M&A Deals

Okta acquires cloud identity platform Auth0 for $6.5bn

As organisations continue to transition to online working and shift towards cloud computing, it is imperative to invest in robust identity verification systems to help protect against cyber attacks. It is no wonder, then, that the total addressable market for cyber identity management is estimated to be $55bn. On March 3 2021, publicly-traded identity management company, Okta, agreed to acquire cloud identity start-up Auth0 for $6.5bn. Although some have criticised the deal for being overvalued, it leaves Okta well-placed to take advantage of the cloud and cybersecurity revolution. 

Deal Overview

Founded in 2013, Auth0 is an identity management platform based in Washington, USA, which enables software developers to build identity authentication capabilities into applications. Founded in 2009, Okta (with a market capitalisation of $28bn, as of Friday 5 March 2021; although, Okta was valued at approximately $35bn in the days preceding the announcement), is a cybersecurity company based in San Francisco, USA. Okta typically provides software to corporates to authenticate users and employees, for example, with password authorizations. Okta’s clients include Zoom and FedEx. 

On March 3 2021, Okta entered into a definitive agreement to acquire Auth0 in an all-stock transaction. Okta will acquire Auth0 for approximately $6.5bn in Okta Class A common stock. Based on a fixed number of Okta shares at $276.21 per share, the transaction represents 14% pro forma ownership. Auth0 will operate as an independent business unit within Okta, and both platforms will be integrated over time. Eugenio Pace will remain CEO of Auth0 reporting directly to Todd McKinnon, CEO of Okta. The proposed transaction, expected to close by July 31 2021, is subject to regulatory approval. 

Okta shares fell 7 % after the deal was announced on Wednesday and had fallen by 10% by Friday 5 March 2021. This was in spite of the company’s relatively promising Q4 and FY2020 earnings reports. Okta 4Q revenues were reported at $234.7m, a 40% increase year-on-year (YoY), beating estimates. They also reported a GAAP net loss of $75.8m, down from a loss of $50.5m last year, again beating consensus. FY2021 revenue totalled $835m, growing 43% YoY. Subscription revenue similarly grew 44% YoY. Okta expects FY2022 total revenue between $1.08bn to $1.09bn, representing a growth rate of 29% to 30% YoY; and non-GAAP net loss per share of $0.49 to $0.44, assuming weighted-average shares outstanding of approximately 135 million. 

Deal Rationale 

The deal is expected to be accretive to revenue growth and below Okta’s forward multiple, based on FY2023 consensus estimates. Yet, some have questioned why Okta have acquired another identity vendor when it has its own identity offerings. Okta CEO, Todd McKinnon, has made clear, however, that this acquisition will help Okta penetrate into the customer identity and access management market. The $30bn workforce identity market makes up 75% of Okta’s revenue, while the $25bn customer identity market accounts for 25% of revenue. Therefore, Auth0’s platform will help Okta better diversify its business model across both workforce and customer identity markets. Auth0 also operates within over 70 countries, which will aid Okta’s geographical expansion into Asia-Pacific and European markets. 

Source: Okta Investor Presentation 

Furthermore, Auth0’s developer-first approach complements Okta’s enterprise-focused strengths, presenting synergy opportunities across complementary products, customers and geographies. As McKinnon explains, Auth0’s focus on purpose-built app development makes it a much more flexible and extensible product than Okta’s pre-built, pre-configured solutions. Consequently, the deal will expand Okta’s customer value proposition by providing richer data, deeper signals, and enhanced use cases to help meet the unique needs of clients. 

The acquisition also eliminates one of Okta’s largest competitors within the identity authentication market; improving its pricing power as a result. Okta, nonetheless, faces considerable competition from Microsoft’s identity and access management solution, as well as Ping Identity, which boasts clients such as Netflix.  

Deal Considerations 

The depreciation in Okta stock following the deal announcement suggests that not all shareholders are happy with Auth0’s valuation. In July 2020, Auth0 raised $120m in a Series F funding round at a valuation of $1.92bn (led by Salesforce Ventures with participation from Bessemer Venture Partners, Trinity Ventures, Meritech Capital, and Sapphire Ventures). So this acquisition represents roughly 3.4x Auth0’s valuation 8 months ago. Moreover, Auth0 is currently lossmaking and is expected to report revenues of about $200m next year, suggesting that Okta has paid approximately 32x forecast sales. Additionally, although Okta’s stock doubled during 2020, in-line with the Covid-induced tech stock surge, the deal is equivalent to about a fifth of Okta’s market capitalisation; certainly unprecedented within the identity access management space. 

Source: Financial Times

Having said that, the cloud security industry is yet to mature and there are significant growth opportunities ahead. Investors are aware of cloud’s growth trajectory; cloud stocks (based on the BVP Emerging Cloud Index) have consistently outperformed the S&P 500 since 2019, according to Refinitiv data. Note, however, that it is difficult to know how much of this performance is attributable to the covid-induced tech frenzy as opposed to genuine sentiment towards the cloud industry. What is clear, nonetheless, is that enterprise software is generally a high-margin sector. Also, the nature of its business model is such that existing clients tend to buy new versions of the software for updates, helping enterprise firms to build on profit margins. On balance, therefore, the stable nature of Okta’s business model alongside potential synergies within an emerging cloud landscape will make this deal worth the premium in the long term.  

The extent to which Okta expands into the customer identity verification market will depend on how well Okta incorporates Auth0’s agile, nimble, and disruptive developer-led approach into its ‘enterprise-friendly’ pre-built solutions approach. Some from the developer community have shared negative reviews regarding Okta’s developer support and pricing. One developer shared, on the Hackernews comment section, “the two companies couldn’t be more different, with Auth0 embracing a remote-first-class culture with creative interview processes, and Okta (pre-Covid) being very much the opposite.” This suggests that Okta will have to take great care to meet the demands of the developer community so as to not undermine Auth0’s favourable reputation in the developer scene and, in the longer run, its own ability to exploit opportunities in the customer identity verification space. Okta and Auth0 must focus not solely on integrating systems over the next twelve months, but on integrating values and cultures. Over the next few years, the cloud security provider that best differentiates itself culturally will attract the brightest and most talented developers to, in turn, help develop the best APIs and products for clients. 


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