A Note On Palantir: IPO vs M&A with Booz Allen Hamilton?

Our research team at Kähler Insights has been busy monitoring the torrent of IPO filings from top VC backed unicorns! 

Palantir is in the Spotlight

Since the news of Palantir’s SEC filings broke there have been plenty of articles about the company. One interesting/provocative article that caught our attention was written by PitchBook's Alexander Davis entitled 'Memo to Palantir: Be careful what you wish for':

Filing papers for a proposed new stock listing can be a bit of a double-edged sword for private companies seeking to go public.

That is a risk that Palantir Technologies, the data-mining specialist whose co-founders include CEO Alex Karp and venture capitalist Peter Thiel, seems willing to embrace—with gusto.

Unveiling the all-important S-1 filing, which Palantir did last week, is a milestone marking a private company's coming of age. Companies use these filings to signal to Wall Street they've arrived, presenting a valuable opportunity to tell a story of successes, aspirations and risks, especially to a wider audience of investors and potential new customers.

But some companies—like Google and WeWork—have famously seized that moment to go a bit further, making a singular declaration or statement of purpose to set themselves apart. Remember the credo "don't be evil" that Google pledged in its 2004 IPO? It later would find itself mired in clashes over anticompetitive behavior, digital privacy, sexism and controversial Pentagon contracts. More recently, WeWork, ahead of its doomed IPO last fall, brashly proclaimed its mission to "elevate the world's consciousness." This from a cash-hemorrhaging office-sharing startup now on life support under SoftBank's supervision.

Theatrical S-1s have long featured a bit of storytelling bravura but they sometimes end up looking quite laughable or ironic, especially later on as a company matures—or doesn't mature (see WeWork).

Now it's Palantir's turn, and the company is about to find out whether it made sense in a prospectus for a direct listing to call attention to its superiority complex.

In a letter accompanying the S-1 papers, Karp took pains to paint Palantir as the alter-ego of Silicon Valley. Palantir, he wrote, only does business with "the world's most vital" institutions whose work is critical to society as we know it. In the annals of S-1 chest-beating statements, this one stands apart.

"Our company was founded in Silicon Valley," Karp wrote. "But we seem to share fewer and fewer of the technology sector's values and commitments." That's more of a political broadside than forward-looking guidance of use to investors.

Plenty of major software companies going public in recent years have courted controversy by issuing a separate class of stock that gives founders greater voting power than common shareholders. Palantir's prospectus revealed its plan to grant Class F shares to its co-founders, effectively giving them boardroom control.

To be sure, Palantir used its S-1 to make a forceful argument about the strength of its business model, which covers a diverse government and corporate market it values at well over $100 billion. But that wasn't enough for Karp. He did more than disavow Silicon Valley's mainstream software industry (recently moving Palantir's headquarters to Denver from Palo Alto); he belittled his tech peers.

"The engineering elite of Silicon Valley may know more than most about building software," Karp sniffed. "But they do not know more about how society should be organized or what justice requires."

Many startups go off on lofty, even cringeworthy, tangents in making their case to investors. They usually don't use the moment to settle scores or make enemies. But Palantir did just that in its filing.

Karp made clear Palantir has no qualms about taking sides in today's fractured political climate. Already known for the secretive and sometimes-controversial nature of its security-related work, it had plenty of detractors as a private company.

Becoming a publicly traded company will raise Palantir's profile. And taking shots at its critics and peers is only likely to amplify the scrutiny it faces in the months and years ahead.

Consulting Company vs Software Company

Palantir is an interesting example of a company in the descrete govtech market, with an enterprise consulting operating model married with a big data software licencing model. However, in Silicon Valley, where Palantir was based until very recently, the mantra ‘Software Eats the World’ is very predominant amongst high profile investors and engineering talent. Hence, Palantir has tried to fit into the ecosystem by projecting the image of an enterprise software company rather than an enterprise consulting company, this is despite their current operating model suggesting more of the latter!

A potential problem for Palantir is that by projecting the narrative of them being an enterprise software company, it is likely to be judged as such. Therefore, if the core business performance is not congruent with what is typically expected from an enterprise software company then wise investors may naturally be very skeptic about what they are actually buying into.

Our partial sentiment analysis suggests that until Palantir reconciles its internal vision with its external image, the middle ground position will probably not be enough to satisfy investors in the near term and under these market conditions may not result in a successul IPO.

What are the alternative options?

According to our analysis of the most viable options, an M&A would seem to be the best course of action, as opposed to raising another private round at a reduced valuation. Our Kähler Insights M&A Simulation yields the following best case strategies for Palantir based on the meta-profile that we’ve generated for the company:

  1. Booz Allen Hamilton: 89.7% Match

  2. General Dynamics Corporation: 74.2% Match

  3. Raytheon Company: 60.5% Match

  4. Lockheed Martin: 55.8% Match

On a humble note, we recognize that our predictions may end up being completely wrong (please read our disclaimer at the bottom). We wouldn’t be the first, nor the last, to get predictions wrong. Developing mathematical models for a company like Palantir comes with a lot of challenges, the one obvious being is that since the company is still private a portion of the business related data is not yet fully in the publicly domain. As such, we’ve had to create a number of sophisticated extrapolation methods based on indirect observation of the company - we are learning a lot from our Astronomy friends in the art of indirect observation!

We’ll keep monitoring SEC for more details on Palantir and update asap. That’s it for now thanks for reading!

Disclaimer: Any opinions, newsletters, research, analyses, prices, projections or other information offered by ZAIKU CAPITAL is provided as general market commentary, and does not constitute investment advice. ZAIKU CAPITAL will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.  ZAIKU GROUP LTD.

Disclosure: We have no positions in any of the public companies featured on this post, and have no plans to initiate any positions within the next 7 days.