RPT-BREAKINGVIEWS-Thoma Bravo hails tech’s ‘show me the money’ era

By Pranav Kiran

TORONTO, Aug 20 (Reuters Breakingviews) - The cycle of technology fads is brutal. Once the darlings of public markets, given wide latitude to chase unprofitable growth, cloud software developers now seem pedestrian next to the incredible promise of artificial intelligence. Private equity firm Thoma Bravo’s $11.2 billion mooted deal to buy human resources application provider Dayforce DAY.N, disclosed on Wednesday, signals the end result of this shift: accept being a bit boring and transition into a cashflow machine, or become a target.

Interest-rate hikes beginning in 2022 challenged the industry’s “expand at all costs” mantra: burning cash became more expensive, forcing a retrenchment that trimmed growth and valuations. Some firms have since regained speed, steadily beating Wall Street’s revenue expectations by growing margins since early 2024, according to Altimeter Capital. Valuations, though, are still in the dumps.

It might be a matter of measuring up to the next big thing. Bessemer Venture Partners research shows that, on average, private cloud software firms have taken about 7 years to hit $100 million in annual recurring revenue. Successful AI startups are crossing that threshold in just 4 years, or as little as 18 months for particularly hot breakthroughs. Just compare the BVP Nasdaq Emerging Cloud Index, which is down 10% year-to-date, to an exchange-traded fund tracking the AI-exposed Magnificent Seven stocks, up 7%.

If you can’t impress with growth, the next best thing is to at least throw off cash. Here, Dayforce has fallen behind its peers. The company is expected to achieve a free cash flow margin of 13.7% in the financial year ending this December, according to Visible Alpha. Rivals Paycom Software and Paylocity should notch margins of 18% and over 20%, respectively. Little wonder that Dayforce’s stock had fallen over 25% thus far in 2025 before news of a potential sale arrived.

Thoma Bravo’s mooted $70 per share offer would represent a respectable 32% premium, valuing the company at a little over 6 times last year’s revenue. That roughly matches the average multiple paid in deals across the industry in the second quarter, according to Software Equity Group data.

Buyout barons can benefit from software investors’ short attention spans. TD Cowen analysts reckon that Thoma Bravo could plausibly increase Dayforce’s cash flow margin to over 20% while maintaining low-double-digit topline growth. If it can subsequently exit after five years at a multiple of between 6 and 7 times revenue, an average of where peers Automatic Data Processing and Paychex trade, its annualized rate of return could hit 24%, Breakingviews calculates. Dayforce struggled to meet public markets’ “show me the money” challenge. Private equity is probably happy to do the job.

CONTEXT NEWS

Human resources software firm Dayforce said on August 20 that it was in advanced discussions to be acquired by Thoma Bravo for $70 per share. The offer represents a premium of 32% based on the stock's closing price on August 15, prior to media reports of a potential transaction, and a deal value of about $11.2 billion.