IPO then Buyback? - Transaction Review

Author

Private Equity Bro
December 04, 2024

In partnership with

Hi there,

This week, we're unpacking the intriguing “double acquisition” of Thoughtworks Holding, Inc. ("Thoughtworks") from Apax Partners (“Apax”). It’s not every day you see a company taken public and then brought back into private ownership by the original seller — especially after a 90% stock decline. Let’s dig into the details of this unique case.

As always, feel free to share your thoughts or fire over any questions!

Real Deals, Real Exposure

📑 Background

Thoughtworks was founded in Chicago in the late 1980s by Neville Roy Singham. Originally named Singham Business Services, it began as a management consulting firm focused on the equipment leasing industry. Over time, it rebranded to Thoughtworks and shifted its focus to software development.

By the late 1990s, the company was expanding its tech expertise, incorporating programming languages and frameworks like C++, Forte 4GL and Java. A turning point came in 1999 when Martin Fowler joined the company. He was appointed Chief Scientist in 2000 and played a major role in shaping the company's strategic direction.

In the early 2000s, Thoughtworks became a driving force in the agile software development movement. In fact, Fowler and others co-authored the Agile Manifesto in 2001, helping to revolutionize the way software gets built. Around the same time, the company expanded globally, opening offices in the UK, Australia, Canada, China and India, solidifying its international presence.

By 2008, Thoughtworks had grown to over 1,000 employees with an impressive annual growth rate of 20–30%. In 2010, the company launched its Social Impact Program, dedicating resources to supporting non-profits and socially driven organizations. Meanwhile, Singham’s focus shifted increasingly toward activism, raising questions about the company’s future leadership.

💼 Private Equity Buyout – Apax’s First Deal

In August 2017, Apax Partners, a British private equity firm, announced it would acquire Thoughtworks. From its humble beginnings in Chicago, Thoughtworks had grown to a global enterprise with over 4,500 employees across 42 offices in 15 countries.

By this time, Singham’s priorities had shifted even further toward activism, making the sale an appealing option that would enable him to use the proceeds to fund such initiatives. As Martin Fowler detailed in his blog post “Roy Sells Thoughtworks”, the decision boiled down to three main factors:

Personal Motivation and Activism:

Over the last few years Roy has been increasingly involved in his activist work, and spending little time running Thoughtworks. He's been able to do this because he's built a management team that's capable of running the company largely without him. But as I saw him spend more energy on his activist work, it was apparent it would be appealing to him to accelerate that activism with the money that selling Thoughtworks would bring.

Post-Roy Ownership Challenges:

Another issue encouraging a sale has been the difficulty of creating a post-Roy ownership structure for Thoughtworks. Roy has often talked about setting up some kind of trust to own Thoughtworks and maintain its values into the future. But setting up such a trust implies a change of ownership, and a change of ownership involves taxes.

Tax Implications:

Whether Roy transferred the company to a foundation, the employees, or sold to private equity, there is always tax to pay. The difference is that a commercial buyer is able to pay it.

The opportunity was clear, and Apax took advantage of it. At the time of the sale, Thoughtworks was valued at approximately $785 million. Singham, who owned 97% of the company’s common stock, received about $761 million in gross proceeds (before taxes and deductions).

👔 From Buyout to IPO – Maximizing Equity Returns

When Apax took over the reins in 2017, the firm’s strategy was clear from the start: take Thoughtworks public. In September 2021, the company launched its IPO on NASDAQ under the ticker “TWKS.”

While the anticipated price range was $18 to $20 per share, the opening price was ultimately $21/share, valuing the company at approximately $6.4 billion.

What happened next, however, was less expected. Despite initial optimism, the stock price peaked at $34.41 just two days post-IPO before entering a steady decline that went on for years.

Then, in March 2023, Apax identified an opportunity to buy back Thoughtworks, now at a price of $11/share (more insights to follow in the next section).

🔍 Taking Thoughtworks Private

The start of the transaction process dates back to 16 March 2023 when Apax made a proposal to acquire Thoughtworks for $11/share. Lazard, representing the sell-side, countered with a higher offer of $16/share.

More than a year goes by, and the situation doesn’t look bright. The company missed several financial targets, to which the market didn’t react well. The market price is now a fraction of Apax’s previous offer, sitting around $2.5/share.

The challenges weren’t just financial. The market cycle was prompting lower revenues due to downsizing and cancellation of projects, as well as reduced demand for premium consulting weighed heavily on the business. Nevertheless, Thoughtworks seemed to be tackling these challenges through multiple initiatives, as detailed in the discussion materials dated May 2024.

Although the sell-side advisor (Lazard) does not mention the offer in the discussion materials, it is speculated that Apax offered $4/share around that time. This is supported by documents released by Goldman Sachs (Apax’s buy-side advisor), comparing the offer with different prices to understand the variation of enterprise value (EV).

Though details on the negotiations are sparse, they were most likely intense, leading to Apax ultimately acquiring Thoughtworks for $4.4/share in November 2024. While far from the IPO price, this price represented a calculated opportunity for Apax to re-enter the fold at a significant discount. With their in-depth knowledge of the business, Apax presumably saw this as a chance to guide Thoughtworks back toward sustainable growth.

Source: PE Bro

🔄 How Common are Buybacks?

Buybacks by private equity firms of companies they previously owned are extremely rare, as these firms focus on generating returns for their limited partners (LPs) within defined timeframes. Their strategy typically involves acquiring companies, enhancing value and exiting via a sale or public offering. Repurchasing a previously owned business challenges this model and raises questions about the underlying rationale.

In the case of Apax and Thoughtworks, this move reflects confidence in the company’s future prospects. Apax likely identified a disconnect between the company’s current market valuation and its intrinsic worth. Leveraging their deep understanding of the firm and the software development sector, they may have calculated that future growth potential — driven by infrastructure, assets, or competitive positioning — outweighed short-term challenges.

Thoughtworks' post-IPO stock underperformance adds complexity, but private equity thrives on uncovering value where others see decline. Apax’s familiarity with the business likely gave them an edge in seeing past market pessimism. The buyback suggests a strategic bet that current challenges are temporary and that they can achieve a turnaround, ultimately delivering higher returns for their LPs.

I hope you found this overview helpful. As usual, feel free to reach out with any questions or share your own insights — it’s always good to hear your experiences!

Until next time,
PE Bro

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Disclaimer: The views and opinions expressed in this article are solely my own and are provided for informational purposes only. This content is not intended to be financial advice. The examples and figures mentioned may vary and may not account for all possible scenarios or regional differences. Always seek the guidance of a qualified financial advisor or professional before making any investment decisions.