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Dec 136 min read

CoStar Group's $1.6 billion Acquisition of Matterport

Vice President: Leonardo Bassino


Analysts: Nicola Copetti, Dragos Dobra, Lewis Kelly, Maximilian Lotz


Overview


Acquirer: CoStar Group Inc.

Seller: Matterport Inc.

Deal Size: $1.6 billion

Buy-side Advisors: J.P. Morgan Securities LLC (Financial); Latham & Watkins LLP (Legal)

Sell-side Advisors: Qatalyst Partners (Financial); Foley & Lardner LLP (Legal)


Introduction and Deal Rationale


CoStar Group is a global leader in commercial real estate information, analytics, and online marketplaces, with a strong presence in the industry through platforms like CoStar Suite, LoopNet, and Apartments.com. The company has a market capitalization of over $37 billion and is known for its expansive database and analytical tools.


Matterport, on the other hand, is recognized as a pioneer in 3D digital twin technology, offering advanced 3D scanning solutions widely used in real estate and other sectors.


The recent decision of CoStar Group to acquire Matterport is a strategic move aimed at enhancing CoStar's digital real estate services by integrating Matterport's innovative 3D technology. The integration of 3D technology into the real estate sector has revolutionized how properties are marketed and experienced. By providing immersive and interactive virtual tours, 3D technology allows potential buyers to visualize properties without needing a physical visit. This is particularly beneficial for international or out-of-state buyers, expanding market reach and enhancing engagement.


The rationale behind the deal includes leveraging Matterport's AI-driven digital twin technology to provide a comprehensive property experience, reinforcing CoStar's position as a leader in both data and technology within the real estate sector. This acquisition will allow CoStar to leverage Matterport’s extensive database, which includes over 12 million spaces captured globally, offering clients innovative solutions that set new industry standards.


Risks


This strategic expansion, however, comes with some challenges. Integrating Matterport's technology into CoStar's existing platforms may present technical hurdles, requiring significant resources and expertise.  There might be technical challenges in merging Matterport's advanced 3D and digital twin technologies with CoStar's existing platforms, which could lead to compatibility issues and require substantial resources for seamless integration. Furthermore, successfully integrating a tech-focused company like Matterport into a larger, more established real estate data firm like CoStar can be difficult. Additionally, investing heavily in a sector with fluctuating valuations poses financial risks, particularly if anticipated synergies do not materialize as expected. 


Integrating Matterport's 3D software into CoStar's digital real estate services presents not only technical and operational challenges but also competitive risks. The digital real estate sector is rapidly evolving, with several companies trying to obtain a larger market share by offering innovative solutions. Competitors may quickly adapt by developing similar 3D technologies, potentially limiting CoStar's competitive advantage. Additionally, established players in the industry might leverage their existing customer relationships and brand recognition to overcome CoStar's enhanced offerings. This competitive pressure could lead to pricing wars or may require huge investments in marketing and technology development to maintain the market position. 


As the industry keeps growing fast, CoStar must remain agile and responsive to competitors' strategies to capitalize on Matterport's technology effectively and sustain its leadership in the digital real estate market. Despite these risks, the acquisition positions CoStar to leverage Matterport's data-rich assets, driving future growth and innovation in the competitive real estate market. 


Industry Analysis


Today the Technology, Media and Telecommunications sectors (TMT) is experiencing immense change as a result of accelerating digital technologies and the growing appetite for data, alongside shifting market dynamics. And it's a strategic acquisition trend: CoStar Group's $1.6 billion purchase of Matterport gives CoStar the ability to add Matterport's 3D spatial data capabilities to its real estate technology offerings. Similarly, Cisco’s $28 billion acquisition of Splunk underscores the increased attention paid to cybersecurity, as it pursues Splunk's AI driven analytics to build out advanced prediction-based cybersecurity products. In a macroeconomic environment that continues to be challenged by recession fears and a dearth of deal activity, strategic M&A deals in software, particularly in cybersecurity, remain strong. With the cybersecurity market at $200 billion and growing at 12% annually, it’s an attractive market to tech giants like Cisco, Microsoft and Oracle, which are increasingly acquiring firms with subscription-based revenue models. In contrast, very modest revenue growth and the need for heavy infrastructure investment to support the transition to generative AI pose challenges for the telecommunications sector. 



Source: PWC 2024 global TMT Outlook


Despite global data consumption projected to triple by 2027, telecom companies have limited pricing power on commoditized services, and revenues are projected to grow a mere 4% CAGR. Moreover, telecom providers are expected to spend $342.1 billion on network infrastructure by 2027, which will only exacerbate profitability. However, the sector will continue to consolidate, albeit more so in regions such as Europe, where market concentration is lower than in the U.S. and China. In all, while telecom is crawling towards slow growth, the technology and software sectors—especially cybersecurity—are fueling strategic mergers and acquisitions, transforming the competitive landscape in the industry.



Source : Statista


Finally, it is concluded that the TMT sector is still a landscape of both opportunities and challenges. However, advancements in generative AI offer potential long-term reward in an industry still plagued by slow revenue growth and heavy infrastructure investment demands in the telecommunications industry. However, the information technology and software sectors, especially in cybersecurity, are booming due to the rapidly growing demand for data protection and AI solutions. The industry is concentrating on consolidation and innovation evidenced by strategic mergers and acquisitions, such as CoStar Group’s acquisition of Matterport and Cisco’s purchase of Splunk. Looking ahead we can expect continued consolidation in software as tech giants seek to broaden their recurring revenue streams while raising their capabilities, with cybersecurity set to be a key focus. These trends are changing the competitive landscape and helping established players and new entrants create the next wave of growth in this sector.


Matterport Valuation – Discounted Cash Flow


Our DCF analysis results in an implied share price of $0.36, compared to the current market price of ca. $4.76 as of Thursday, November 14. The pre-announcement price was however lower, at around $1.74 per share. Pro-forma revenues are expected to grow with a CAGR of 11.3% within 2023 and 2028, with imrpoved cost-management leading to a positive EBITDA margin in 2025. Financial statements were projected until 2033, as we do not expect Matterport to achieve a stable growth state earlier.


The discount rate used is a WACC of 10.44%, which is the same as the firm’s cost of equity. Indeed, due to the startup-like structure and business model of Matterport, the debt within the capital structure plays an insignificant role. A terminal growth rate of 2.0% was chosen, to reflect the stable growth rate of the US economy.


Matterport Valuation – Market Multiples


Matterport’s negative EBITDA and Net Income make it impossible to use P/E and EV/EBITDA multiples for comparison; we decided to show them for information purposes.


The industry is characterized by very high multiples, which is likely due to priced-in growth from investors. The sector’s disruptive technology is expected to generate economic benefits in the future as a high growth industry. Matterport shows below-average multiples, due to the difficulty of the firm in generating cash from its operations, and no dependency on debt.


Conclusion


Historically, the TMT sector has been a dynamic landscape characterized by challenges and opportunities, and as such is home to numerous M&A deals each year. Generative AI and cybersecurity are attracting industrial acquirers which want to expand inorganically, leverage these technologies, or gain market share and bet on this new complex but promising market, as seen with CoStar's acquisition of Matterport and Cisco's acquisition of Splunk. The strong demand for data protection and AI-driven solutions in software is reshaping industry competition and paving the way for future consolidation. These acquisition exemplifies the willingness of a sector to integrate innovative solutions and bolster revenue streams, offering new unique products and services while competition is quickly rising.


Sources



The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.


Copyright © December 2024 | The Junior IB.

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