EUR 470.60 For Business Accounts Only

Deep Value Spin With an M&A Catalyst

As we are couple of months away from 2019, we decided to look back over the last couple years of Spinoffs and release our next fallen Spinoff name that could potentially outperform the market in the longer term. The fallen Spinoff idea that jumped out to us was LogMeIn, Inc (LOGM).

The Edge View...
LogMeIn, Inc. (LOGM) has moved downwards by -23.2% YTD, underperforming the S&P MidCap 400 (MID) Index’s return of -0.4% as well as its industry peers’ return: Box (BOX, -10.4%), CommVault Systems (CVLT, +13.9%), FireEye (FEYE, +36.4%), Mimecast Ltd. (MIME, +25.7%), and Proofpoint (PFPT, +1.2%) during the same period. This decline has been due to:

Lowering of the management’s full-year guidance because of the issues impacting renewal rates in its collaboration business (>50% of revenues) that was disclosed in the 2QFY18 earnings release;
Largest product line consisting of the GoToMeeting offering stumbled as LOGM tried to force customers to accept new contract terms and missed shipping some product enhancements;
In the meantime, LOGM’s stock has been slowly gaining share price momentum and we’ve identified our angles that can help the stock price continue to increase from here.

Stabilization in collaboration business delights investors: Recently, the Q3FY18 earnings indicated that the changes implemented in Q2FY18 have largely helped to stabilize annual GoToMeeting gross retention rates, which has returned to the historical levels. Furthermore, the company highlighted that the bundled Jive + GoToMeeting offering is also helping LOGM to drive higher account penetration and increased revenue per customer. This has addressed investor concerns about its Communications & Collaboration business (revenue in this business has increased by 19.2% Y-o-Y in Q3FY18), which is evident from LOGM’s share price increase of +15.4% during the intraday trading to close at +10.9% up on a single day (compared to the MID return of -1.1%) on October 26, 2018 (following the earnings release).

M&A at the Forefront...
In February 2017, the merger of Citrix’s (CTXS) GoTo Business for $1.8bn in CTXS’s Spin-merger helped LOGM to be one of the top 10 SaaS companies with >20 product offerings. The acquisition of GoTo nearly tripled the revenues of LOGM (from $336m in FY16 to $990m in FY17). In April 2018, LOGM acquired Jive Communications (a leading provider of cloud-based telephony and unified communications services), which will strengthen the unified communications and collaboration offering of LOGM. We expect to see continued M&A activity aimed at increasing market positioning and cross-selling opportunity across its large user base.

World Class SaaS CEO...
William (Bill) Wagner, President (January 2015) & CEO (December 2015) of LOGM, first joined as LOGM’s first-ever COO in May 2013. He has played an important role in positioning LOGM as a leader in the market as well as worked towards its top-line growth, resulting in a ~500% revenue increase between 2013-17 (via both organic & in-organic growth). Since January 2015 to date, the total shareholder return (TSR) of LOGM is +17.9% outperforming the index (MID) TSR of +9.1%.

Valuation...
Based on the relative valuation applying an EV/Revenue multiple of 4.2x (at a 2.5% discount to the industry peers’ average), we have arrived at a one-year Base case target price of $103.26, implying a potential upside of +17%. Based on a takeover, we have taken the average precedent transaction multiple of the internet communications industry, we have arrived at a potential deal value of $119.51, implying an upside of +36% from current levels.