Eminence Capital Announces Intention to Vote Against Pluralsight’s Proposed Transaction With Vista Equity Partners

Sends Letter to Pluralsight’s Board of Directors Outlining Flawed Sales Process Resulting in Grossly Inadequate Offer

Makes Books and Records Demand

NEW YORK--(BUSINESS WIRE)--Eminence Capital, LP (“Eminence”), the beneficial owner of approximately 6 million shares of Class A Common Stock of Pluralsight, Inc. ("Pluralsight" or the "Company") (NYSE: PS), representing approximately 4.94% of the Company’s outstanding shares, today sent a letter to the Pluralsight Board of Directors outlining why Eminence intends to vote against the Company’s proposed acquisition by Vista Equity Partners (“Vista”) announced on December 13, 2020.

In addition, Eminence has made a books and records demand under Section 220 of the Delaware General Corporation Law to gain further insight into what it believes is Pluralsight’s flawed sales process.

The full text of Eminence’s letter to the Pluralsight Board of Directors follows:

January 11, 2021

Pluralsight, Inc.
42 Future Way
Draper, Utah 84020

To the Board of Directors of Pluralsight, Inc.:

Eminence Capital, LP (“Eminence Capital,” “we” or “us”) beneficially owns approximately 6.0 million shares of Class A Common Stock of Pluralsight, Inc. (“Pluralsight” or the “Company”), representing approximately 4.94% of the Company’s outstanding shares.

When the Company first announced on December 13, 2020, that it had entered into a definitive agreement (the “Merger Agreement”) to be acquired (the “Merger”) by Vista Equity Partners (“Vista”) for $20.26 per share of Class A Common Stock (the “Merger Consideration”), we were disappointed by the de minimis premium to Pluralsight’s recent stock price and concerned about the Company’s rushed sales process. We have now had an opportunity to review Pluralsight’s preliminary proxy statement (the “Proxy Statement”) relating to the Merger that was filed with the Securities and Exchange Commission (“SEC”) on January 7, 2021, speak with Company representatives and gather more market intelligence, and our disappointment and concern have evolved into outrage. For the reasons described below and in the Addendum attached to this letter, we are strongly opposed to the current terms of the Merger and intend to vote against it unless the Merger Consideration is increased materially. We encourage other shareholders to oppose the Merger as well.

We believe that Pluralsight conducted a deeply flawed and highly manipulated sales process that conveniently occurred during a period when the Company’s quarterly billings growth rate showed optically weaker growth than expected simply because of a shift in the timing of the Company’s annual user conference. As a result of this flawed process, the price per share that the Company is accepting from Vista is grossly inadequate. Vista’s offer does not come close to compensating Pluralsight’s shareholders for the health of its current financial performance nor its long term value, especially given how well positioned the Company is for future growth.

When reviewing the facts and circumstances surrounding this Merger Agreement, we can only come to one conclusion: motivations completely at odds with maximizing shareholder value drove a sham process designed to support a pre-determined decision to sell to Vista at an artificially low price in order to benefit management and Vista at the expense of shareholders. Pluralsight was not actively pursuing a going-private transaction, nor was it facing any financial or operational crisis. Yet when Vista communicated an interest in acquiring the Company without even putting forward a price, the Company feverishly instituted a process designed to demonstrate a fair market test and less than four weeks later demanded that all interested parties, except Vista, submit a final bid. Astoundingly, a company that was not originally looking for a buyer agreed to accept a takeover proposal from Vista at little to no premium for shareholders. The only winners in this process appear to be Vista and Company management, who will divide up the spoils of an artificially low takeover price for a market leader with a strong future.

Given our serious concerns as to whether the Board of Directors of the Company has met its fiduciary duties in connection with its review and approval of the Merger, we have separately made a books and records demand under Section 220 of the Delaware General Corporation Law to gain further insight into the Company’s process in arriving at this transaction and for the additional purposes described in the demand. We eagerly await the materials we requested so that we can get to the bottom of the true motivation for this flawed sales process which we believe resulted in the grossly inadequate Merger Consideration.

Sincerely,

Ricky Sandler
Chief Executive Officer and
Chief Investment Officer

Addendum

Vista’s Offer Price Represents a de Minimus Premium to Pluralsight’s Recent Stock Price and a Discount to Multiples in Recent Enterprise Software and SaaS Acquisitions

• Less than five months ago, Pluralsight’s shares were trading at $22.36, 10% higher than the Merger Consideration. The Merger Consideration represents a mere 15.4% premium to the closing price of Pluralsight’s stock on September 16, 2020 (the day before Pluralsight was approached by Vista on an unsolicited basis) and only a 6.7% premium over the closing price of $18.98 on the last trading day prior to the announcement of the Merger.
• As noted in Akaris Global Partners’ December 28^th letter, the Merger Consideration represents a multiple to LTM sales and 2022 recurring sales estimates that is far lower than recent peer transactions, as well as the current valuation of comparable public companies.

Vista’s Offer Price Deprives Pluralsight’s Shareholders of the Value from Pluralsight’s Unique Position to Capitalize on Two Intersecting Secular Tailwinds: The Transition to Enterprise Digital Learning and the Growing Demand for Continuing Software Development Training

• COVID-related considerations and greater work-from-home initiatives have accelerated a pre-existing shift in enterprise educational budgets for software developers and engineers towards digital delivery versus in-person instructor led training.
• Accelerating technology developments and ongoing and increasing shortages in the software development workforce require enterprises to continually redevelop the technical skills of their workforce, which makes older education practices obsolete.
• Pluralsight is poised to enter a period of sustained accelerated growth. At just $390 million in annual recurring revenue and approximately 1.5 million users, we believe that Pluralsight has significant room to grow with an immediate total addressable market of $42 billion and 102 million potential global users. Longer term, Pluralsight has the ability to grow as a legitimate alternative to individuals going back to school and will be able to start taking share in the global eLearning market that is over $300 billion.
• Pluralsight already has a significant strategic barrier to entry given that it owns all the content that its 1,500 content creators have developed for use on the Company’s platform. The Company’s revenue sharing model creates a natural network effect in which the more users that join the platform, the better Pluralsight can attract and retain talent with higher author compensation.

We Believe Pluralsight Ran a Deeply Flawed and Highly Manipulated Sales Process that was NOT Designed to Maximize Shareholder Value

• The Transaction Committee (the “Transaction Committee”) that the Company’s Board of Directors formed on September 24, 2020, to review a possible sale of the Company after being approached by Vista on September 17^th, was not independent and had little power. As originally formulated, the Transaction Committee was merely advisory and a majority of its members were parties to the Company’s Tax Receivable Agreement (the “Tax Receivable Agreement”). Even after the Company acknowledged the inadequacy of the original Transaction Committee and changed its composition and enhanced its formal power, the Transaction Committee never engaged independent legal or financial advisors and many of its meetings were attended by management and members of the Company’s Board of Directors who were not Transaction Committee members. Clearly, this was not an independent body.
• As described in the Proxy Statement, the Tax Receivable Agreement, as it existed prior to the Merger Agreement, required a payout of approximately $400 million to the non-Company parties to the agreement upon a Company change of control. This significant potential payout may partially explain why nearly all the prospective buyers of the Company never even made a formal offer. Rather than addressing this obvious obstacle to maximizing shareholder value when the Company’s own advisors acknowledge the true economic value of the Tax Receivable Agreement was only approximately $130 million, the Company continued with the sales process and did not engage in negotiations to amend the Tax Receivable Agreement to reduce the change-of-control payout until November, when Vista was the only active potential buyer.
• By the end of September 2020, Vista and nine other potential purchasers (four strategic and five financial) had entered into confidentiality agreements with the Company. On October 18^th, Qatalyst Partners (“Qatalyst”), the Company’s financial advisor, informed the three remaining interested parties other than Vista that their acquisition proposals for the Company were due by October 26^th. By October 26^th, all three of these bidders dropped out of the sales process without submitting a proposal. On October 27^th, Vista, after indicating that it would submit its proposal on or about October 26^th, informed Qatalyst and Pluralsight’s CEO, Aaron Skonnard, that it would postpone making its proposal until after the November 3^rd elections and the Company’s November 5^th earnings call. No explanation is given in the Proxy Statement as to why Vista was entitled to dictate the timing of the sales process while other potential participants were not.
• On its November 5, 2020 earnings call, the Company provided some optically disappointing results and guidance that were each conveniently approximately 1-3% below consensus. Although the Company had moved its annual user conference from the third to the fourth quarter, sell side analysts had not been advised to take this timing shift into account for their third quarter billings growth estimates.
  • The Company’s third quarter billings were $100 million (up 9% year over year) versus consensus estimates of $103 million (up 12% year over year). Additionally, on the third quarter conference call, the Company chose to issue forward quarter billings guidance for the first time in its history. Conveniently, this billings growth guidance for the fourth quarter of 2020 was +12% to 13% year over year, just below consensus estimates of +14% year over year.
  • As a result of this misleading and disappointing guidance and disclosure, on November 6, 2020, the stock dropped 22% from its November 5^th closing price of $19.00 and created an artificially depressed stock price. Additionally, on the same date, Vista made its initial offer for the Company of $16.50 per share. This is less than what the Company’s stock was trading for when Vista first approached the Company on September 17^th.
  • Importantly, the Company’s CFO told a number of shareholders that billings for October 2020 (the first month of the fourth quarter) had accelerated to +47% year over year, yet the Company chose not to disclose this number on the conference call nor explain why they were guiding to +12-13% despite such a strong first month. After reading the Proxy Statement, we are still unclear if the potential bidders were advised of the Company’s strong October performance.
• Just two weeks after the disappointing earnings call, the Company agreed to terms with Vista at an appallingly low price rather than deciding to remain independent.
• The Proxy Statement states that the Company’s CEO had not had discussions with Vista about his continuing role as CEO and equity owner of the Company subsequent to the Merger. Nevertheless, in its Employee FAQ filed with the SEC on December 15, 2020, the Company stated that Mr. Skonnard would continue as CEO of the Company.

Qatalyst’s Fairness Opinion Substantially Understates the Value of the Pluralsight Stock

• Discounted Cash Flow Analysis
  • The discounted cash flow (“DCF”) analysis in the Qatalyst Fairness Opinion uses an Unlevered Free Cash Flow (“UFCF”) multiple range of 20-35x , while most comparable public companies today trade at a UFCF multiple of between 30x-45x.
  • The DCF analysis uses a range of discount rates of 9.5% to 11%, which we believe is high for a software company such as Pluralsight. At least one major sell side analyst uses a 9% discount rate for the Company.
• Selected Company Analysis
  • The selected company analysis in the Qatalyst Fairness opinion uses the wrong comparable companies. Only three of the 21 companies used by the Compensation Committee of the Company’s Board of Directors for its 2019 compensation decisions (as set forth in the Company’s 2020 proxy statement) were used by Qatalyst in its analysis. For Qatalyst’s selections, the average CY2021E Revenue Multiple (defined as the fully-diluted enterprise value divided by the consensus estimated revenue for the calendar year 2021) is approximately 8.5x. The same multiple is nearly 17.0x for the Compensation Committee’s peer company selections.
• Selected Transactions Analysis
  • Qatalyst has selected certain transactions going back all the way back to 2011, when software companies were valued at significantly lower revenue multiples. Further, Qatalyst seemed to exclude certain transactions that occurred during this time period, such as MuleSoft, Inc.

     

Disclaimer

This material does not constitute an offer to sell or a solicitation of an offer to buy any of the securities described herein in any state to any person. In addition, the discussions and opinions in this letter and the material contained herein are for general information only, and are not intended to provide investment advice. All statements contained in this letter that are not clearly historical in nature or that necessarily depend on future events are “forward-looking statements,” which are not guarantees of future performance or results, and the words “anticipate,” “believe,” “expect,” “potential,” “could,” “opportunity,” “estimate,” and similar expressions are generally intended to identify forward-looking statements.

The projected results and statements contained in this letter and the material contained herein that are not historical facts are based on current expectations, speak only as of the date of this letter and involve risks that may cause the actual results to be materially different. Certain information included in this material is based on data obtained from sources considered to be reliable. No representation is made with respect to the accuracy or completeness of such data, and any analyses provided to assist the recipient of this material in evaluating the matters described herein may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any analyses should also not be viewed as factual and also should not be relied upon as an accurate prediction of future results.

All figures are unaudited estimates and subject to revision without notice. Eminence Capital disclaims any obligation to update the information herein and reserves the right to change any of its opinions expressed herein at any time as it deems appropriate. Past performance is not indicative of future results. Eminence Capital has neither sought nor obtained the consent from any third party to use any statements or information contained herein that have been obtained or derived from statements made or published by such third parties. Except as otherwise expressly stated herein, any such statements or information should not be viewed as indicating the support of such third parties for the views expressed herein.

About Eminence Capital, LP

Eminence Capital, LP (“Eminence”) is a global asset management firm founded in 1999 that currently manages approximately $7.8 billion. Eminence’s investment approach is anchored in bottom up fundamental research seeking to identify “quality value” investment opportunities that are likely to undergo a positive change in investor perception.