the validity of the Company’s claimed timeline, Praesidium has learned that multiple interested firms were rebuffed by the Company during this purported review period, including three large, reputable private equity firms. Praesidium understands these firms reached out to the Company only to be turned away under the guise that no process was being conducted by Instructure at that time.

Much of the letter described the process to separate the Bridge product line and business line, with shareholders not getting a chance to see the details of that strategy. But the core argument was about conflicts of interest with the team chosen to conduct negotiations.

Perhaps even more alarming, we have heard deeply concerning reports that CEO Dan Goldsmith has expressed to shareholders his unwillingness to work for certain potential acquirers, which means he may have put his own interests ahead of Instructure shareholders. This is not the first time we have seen this type of behavior from Dan. He hired his own sister as Chief Strategy Officer and may have additional motivation to enrich and protect her as well.

Clearly, the composition of this [core negotiating] team is highly inappropriate and considerably undermines the integrity and fairness of the sales process. Each member of the “core team” had a potential conflict of interest in running this process that the Board should have recognized. We believe these conflicting relationships represent a severe misalignment of interests with Instructure shareholders and interfered with the team’s ability to objectively oversee the review process. By its own admission, the Board rejected at least one bid for Instructure in the past year at a price higher than the $47.60 offered by Thoma Bravo. If the Board were truly interested in running a full and fair process to obtain the best price for the benefit of the Company and its shareholders, it should have formed an independent committee of the Board tasked with overseeing this process.

Keep Watching

Note that Instructure has not responded to these letters yet, and we will share any updates as they occur – there are at least two sides to this story.

I realize this might seem like a lot of inside baseball about financial transactions, but this situation is about much more than share price and could get into a legal issue. I am not a financial or legal expert, but the Instructure sale to Thoma Bravo is not a done deal. There is more to come before we see resolution on the possible acquisition.

And Another One

Update 12/19: Another investor with large holding, Oberndorf Enterprises (OEL) with a 5.9% stake in Instructure, came out against the sale with a letter to the board and public release.

OEL has recommended the appointment of an independent special committee with newly chosen legal and financial advisors. The committee should thoroughly review the details of the sale process to date, fully disclose to shareholders all the “clear milestones and target dates focused on profitability and growth” which the management team referenced on its October 28th earnings call, and devote full time and attention to all the Company’s strategic alternatives. We believe these steps may help shareholders make an informed decision as they vote on any proposed merger agreement.

Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.

Ellucian and the Wave of EdTech Buyouts

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While Instructure’s agreement to be acquired has generated the most interest recently, that company is not alone in having either private equity firms or larger technology companies looking to buy them out. Recently we’ve had a wave of actual and potential buy-outs in a consolidating market trend. Instructure, Civitas, Knewton, Pearson’s K-12 Courseware business, Trilogy, Parchment, Schoology. Berkerey Noyes tracks the M&A markets for education, and their recent report shows the trends of education-related activity. 2017 was the peak in value, with Frontline Education, Capella University, and EAB joining several other large companies. But the number of deals continues to rise.

M&A activity in education from 2016 - 2019. Total deal value peaked in 2017 at $10 billion, but the number of deals is continuing to grow.
Source: Berkerey Noyes newsletter

The biggest planned acquisition, and the largest one based on expected value, is Ellucian, which sells CRM, Financials, and HR systems as well as Student Information Systems (SIS). 

To a large degree, the SIS market and associated systems are seen as outdated, yesterday’s news. Despite their reputations, SISs matter. A lot. There is a broad movement in higher ed to adapt to changing student demographics with new needs. The ability to start terms more than two or three times per year, the ability to support competency-based education programs, the ability to support certificate programs and open enrollment programs with non-matriculated students. I have seen outdated, inflexible student systems prevent schools from implementing initiatives that serve these needs, or at least determine the actual implementation details of those programs. Even for traditional programs, there is no other system that touches almost every campus stakeholder in the same way as the SIS.

We noted in our EDUCAUSE coverage this year that there was increased presence by companies offering SIS and related systems.

One theme that emerged as soon as one entered the exhibit hall was the (Re)emergence of Big Tech. Attending EDUCAUSE a decade ago, it was difficult to not view technology as primary by large companies selling IT infrastructure and ERPs (student information systems in particular). The marketing spend on ERP has gone down in the past five years or so, but this year ERP is back – big booths for traditional Oracle, Ellucian, Jenzabar suppliers as well as newer ones like WorkDay, Unit4, and Unifyed. These booths were mostly clustered at the entrance, and the level of spending on the booths and the general interest were markedly greater than previous years. Add to this the increased presence of Big Tech such as Amazon, Microsoft, and Google. And the mood of these companies seemed to be more positive. As we heard at Jenzabar, they think schools are not taking transformation seriously and want to re-engineer their business processes.

What has happened is that  Ellucian is up for sale. From private equity to private equity, again, as reported by PE Hub. According to PE Hub’s sources, Ellucian generates approximately $300 million in Ebitda (corporate earnings) and could generate a company value of up to $5 billion.

Ellucian was created in 2012 when H&F [Hellman & Friedman] acquired SunGard’s higher education division through its portfolio company Datatel. JMI and H&F acquired Datatel from Thoma Bravo [Instructure’s acquirer] in 2009 for $570 million, according to an announcement at the time. A few years later, Datatel made an $1.8 billion acquisition of SunGard’s higher education business, an SEC filing disclosed.

Source: PE Hub https://www.pehub.com/tpg-leonard-green-prep-for-potential-5-bln-plus-sale-of-ellucian/

In 2015 Ellucian was sold from private equity to private equity for $3.5 billion.

The ERP market in education is different than the LMS market, as it is characterized as stable and generating cash compared to the growth of the LMS, at least for Instructure.

Our partners at LISTedTECH have shared data showing Ellucian’s long-term market decline which has more recently improved to a plateau (or valley) starting in 2014, but note how the company is still generating more in earnings than Instructure generates in gross revenue.

Ellucian's North American market share for SIS. With their peak of 59% in 2000, the company dropped to 41% by 2014 and remains at that level today.

Where are those customers going? In the following chart also from LISTedTECH, we see that the primary beneficiaries of Ellucian migrations (for Banner, Colleague and PowerCampus product lines) are Oracle / Peoplesoft and Jenzabar.

Consider Ellucian to be the latest company that either has been sold or is up for sale in a consolidating EdTech market. There is a broad trend at play here, and it is quite different from the venture capital wave of earlier years, where most investment was driven by growth potential. EdTech is in a new era.

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

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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.