Billionaire Robert Smith’s Vista Equity Makes $3B Selling Marketo
Two years ago, billionaire Robert Smith’s private equity firm made a big bet on a marketing automation software company that many on Wall Street thought might not work out.
On Thursday, Vista Equity Partners announced it would be selling Marketo to Adobe for $4.75 billion, vindicating a strategy that Smith and his Vista billionaire co-founder, Brian Sheth, initiated as the software private equity game they helped create was going mainstream.
Vista will make $3 billion in two years from the Marketo sale, the biggest realized profit from a single company in the private equity firm’s 18-year history.
A former Goldman Sachs investment banker, Smith founded Vista in 2000 in order to invest solely in software companies. At the time, the conventional view on Wall Street was that building a leveraged buyout business around software was impossible because the target companies had no assets to lend against.
Smith ignored the naysayers and built Vista into a wildly successful private equity firm, becoming the wealthiest African-American in the process.
Smith was so successful that imitators rushed in and eventually many private equity investors were trying their hand at buying the kind of legacy software companies Vista had been focused on and restructuring them, bidding up prices in the market. By 2016, according to DeaLogic, private equity firms had conducted $58 billion of tech transactions, a third of all U.S. deals.
So Smith and Sheth pivoted in a different direction. They decided to write big checks and buy software companies that were still in their growth phase, but had often fallen out of favor. In San Mateo, California, Vista found Marketo and its cloud-based marketing automation software. With its revenue growth-rate stalling, Marketo’s stock price had plunged by some 50% in the first few months of 2016.
In May 2016, Vista struck a deal to buy Marketo for $1.8 billion. It was a richly priced acquisition, a 64% premium to where the stock was trading at the time the deal was inked. The deal was also done mostly with equity as Vista put up $1.3 billion in cash to make the purchase happen. The terms helped Vista snag Marketo away from strategic bidders, like Adobe. But not everyone on Wall Street thought Smith and Sheth knew what they were doing. Marketo was losing a lot of money and with its growth promise flailing, top employees were heading for the exits and looking for better opportunities elsewhere in Silicon Valley.
Vista replaced the founding CEO of Marketo, Phil Fernandez, who had been running the company for a decade. His replacement, SAP executive Steve Lucas, had more experience with reinvigorating the growth of a software business. The company revamped its product development and decided to go after large deals in the enterprise space, where retention rates are higher and upselling is easier. At the same time, Vista modified its secret-sauce playbook for revamping software companies and applied it to a growth story.
In 2017, Marketo’s revenue grew to about $321 million from $209 million in 2015 and by the start of 2018 the company was generating positive EBITDA; it was posting -$50 million of EBITDA in the 12 months before the Vista acquisition. Marketo remains a strong marketing automation platform with a large installed subscription base and the wind at its back in a growing market.
There are signs that Vista’s other big growth bets on companies like Tibco software and Cvent are also working out. Smith’s bet on growth now appears shrewd.
This article originally appeared in Forbes.