Arlington language learning company Rosetta Stone Inc. is being acquired by private equity-backed Cambium Learning Group Inc. for $792 million.
The all-cash deal announced Monday values Rosetta Stone (NYSE: RST) at about $30 per share, about 87% higher than its closing price on July 16, before a Bloomberg report about a potential sale sent its stock higher. It had been trading around $16 per share prior to that. Its share price closed Friday at $29.83.
The deal is expected to be completed in the fourth quarter. The company said in its communications to staff and clients that it's too early to say what this deal means for Rosetta Stone's leadership, as well as its 1,147 employees as of Dec. 31 and 13,000-square-foot headquarteres lease atop an Arlington building, one that expires in April 2023.
Rosetta Stone's stock saw just a modest 1.84% bump in share price to close Monday at $30.38. Trading volume, with 8.8 million shares changing hands Monday, soared to more than 16 times its recent average.
The acquisition is the culmination of a multiyear strategy that saw the once consumer-centric Rosetta Stone shift away from one-time purchases of its many language modules by individuals — think of the company's old yellow boxes for sale on store shelves — to a software-as-a-service provider focused on companies and schools. That strategy, which reduced consumer sales, grew both its foreign language learning services to companies as well as its English language literacy programs to public and private schools.
But that involved some short-term trade-offs. Its revenue dropped for several years, to $173.6 million in 2018, before growing again in 2019 to $182.7 million, according to Securities and Exchange Commission filings. It has also had net losses in each of the last five years. But the share of revenue from literacy and its enterprise language business has grown to nearly two-thirds of its revenue, with subscription and recurring revenue considered substantially more valuable than the one-time purchases.
For the first six months of this year, the company saw a 6.4% year-over-year increase in revenue to $96.4 million, though its net losses tripled to $9.8 million compared with the same period last year.
The massive shift has been spearheaded by CEO — and significant shareholder — John Hass, who took over in 2016 from former CEO Stephen Swad. At that time, Rosetta Stone’s stock was trading around $7 per share, though it had recently closed on deals to acquire new businesses, including Lexia Learning Systems Inc. in 2013, to build up its literacy education business. Hass alluded to that multiyear effort in Monday's deal announcement.
“This transaction represents the next step on a path that, over the past several years, has transformed our language business and built a previously small K-12 software business into a growing leader in education technology,” Hass said.
Dallas-based Cambium is a portfolio company of New York private equity firm Veritas Capital Management LLC. Before it sold at the beginning of last year, Cambium had been generating a little more than $150 million in annual revenue. In the first nine months of 2018, it had reached $122.3 million in revenue and nearly $13 million in profits.
For its end, Veritas has put money into a wide variety of companies and deals in recent years, according to data from venture analytics firm PitchBook. Its investments include Fairfax-based Salient CRGT, Herndon-based Peraton and McLean-based Alion Science & Technology. It has made about 90 investments in total, according to the company's website.
If the deal falls through, Rosetta Stone could pay upward of $15.8 million in termination fees and Cambium up to $55.4 million depending on the circumstances.
Goldman Sachs & Co. LLC acted as financial adviser and Hogan Lovells U.S. LLP as legal adviser to Rosetta Stone. Schulte Roth & Zabel LLP was legal adviser for Cambium.
