Matt Ehrlichman, Porch founder and CEO. (Porch Group Photo)

Big deals have become almost run-of-the-mill for Seattle-based home services tech company Porch Group, which has been acquiring an array of companies in areas such as home inspections, moving, real estate, and insurance.

But one aspect of its latest deal is anything but ordinary.

Porch on Thursday announced the acquisition of Floify, a provider of software used by mortgage companies and loan officers, for $76.5 million in cash and $10 million in Porch stock — guaranteeing the sellers that the value the stock will double by the end of 2024, and committing to make up the difference if it doesn’t.

Lawyers and other M&A experts described the promise as bold, clever, and highly unusual. Several said they’ve never seen anything quite like it before.

Porch’s explanation: “Simply put, we expect the stock price to appreciate significantly over the next several years,” said Porch CEO Matt Ehrlichman via email after GeekWire asked about the approach. “We aren’t interested in providing $20M in equity at today’s share price; however, we were able to cut the number of shares used (and corresponding dilution) in half by providing this guarantee.”

The net impact, he said, is “less dilution and more value for our shareholders.”

So what happens if the stock doesn’t ultimately double? Under terms of the deal, Porch can choose to make up for any gap either in cash or additional stock.

What experts are saying: Investment banker Matthew​ Riendeau, managing director at Cascadia Capital in Seattle, was among the experts contacted by GeekWire who said they’ve not seen such a deal term before.

“Typically the [acquisition] target’s shareholders are subject to the same idiosyncratic risks as the buyer’s shareholders with no guarantee of future appreciation,” he said. “If the target’s shareholders were concerned about the downside or limited upside of a concentrated position they could purchase derivatives (e.g. options) to hedge against the risk at their own expense.”

Longtime M&A advisor Nat Burgess, managing partner at TechStrat in Seattle, recalled working on past acquisitions in which companies guaranteed a threshold value for their stock based on their inside knowledge of other specific plans or deals in the works, and their confidence that those plans would boost the stock.

“In this case, I imagine the seller got tired of hearing Porch say their stock is undervalued, and told them to put their money where their mouth is,” Burgess said. “The structure is much more beneficial to the other shareholders than simply issuing more shares because a) less dilution and b) this structure effectively locks the recipients out of selling shares during the hold period.”

Porch’s legal advisor on the deal was Manatt, Phelps & Phillips, LLP. Floify’s financial advisor was AGC Partners, and its legal counsel was Sheppard, Mullin, Richter & Hampton LLP.

Floify background: Based in Boulder, Colo., Floify was founded in 2012 by husband-and-wife team Dave and Michele Sims, a software engineer and business operations manager, respectively.

Porch says Floify is profitable, with a customer base of more than 1,500 companies using its software. Floify projects $10 million in revenue in 2021 and $15 million in 2022, according to a Porch news release and investor presentation.

Slide from Porch Group investor presentation.

Stock market reacts: Whether it was Porch management’s show of confidence, or the potential of the Floify acquisition, the deal appears to have emboldened investors.

Porch Group shares jumped 15% to a peak of $20.50 at one point Thursday morning, before dipping back below $20, after closing Wednesday at $17.77, prior to the announcement of the Floify acquisition.

Ehrlichman started Porch in 2012 after his own experience building a home convinced him of the need for a better online marketplace for home services.

The company became publicly traded on the Nasdaq in December through a merger with a special purpose acquisition company (SPAC), raising $322 million in the process.

Acquisition spree: Porch has made a string of acquisitions in recent months, including:

  • Home warranty policy provider American Home Protect of Plano, Texas, for total consideration of $45.85 million;
  • California-based CSE Insurance for $48.6 million in cash;
  • Title software company Rynoh, of Virginia Beach, Va., for a total of $35 million;
  • Irving, Texas-based insurance company Homeowners of America for $100 million in cash and stock.

Through the first six months of this year, Porch posted revenue of $78.1 million and a net loss of $81.4 million.

Porch ended the June quarter with $150 million in cash, and has since raised $425 million in convertible notes, loans that can be converted to equity at a later date.

Porch’s pivot: After focusing in its early years on providing consumers with home improvement data, Porch reinvented itself as a provider of enterprise resource planning (ERP) and customer-relationship management (CRM) software to home services companies. It makes money from software licenses and transaction fees that it receives when connecting homebuyers to movers, insurance agents, home automation and security firms, TV/internet companies and other service providers.

Companies can pay recurring fees to use the software, or they can use the software for free if they provide Porch with access to information about home buyers.

Announcing the latest acquisition, Porch explained how Floify plays into that strategy — saying the mortgage software company’s “access to borrowers at the start of the mortgage application provides Porch an early introduction to high-intent homebuyers in need of other home related services.”

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