How Atlassian Stands to Benefit From Slack's IPO

There has been much talk about the upcoming Slack IPO. The company's founders and early investors stand to be validated by the public markets and could reap huge sums of money if they sell their shares.

Few people, however, are talking about how enterprise software company Atlassian (NASDAQ: TEAM) also stands to benefit. Last year, Atlassian inked a partnership with Slack that gave the company a small equity stake and a product alliance. Atlassian's equity stake will probably rise in value, but the company should benefit more from its new business relationship.

Slack partnership

Atlassian makes software that helps business teams communicate and collaborate. The company is booming. Over the past four years, Atlassian's revenue has grown by a factor of eight, and it now has a market capitalization greater than $30 billion.

After watching Slack's real-time collaboration products take off in popularity, in 2017, Atlassian launched Stride to directly compete with Slack. But Stride never took hold and Slack continued to flourish, leading Atlassian to eventually throw in the towel.

Last July, Atlassian announced a deal with Slack in which it sold its Stride business to Slack and discontinued products that were directly competitive. Both companies agreed to improve integration between their products.

Atlassian's quick admission of failure may be disappointing to some, but is actually courageous because Atlassian was honest with itself. The company recognized that it needs to focus on product areas where it can create the most value for customers and investors and let other products fill in what Atlassian cannot.

The partnership with Slack is a master class in product management and capital allocation. Atlassian took on a popular rival head-on but quickly realized it was outmatched. Instead of wasting time and money chasing its more successful competitor, it struck a deal that gave the company a vested interest in Slack's success. Now Atlassian has an ownership stake in a highly valuable company as well as a new channel to cross-sell customers from. Atlassian has turned a huge competitive headache into a win-win situation.

What could Atlassian's Slack stake be worth?

Neither Atlassian nor Slack gave financial details regarding their partnership. However, a recent SEC filing may provide a clue to what Atlassian's Slack equity is worth.

In Atlassian's financial report for the first three months of 2019, it disclosed "non-marketable securities" worth roughly $24 million. This is most likely related to the investment in Slack because the line item doesn't appear until the second half of 2018, lining up with when the investment was announced. Per U.S. accounting rules, minority investments in non-marketable securities should be valued at cost. This means that Atlassian's Slack position could be worth $24 million, or more.

Slack's last private financing round took place in fall 2018 and valued the company at around $7 billion -- this is probably close to the valuation Atlassian got on its Slack investment. Since that funding round, Slack has been valued as high as $17 billion in recent private market transactions. If those transactions are any indicators as to how Slack's IPO will be priced, then Atlassian may have doubled or tripled its investment in less than one year.

Granted, sub-$100 million investments are small potatoes to a company worth $30 billion, and Atlassian isn't expected to sell its Slack shares. However, it is interesting to take note. Also, it wouldn't be surprising to see Atlassian increase its Slack stake through the IPO.

A win-win situation

The real value driver for Atlassian is the strategic partnership with Slack. First and foremost, Atlassian doesn't have to compete with a rival. Second, Atlassian's integration with Slack will improve its existing team collaboration products and could introduce many of Slack's customers to Atlassian.

Slack is already a fairly large software platform in its own right. In IPO documents, it disclosed that more than 600,000 teams use Slack and that the company has over 10 million daily active users. A highly publicized, successful IPO could serve as good advertising for prospective customers and employees and after it goes public Slack can tap into the equity market if it needs additional capital to grow.

Atlassian will benefit from Slack's success both as a business partner and as an investor.

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Luis Sanchez has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Atlassian. The Motley Fool has a disclosure policy.