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Observability and app monitoring company New Relic (NEWR) is launching higher after private equity firms Francisco Partners and TPG have agreed to acquire the company for $87/share in cash, representing a 17.5% premium to last Friday's closing price. There has been plenty of speculation that NEWR could be acquired over the past several months, so today's news doesn't come as a complete surprise. The main question was whether NEWR and its suitors could come to an agreement on valuation.

• On that note, in late May Reuters reported that Francisco Partners and TPG walked away from the negotiating table after the firms couldn't reach an agreement with NEWR on a price tag for an acquisition. Securing enough capital to finance the deal was another issue standing in the way. 
• With both sides finding a middle ground, NEWR is now poised to become a privately held company again after launching its IPO in December of 2014. Since going public, it's been a rollercoaster ride for NEWR.
  • After shares soared to all-times highs in 2021, rising interest rates sparked a nasty tech sell-off, sending NEWR crashing lower in the winter and spring of 2022. Although NEWR's observability tools help companies improve the efficiency of their apps and networks, demand still languished under the difficult macroeconomic conditions and from tough competition from peers like DataDog (DDOG) and Dynatrace (DT).
• NEWR's recent revenue growth rates, for instance, significantly lag behind DDOG's. In 1Q23 and 4Q22, NEWR posted top-line growth of 12% an 18%, respectively, compared to growth of 33% and 44% in those same quarters for DDOG.
  • It's fitting, then, that DDOG would also be trading higher today as NEWR's valuation pops to $6.5 bln on the acquisition news. On a P/S basis, though, NEWR is still trading at a steep discount to DDOG at about 5.4x compared to roughly 19.8x.
  • Based on the magnitude of that valuation divergence, one could argue that Francisco Partners and TPG scored a bargain on the deal -- especially since NEWR's financials are improving.
• This morning, NEWR also reported better-than-expected Q1 results that featured a vast improvement in margins and profitability. Specifically, non-GAAP operating margin climbed to 15.0% from (7.9)% in the year-earlier quarter as EPS reached $0.43 compared to $(0.26) a year ago.
  • Last summer, NEWR implemented a restructuring program that included layoffs as the company continued to transition to a consumption-based model. That transition, which began in 2020, has taken some time to yield better results, but the company seems to be turning a corner with Francisco Partners and TPG taking notice. 

Overall, it's good to see some M&A activity finally spring up in the tech sector as it indicates that firms are feeling more comfortable and confident about market conditions. Whether this deal is the forerunner of more M&A activity is highly uncertain, though, especially with tech valuations at rich levels.