425: Udemy to Merge with Coursera in All-Stock Deal

Udemy, Inc. and Coursera, Inc. have entered into a definitive merger agreement, with Udemy becoming a wholly-owned subsidiary of Coursera through an all-stock transaction at an exchange ratio of 0.800 shares of Coursera Common Stock for each Udemy share.

Summary

• Udemy, Inc. will merge with Coursera, Inc., with Udemy surviving as a wholly-owned subsidiary of Coursera.
• Each share of Udemy Common Stock will be converted into the right to receive 0.800 shares of Coursera Common Stock.
• No fractional shares of Coursera Common Stock will be issued; holders will receive cash in lieu of fractional shares.
• The boards of directors of both Udemy and Coursera unanimously approved the merger agreement and the transactions contemplated thereby.
• Udemy's outstanding equity awards (restricted stock units, performance stock units, stock options, and stock appreciation rights) will be assumed by Coursera and converted into corresponding Coursera equity awards, maintaining original vesting schedules and terms.
• Post-merger, Coursera's board of directors will consist of nine directors: six current Coursera directors (including the Chairman and CEO) and three current Udemy directors.
• The merger is subject to customary closing conditions, including stockholder approvals from both companies, regulatory approvals (such as under the Hart-Scott-Rodino Antitrust Improvements Act), and the effectiveness of the Form S-4 registration statement.
• The transaction is intended to qualify as a reorganization within the meaning of Section 368(a) of the U.S. Internal Revenue Code for federal income tax purposes.
• Significant stockholders of Coursera (representing approximately 12% of outstanding shares) and Udemy (representing approximately 26% of outstanding shares) have entered into voting agreements to support the merger.
• Udemy's Employee Stock Purchase Plan (ESPP) will be terminated immediately prior to the Effective Time, with restrictions on new participants and increased contributions prior to termination.

Sentiment

Score: 7

Explanation: The merger is a significant strategic move for both companies, with unanimous board approval and strong shareholder support. While integration risks and regulatory hurdles exist, the overall sentiment is positive due to potential synergies and market expansion in the growing online education sector. The all-stock nature suggests a focus on long-term value creation.

Positives

• The merger agreement received unanimous approval from the boards of directors of both Udemy and Coursera, indicating strong internal support for the strategic combination.
• Significant stockholders of both Coursera (approximately 12%) and Udemy (approximately 26%) have committed to vote in favor of the transaction through voting agreements, increasing the certainty of shareholder approval.
• The transaction is structured as an all-stock merger, which can be tax-efficient for U.S. federal income tax purposes, as it is intended to qualify as a reorganization under Section 368(a) of the Code.
• Equity awards for Udemy employees will be assumed and converted into Coursera equity awards, preserving employee incentives and facilitating talent retention.
• The combined company will maintain Coursera's public benefit purpose, focusing on global access to flexible, affordable, high-quality education.

Negatives

• The merger involves potential integration challenges between two distinct companies, which could impact operational efficiency and synergy realization.
• There is a risk of key personnel attrition from both companies due to the uncertainty and changes associated with the merger.
• The agreement includes termination fees of $40.5 million and expense reimbursements of $8.0 million payable under certain circumstances if the merger is not consummated, creating financial exposure.
• The transaction requires various regulatory approvals, including antitrust clearances, which could lead to delays or necessitate divestitures or other remedies.
• The 'Cautionary Note' highlights uncertainty regarding the impact of the merger on the results of operations and financial condition of the combined companies or the price of Coursera or Udemy stock.

Risks

• General economic, market, or business conditions, including competition and risks related to online learning solutions and AI innovations.
• The effect of the announcement of the business combination on the ability to retain and hire key personnel and maintain relationships with customers, vendors, and other business partners.
• Disruptions to current plans and operations and potential difficulties in attracting and retaining qualified personnel as a result of the business combination.
• The outcome of any legal proceedings related to the business combination.
• The ability of the parties to consummate the proposed transaction on a timely basis or at all.
• The satisfaction of the conditions precedent to consummation, including securing regulatory approvals on the terms expected, at all, or in a timely manner.
• The ability to successfully integrate Coursera's and Udemy's operations and business on a timely basis or otherwise in accordance with applicable standards.
• The ability to implement plans, forecasts, and other expectations with respect to the combined company's business and realize expected synergies and other benefits.
• The amount of the costs, fees, expenses, and charges related to the proposed combination.
• Fluctuations in the prices of Coursera or Udemy stock.
• Potential business disruptions following the business combination.
• Any change in Coursera's certification as a B Corp.

Future Outlook

The combined company intends to continue providing charitable contributions and community support at levels substantially comparable to prior levels. The merger is expected to realize synergies and other benefits, though the timing and extent are uncertain. Coursera's public benefit purpose to provide global access to flexible, affordable, high-quality education will remain.

Management Comments

• Udemy's Board of Directors unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to, and in the best interests of, Udemy and its stockholders.
• Coursera's Board of Directors unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable to, and in the best interests of, Coursera, taking into account the pecuniary interests of holders of Coursera Common Stock, the best interests of those materially affected by Coursera's conduct, including holders of Coursera Common Stock, employees of Coursera, community, educators and learners, and Coursera's specific public benefit purpose.
• Qatalyst Partners LP delivered an opinion to Coursera's Board of Directors that the Exchange Ratio is fair, from a financial point of view, to Coursera.
• Morgan Stanley & Co. LLC delivered an opinion to Udemy's Board of Directors that the Exchange Ratio is fair from a financial point of view to the holders of shares of Udemy Common Stock (other than Cancelled Shares).

Industry Context

This merger combines two significant players in the online education and e-learning industry, suggesting a trend towards consolidation in the sector. The strategic rationale likely includes expanding course offerings, broadening user bases, and increasing market share. The mention of AI innovations as a risk factor indicates the industry's evolving technological landscape. Coursera's status as a public benefit corporation highlights a focus on social impact alongside financial goals, which could influence the combined entity's strategy and market positioning.

Comparison to Industry Standards

• The all-stock nature of the transaction is a common approach in strategic mergers, particularly when companies aim for long-term integration and synergy realization rather than immediate cash payouts.
• The inclusion of voting agreements from significant institutional investors (New Enterprise Associates, Andrew Ng for Coursera; Insight Venture Partners for Udemy) is a standard practice to ensure strong shareholder support for major corporate transactions.
• The structure of equity award conversion, where awards are assumed by the acquirer and original vesting schedules are maintained, is a typical method to retain talent and align employee incentives post-merger.
• The composition of the post-merger board, with the acquiring company (Coursera) holding a majority of seats while incorporating representation from the acquired entity (Udemy), is a common governance strategy for integration.

Management Changes

Corporate Governance

Legal Proceedings

• Neither Coursera nor Udemy, nor any of their respective subsidiaries, are currently parties to any outstanding or pending legal, administrative, arbitral, or other proceedings, demands, claims, actions, or governmental or regulatory investigations that would reasonably be expected to be material to them, taken as a whole.
• There are no injunctions, orders, judgments, decrees, or regulatory restrictions imposed upon either company or their assets that would reasonably be expected to be material.
• The 'Cautionary Note' section identifies 'the outcome of any legal proceedings related to the business combination' as a potential risk, but no specific ongoing or threatened litigation regarding the merger itself is detailed.

Related Party Transactions

• Certain stockholders of Coursera affiliated with New Enterprise Associates and Andrew Ng (Coursera Significant Stockholders) have entered into a voting agreement to vote their shares (approximately 12% of total outstanding) in favor of the stock issuance and charter amendment.
• Certain stockholders of Udemy affiliated with Insight Venture Partners (Udemy Significant Stockholders) have entered into a voting agreement to vote their shares (approximately 26% of total outstanding) in favor of the adoption of the Merger Agreement.
• The filing states that, as of the agreement date, there are no other material related party transactions of the type required to be reported under Item 404 of Regulation S-K that have not been disclosed in prior SEC filings for either Coursera or Udemy.

Stakeholder Impact

• Shareholders of Udemy will receive 0.800 shares of Coursera Common Stock for each Udemy share, becoming shareholders of the combined entity and participating in its future growth.
• Shareholders of Coursera will experience dilution due to the issuance of new shares but are expected to benefit from the strategic combination, expanded market reach, and potential synergies.
• Employees of both companies are expected to receive comparable annual base salaries/wage rates and severance benefits for at least one year post-merger, and their equity awards will be converted to Coursera awards, maintaining incentives.
• Customers and learners are anticipated to benefit from a potentially broader range of course offerings and an enhanced learning platform from the combined entity.
• Educators and content partners, particularly Udemy's top instructors with exclusivity arrangements, will continue their relationships with the combined company, potentially reaching a larger audience.
• Suppliers and vendors are expected to maintain their relationships with the combined entity, as both companies have committed to conducting business in the ordinary course.
• The community will continue to receive charitable contributions and community support from the combined company at levels comparable to prior individual company contributions.

Next Steps

• Preparation and filing of the Form S-4 registration statement, which will include the Joint Proxy Statement, with the SEC.
• Obtain effectiveness of the Form S-4 from the SEC.
• Mailing of the Joint Proxy Statement to stockholders of both Udemy and Coursera.
• Holding separate stockholder meetings for Udemy to adopt the Merger Agreement and for Coursera to approve the stock issuance and charter amendment.
• Obtain required regulatory approvals, including under the HSR Act and other Competition Laws.
• Secure approval for the listing of the new Coursera Common Stock on the NYSE.
• Termination of Udemy's Employee Stock Purchase Plan (ESPP) prior to the Effective Time.
• Termination of the Udemy Credit Agreement and release of associated Liens and guarantees.
• Coursera will file a resale shelf registration statement covering the resale of the Merger Consideration received by Udemy Stockholders, continuing for a period of two years post-Effective Time.

Key Dates

Recommendation

The merger between Udemy and Coursera is a significant strategic development that could create a stronger combined entity in the online education market. While the unanimous board approvals and strong shareholder support are positive indicators, the all-stock nature of the deal means Udemy shareholders will become Coursera shareholders, and Coursera shareholders will experience dilution. The success of the merger hinges on effective integration and the realization of anticipated synergies, which always carry execution risks. Regulatory approvals and potential delays also introduce uncertainty. Given these factors, a 'hold' recommendation is appropriate for existing shareholders to observe the integration process and the combined entity's performance. New investors should carefully evaluate the combined company's long-term prospects and integration risks before making an investment decision.

Keywords

Udemy, Coursera, Merger, Acquisition, Online Education, E-learning, Stock-for-Stock, SEC Filing, Corporate Governance, Equity Awards, Regulatory Approval, Antitrust, Stockholder Vote, Public Benefit Corporation