High-flying Sydney artificial intelligence firm Appen has agreed to pay as much as $A426 million for a controversial San Francisco-based company that has yet to turn a profit.
Appen is launching a $300 million capital raising to fund the acquisition of Figure Eight, raising $285 million through a fully underwritten placement of $21.5 a share and $15 million through a non-underwritten share purchase plan.
“This is an acquisition that futureproofs Appen,” chief executive officer Mark Brayan said on Monday.
“To us, this was a no-brainer that accelerates what we do.”
Appen will pay $US175 million ($A249 million) for the company, and an earn-out consideration of up to $US125 million ($A177 million) in March next year.
Founded in 2007 as Crowdflower, Figure Eight services the booming artificial intelligence market.
Clients such as Microsoft, Google, Spotify and Microsoft, eBay and the Home Depot upload images, audio, video and text for Figure Eight’s remote workforce to annotate.
That annotated data is then used by clients to train machine learning algorithms for use in everything from chatbots to autonomous vehicles.
It was reported last month that Figure Eight’s gig workers had unwittingly helped train the Pentagon’s battlefield drones as part of a contract for Google’s Project Maven.
Google ended its involvement in the contract when several employees quit, online news outlet The Intercept reported.
Mr Brayan did not address the issue during Monday’s call with analysts but did say he met with a high-ranking US government employee to see if they would be comfortable with Australian ownership.
Ethical Equities founder Claude Walker said there were serious issues about the company and he would consider selling his Appen shares even though he liked the company.
“It would be good to see Appen develop a policy around this,” he said.
But Mr Walker said it made sense from a macro view as it combines the market leader in human-annotated datasets with the market leader in automated datasets, Appen.
“I think the longer term view for the company is very good, but I think it brings higher risks,” Mr Walker said, adding acquiring an unprofitable company will hurt Appen’s bottom line.
The up-front payment for Figure Eight represents 5.7 times the company’s 2018 revenue of $A41.5 million.
Appen expects to pay another $A86 million to $A114 million in earn-out consideration, which will go to Figure Eight’s 107 employees.
Other software-as-a-service companies have been bought for about six to eight times the last 12 months of revenue, Mr Brayan said.
While Figure Eight lost $A22 million last year, Mr Brayan said it is rapidly growing and has a clear pathway to profitability.
Appen shares are in a trading halt and are expected to resume trading on Tuesday.
They were last trading at $24.37, up 90 per cent this year and an eye-popping 47 times the price of their January 2015 initial public offering.