Matt Ehrlichman, Porch founder and CEO. (Porch Group Photo)
Big deals have become almost run-of-the-mill for Seattle-based home services tech company Porch Group, which has been acquiring an array of companies in areas such as home inspections, moving, real estate, and insurance.
But one aspect of its latest deal is anything but ordinary.
Porch on Thursday announced the acquisition of Floify, a provider of software used by mortgage companies and loan officers, for $76.5 million in cash and $10 million in Porch stock — guaranteeing the sellers that the value the stock will double by the end of 2024, and committing to make up the difference if it doesn’t.
Lawyers and other M&A experts described the promise as bold, clever, and highly unusual. Several said they’ve never seen anything quite like it before.
Porch’s explanation: “Simply put, we expect the stock price to appreciate significantly over the next several years,” said Porch CEO Matt Ehrlichman via email after GeekWire asked about the approach. “We aren’t interested in providing $20M in equity at today’s share price; however, we were able to cut the number of shares used (and corresponding dilution) in half by providing this guarantee.”
The net impact, he said, is “less dilution and more value for our shareholders.”
So what happens if the stock doesn’t ultimately double? Under terms of the deal, Porch can choose to make up for any gap either in cash or additional stock.
What experts are saying: Investment banker Matthew Riendeau, managing director at Cascadia Capital in Seattle, was among the experts contacted by GeekWire who said they’ve not seen such a deal term before.
“Typically the [acquisition] target’s shareholders are subject to the same idiosyncratic risks as the buyer’s shareholders with no guarantee of future appreciation,” he said. “If the target’s shareholders were concerned about the downside or limited upside of a concentrated position they could purchase derivatives (e.g. options) to hedge against the risk at their own expense.”
Longtime M&A advisor Nat Burgess, managing partner at TechStrat in Seattle, recalled working on past acquisitions in which companies guaranteed a threshold value for their stock based on their inside knowledge of other specific plans or deals in the works, and their confidence that those plans would boost the stock.
“In this case, I imagine the seller got tired of hearing Porch say their stock is undervalued, and told them to put their money where their mouth is,” Burgess said. “The structure is much more beneficial to the other shareholders than simply issuing more shares because a) less dilution and b) this structure effectively …….