Shares of Twilio (NYSE:TWLO) fell on Tuesday after the cloud communications company announced a $2 billion transaction to acquire SendGrid (NYSE:SEND), a provider of email application programming interfaces (APIs). Twilio stock was down about 5.4% at 11:35 a.m. EDT, after having been down as much as 12.3% earlier in the day.
Twilio has entered into an agreement to acquire SendGrid in an all-stock transaction valued at roughly $2 billion. SendGrid investors will receive 0.485 shares of Twilio for each share of SendGrid, a ratio that values SendGrid at $36.92 per share based on Monday's closing price.
Twilio's platform allows developers to easily integrate text messaging, voice, and programmable video into their apps. SendGrid offers APIs to send transactional and marketing emails. Combining the two companies clearly makes strategic sense. But the market might be concerned about the price.
SendGrid has generated $128 million of revenue over the past 12 months, and revenue grew by 32% year over year in the second quarter. The $2 billion price tag values the company at more than 15.5 times sales, despite a growth rate that's quick but not world-beating. SendGrid is also not profitable on a GAAP basis, posting a net loss of $5 million over the past 12 months.
The dilution for Twilio investors will be significant. The company will need to issue around 21.6 million new shares to close this deal, based on SendGrid's share count at the end of the second quarter. That compares with Twilio's current diluted share count of about 96.3 million.
Twilio expects the acquisition to close in the first half of 2019. "We believe this is a once-in-a-lifetime opportunity to bring together the two leading developer-focused communications platforms to create the unquestioned platform of choice for all companies looking to transform their customer engagement," said Twilio CEO Jeff Lawson.
There's no question this deal makes sense. But the price Twilio is willing to pay appears to be leaving a bad taste in investors' mouths, erasing some of the stock's massive gains this year.