BREAKINGVIEWS-Dayforce deal spat lays bare AI transition pains

By Pranav Kiran

TORONTO, Oct 8 (Reuters Breakingviews) - It’s time for investors to gauge their pain tolerance. Buyout shop Thoma Bravo’s $12.3 billion take-private of human resources software firm Dayforce DAY.N comes as anxiety over high interest rates and the consequences of artificial intelligence has crushed valuations. Investor T. Rowe Price TROW.O on Wednesday took exception to the “underwhelming” price. It’s a window into the tortuous wait to catch up to the machine learning boom.

Explosive growth and the rise of usage-based revenue models at startups like ChatGPT maker OpenAI are cooling enthusiasm for older enterprise software firms that bill clients per subscription. Making the shift to an AI-infused business plan has been tough.

Investors have consequently hammered the industry. Just look at Dayforce. Thoma Bravo is paying $70 a share, valuing the firm’s enterprise at $12.3 billion. That’s a healthy 32% premium to where the stock was prior to reports of an incoming deal. It just comes after a nearly 40% share-price slide over the preceding five years.

This explains T. Rowe’s gripe. The asset manager has a near-16% stake after investing in Dayforce’s initial public offering back in 2018. Yet it sees light at the end of the tunnel. While Dayforce’s profitability lags rival Workday, it’s launching a panoply of AI tools and beating analysts’ expectations on earnings per share, according to Visible Alpha. The company aims to hit $1 billion in free cash flow by 2031, up from $172 million in 2024, a lofty bar that Wall Street expects it to meet. That’s crucial: cash generation has become software’s most important metric.

Six years, though, is a long time to wait. Everything must go right in the meantime. The sheer scale of Sam Altman’s OpenAI looms over the industry. Thoma Bravo’s offer, instead, lets investors realize that value upfront.

Take 2031’s cash flow target and put it on a 19-times multiple, where Workday trades. To account for the time value of money, discount it back using Dayforce’s weighted average cost of capital of 8.6%, according to Morningstar. The result is roughly in-line with the deal value.

Software developers like Adobe ADBE.O or Autodesk ADSK.O famously managed to make a leap like the one facing Dayforce before, when cloud-based subscription apps first took off. Yet, unlike those two role models, it is not starting off as the giant of its field. And the nature of the challenge posed by AI – whether from unexpected rivals or entirely new product categories – is unknowable. Going private now is a reasonable way to protect against an unreasonable era in technology.

CONTEXT NEWS

T. Rowe Price Associates said in a regulatory filing on October 8 that it plans to vote against Thoma Bravo's proposed $12.3 billion buyout of human resources software firm Dayforce, calling the offer "underwhelming" and an attempt to take advantage of "short-term pessimism" in the sector.

The asset manager owns a 15.5% stake in Dayforce, according to filings.