Bill.com Acquires Divvy: A $2.5B Deal Explained

Bill.com Acquires Divvy for $2.5 Billion

As anticipated, Bill.com has reached an agreement to acquire Divvy, a corporate spend management startup headquartered in Utah. Divvy operates within the same competitive landscape as companies like Brex, Ramp, and Airbase.

The acquisition is valued at approximately $2.5 billion. This figure represents a significant increase compared to Divvy’s previous post-money valuation of around $1.6 billion, established during its $165 million funding round in January 2021.

Transaction Details

According to Bill.com, the transaction will be financed with $625 million in cash. The remaining portion of the purchase price will be paid using stock in Bill.com, Divvy’s new parent organization.

Strong Quarterly Performance for Bill.com

Alongside the acquisition announcement, Bill.com also released its quarterly financial results. Revenues for Q1 reached $59.7 million, surpassing analyst expectations of $54.63 million.

The company reported an adjusted loss per share of $0.02, which also exceeded predictions. Market analysts had anticipated a larger deficit of $0.07 per share.

Market Reaction

The positive financial results and the news of the Divvy acquisition led to a substantial increase in Bill.com’s stock value. Shares rose by more than 13% during after-hours trading.

Insights from Bill.com’s Investor Deck

Bill.com has made available an investor presentation containing key financial data related to the Divvy acquisition. This information provides valuable insights into the valuation of the company at the time of exit.

Furthermore, it offers a benchmark for evaluating Divvy’s competitors, providing a set of metrics for comparative analysis. We will now analyze the details of this deal to better understand the substantial exit and the valuation of Divvy’s well-funded competitors.

Key Takeaways

• Bill.com is expanding its reach through the acquisition of Divvy.
• The $2.5 billion purchase price signifies a considerable premium over Divvy’s prior valuation.
• Bill.com’s Q1 results demonstrate strong financial performance.
• The deal provides valuable data for assessing the competitive landscape in the corporate spend management sector.

Analyzing Divvy’s Financial Metrics

The following data originates from Bill.com’s documentation regarding the acquisition, accessible here. We will focus on the key financial indicators relevant to our analysis:

• Approximately $100 million in annualized revenue, derived by extrapolating the company’s March results over a twelve-month period. This indicates a March 2021 revenue of roughly $8.3 million for Divvy.
• Revenue growth exceeding 100% year-over-year, also based on March performance. While this doesn’t guarantee the same growth rate for the entirety of Q1 2021, a substantial three-digit growth rate in the most recent month is a positive sign. It also suggests that March 2020 revenue did not surpass $4 million.
• Around $4 billion in annualized total payment volume (TPV), calculated from the March figures.

These figures allow for a preliminary valuation of the company. Divvy was acquired for approximately 25 times its current revenue rate. This valuation multiple, typical of software companies, suggests either exceptionally strong gross margins or a premium paid by Bill.com to secure future growth potential. The latter seems more probable, though further data from Bill.com’s future reports will be needed to confirm this assessment.

Divvy’s growth trajectory demonstrates that the sale wasn’t prompted by performance issues. The March 2021 growth rate implies significant expansion potential remained. This validates the claims made by competitors like Brex and Ramp, who assert a substantial market opportunity for their product offerings. Consequently, this contextualizes Brex’s recent funding round and its resulting $7.4 billion valuation.

Furthermore, the TPV figure is noteworthy. Divvy’s sale price represents 62.5% of its TPV. This is a particularly valuable metric, as companies in this sector frequently disclose TPV rather than revenue. Having both TPV and run rate data allows us to estimate a TPV-to-revenue conversion rate of roughly 2.5% for corporate spend startups that do not charge for their core software. This ratio aligns with expectations given the dynamics of the corporate card interchange market.

Implications for Brex and Ramp

Considering our analysis of Divvy, what insights can we glean regarding Brex and Ramp? Examining notes from Ramp’s dual funding rounds in April:

• The company indicated it was “approaching” a $1 billion annual transaction run rate. This figure was calculated by multiplying a monthly volume by twelve, a standard method for determining such metrics.

Assuming Ramp has reached this $1 billion TPV run rate, and given its current business model doesn’t include software fees, we can estimate a $25 million run rate based on Divvy’s sale metrics. This would suggest a valuation of $625 million for Ramp. However, Ramp’s most recent valuation was $1.6 billion. Why the discrepancy in the TPV-to-valuation ratio?

Faster growth is the likely explanation. Being a younger company than Divvy, Ramp is expected to exhibit a more rapid growth rate. Therefore, its current revenues – or TPV – command a higher price.

What about Brex? Discussions with its CEO following their recent funding round revealed the following:

• From March 2020 to March 2021, Brex experienced revenue and TPV growth exceeding 100%. Given that Brex reached $1 billion in TPV within its first seven months, the company’s total TPV increase over the twelve-month period surpassed that amount.

While we are working with estimates, Brex’s growth rate, comparable to Divvy’s, necessitates a significantly larger TPV to justify its valuation premium. Evidence suggests Brex does indeed possess a TPV advantage over Divvy. However, quantifying this advantage remains challenging.

Applying Divvy’s TPV-to-valuation ratio of 62.5%, we estimate Brex’s current run-rate TPV to be around $12 billion. This figure is speculative; Brex’s growth rate could be slightly higher, reducing its TPV requirements. Alternatively, investors may be anticipating growth from its new ~$500 annual software package, justifying a higher valuation today.

Concluding Thoughts

This initial assessment provides valuable benchmarks and a concrete exit price for the corporate spend sector. This is particularly relevant for the numerous unicorns within this space seeking future liquidity opportunities. Obtaining these concrete numbers is a significant step forward in understanding the market dynamics.