Perhaps rather quietly (in retrospect), while many of us were focused on the extreme volatility of Big Tech equity prices these past few weeks (AMZN, FB, PYPL), a ‘smaller’ Big Tech name (market cap $145 billion) announced its intent to acquire a fintech that’s been a standout pandemic success story. Catching the tailwinds of having the right product at the right time, San Francisco-based technology solutions provider Taulia has been a major beneficiary of the pandemic-induced supply chain challenges to both buyers and producers. The company’s core offerings address the constraints on supplier working capital with dynamic solutions for early funding, removing the potential for disruption in production caused by cash flow shortages from late buyer payments. In what I argue is strategic perfection, or pretty close to it (in terms of an M&A strategy), German enterprise resource management (ERP) giant SAP Software (NYSE: SAP) announced its intent to acquire a majority stake in Taulia on January 27th. The combination aims to marry SAP’s dominant, ERP marketplace footprint among the world’s largest supplier companies to Taulia’s scalable accounts receivable and funding technologies. The acquisition’s objective being to ensure suppliers have access to advanced payments on receivables, and thus, continuous, positive cash flow.
Taulia and SAP were no strangers to one another as Taulia had already successfully integrated with SAP’s ERP software. In fact, at the time of the announcement, over 80% of Taulia’s customer base was using SAP’s ERP offering, including large producers like Airbus, Nissan, and AstraZeneca. The acquisition will accommodate further integration with SAP’s other business lines, including its CFO solution suite and SAP Business Network, becoming the core of SAP’s working capital management portfolio.
The essence of the value that Taulia brings to SAP’s customers, and by extension SAP, is the ability to automate accelerated supplier payments. It’s captured by leveraging Taulia’s two, core technology solutions that solve for reverse factoring and dynamic discounting.
Reverse factoring facilitates the early payment of supplier invoices using an outside funding source. A supplier will upload its invoice to Taulia’s platform for early payment. If approved, and outside funding source – financial institution – will pay the supplier the invoice amount minus a slight discount. When the invoice reaches its original maturity date, the buyer will then pay the FI the full invoice amount. Though reverse factoring in and of itself isn’t new, the automation is, and Taulia’s financial partners are second to none in their ability to support this form of lending to the world’s largest companies.
Dynamic discounting, on the other hand, is a fairly recent innovation. At its core, it differs from reverse factoring because it doesn’t utilize outside funding – it uses the buyer’s cash-on- hand to accelerate the supplier payment. In this scheme, the supplier uploads its invoice to Taulia, requesting early payment and approval from the buyer. The buyer pays the invoice with its own capital, but pays a slightly discounted amount for the early payment. Dynamic discounting gives the supplier greater flexibility because the supplier can choose the payment schedule – the sooner the supplier wants the payment, the greater the discount the buyer will apply to the payment.
In both instances, Taulia’s software automates the request, approval, and payments processes between suppliers and buyers, creating efficiencies and an extremely high level of control over cash flows for both parties.
Investment banking take…
Having a better understanding of the technology Taulia brings to the table, and the SAP clients who are ‘sitting’ at it, it’s not difficult to see why this strategic acquisition appears to be a perfect marriage. The value proposition of the combination of Taulia’s tech with SAP’s ERP software has already borne-out through their pre-existing integration. The extension of Taulia’s tech to SAP’s other business lines is simply the logical next step in the evolution for both parties.
As for the cross-sell opportunity, one need not be an investment banker to intuit the magnitude of the upside potential given the complementarity of the companies’ two user bases.
But there’s one more dimension to this transaction that may not have gotten its due attention in the reporting to date. In addition to Taulia’s innovative technology, it’s also bringing an incredibly valuable financial services relationship to the deal.
In Taulia’s last funding round – July, 10th 2020, it took in $60M USD from a consortium of investors including Ping An Global Voyager Fund, Prosperity 7 Ventures, and JP Morgan. It was disclosed at that time that Taulia entered into a ‘strategic alliance’ agreement with JP Morgan on April 27th that same year. The strategic alliance was touted as “JP Morgan’s most significant strategic alliance with a FinTech in the trade finance business…”.
Well, that strategic alliance is remaining in place with Taulia in the SAP deal.
And that’s no little thing – JP Morgan is one of the world’s largest processors at roughly $60 trillion a day.
With that kind of financial horse-power available to back Taulia’s reverse factoring and processing needs, it removes any potential financial constraints that Taulia may have had as it scales into SAP’s other business lines and client portfolio.
The one element of information about this deal that remains unknown is the economics of the transaction, but given everything else – right timing, right products, right end-users, right partners – if this deal isn’t strategic perfection, I don’t know what is.
Software & Fintech Investment Banking – (NYSE: SAP)
