Okta’s Auth0 deal closes: Inside the 8-year, $6.5 billion courtship

Todd McKinnon knew he had to buy Auth0 the moment he laid eyes on the log-in–tech startup in 2013. The chief executive of Okta, whose software helps people sign in to digital accounts, made his first pass that July, just five months after Auth0’s founding.

The initial proposition was a coy one. McKinnon emailed Auth0’s cofounders about the possibility of a “partnership.” “That’s how, in a courteous way, you say we want to buy you,” McKinnon tells Fortune in an exclusive conversation last week, years after the first attempted pickup. “At the time, we were really paranoid about competition,” he confides.

Eugenio Pace, Auth0’s cofounder and chief executive, regarded McKinnon’s proposal as “flattering” and “a validation” of his own ambitions, he says. But having just spent 12 years at Microsoft, Pace wasn’t ready to give up going it alone on his business, at least not yet.

So, he declined.

Auth0 founder Eugenio Pace sent an email to Okta’s leadership declining a takeover offer in 2013.

McKinnon shrugged off the rebuff; Auth0 was so young and untested anyway. But over the next couple of years, as McKinnon watched Auth0 win customers almost exclusively through word of mouth, the idea of a tie-up nagged at him. He wouldn’t be turned down so easily.

Single sign-on, double or nothing

Since its founding in 2009, Okta has specialized in selling employee authentication services to businesses.

Okta’s products were designed to appeal to top corporate execs. The tools enabled the workforces of clients to use a “single sign-on” across cloud services providers, such as Microsoft, Google, ServiceNow, Salesforce, SAP, and others. The company aimed its sales efforts at chief information officers, typical keepers of corporate purse strings, who were facing down an increasingly fragmented digital landscape. (In time, Okta would land more than 10,000 customers, including JetBlue, Salesforce-owned Slack, T-Mobile, and Twilio.)

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Auth0 took a different approach. The company catered exclusively to software developers, and it pitched its services to coders who wanted to create sign-in options for their own applications. Instead of spending money on marketing, Auth0 won over techies who would endorse and evangelize its products. Clients it clinched eventually ranged from AMD to Siemens to Pfizer.

As he watched Auth0’s star rise, McKinnon began to realize that Okta needed to master a similar bottom-up approach if it was ever going to reach its full potential. The company had to expand its scope beyond employee log-ins (a total market opportunity it estimates at $50 billion) to developer-friendly, customer log-ins ($30 billion). The business’s prospects depended on it—especially as Microsoft, a once-sleepy Goliath, woke up and impinged on its turf with its fast-growing Azure cloud computing business and related identity-focused Active Directory products.

Dining at the stake-house

It was time to make a more serious approach. In September 2015, fresh off a funding round that bestowed upon Okta coveted, billion-dollar “unicorn” status, McKinnon and Eric Berg, Okta’s then–head of product, invited Jon Gelsey, who had taken over as Auth0’s CEO a year earlier, and Pace, then Auth0’s chief customer officer, to lunch.

The group met at El Gaucho steak house in Bellevue, Wash., Auth0’s hometown. Over a meal of bone-in rib eye, McKinnon renewed his takeover pitch—and this time, he delivered a hard-edged ultimatum: Join us, or prepare to compete head-to-head. “I was a little more aggressive,” McKinnon recalls.

“I was like, ‘Listen, we’re going to go public, and we’re talking about a significant part of Okta that I would give up to combine these companies,’” McKinnon says. (He would not say how much of a stake in the business he was prepared to offer.)

Pace heard McKinnon out. He was feeling sanguine as he tore into the meat, grilled in the style of his native Argentina. But even beef barbecue was not enough to sell him on Okta’s vision of a joint future.

“I have to confess that I also had a bit of a bias against mergers and acquisitions because in my previous life I’ve seen them being failures—they fall apart,” Pace tells Fortune, citing a string of multibillion-dollar flops—from aQuantive to Nokia—that befell his longtime employer, Microsoft. These are “big deals that, for whatever reason, look great on PowerPoint, but then the potential is not unlocked,” he says.

Once again unpersuaded, Auth0 declined to be bought. McKinnon’s hopes were dashed, if temporarily. “The first time I was like, ‘Oh, it’s really early. It probably doesn’t matter’” the former Salesforce exec says of the 2013 rejection. The second time, “I was more frustrated.”

‘The perfect time to combine’

McKinnon—a CrossFit fanatic—isn’t one to call it quits. Even after buying an Auth0-alternative, Stormpath, in March 2017, a month before taking Okta public, McKinnon continued to dwell on the one that got away.

McKinnon kept in touch with Pace, who reassumed Auth0’s top job that year. Periodically, Okta’s CEO made takeover overtures. Pace “must have been getting sick of me,” McKinnon says. “I kept hounding them, ‘We’ve gotta do this.’”

The persistence paid off. Serious talks rekindled last summer amid the coronavirus pandemic. A stimulus-happy government and a widespread shift to remote work boosted tech stocks across the board. Okta’s share price, despite having stagnated for much of the prior year, more than doubled to $218 between March and July 2020. Suddenly flush with a surging stock value, Okta could make a deal one couldn’t refuse.

Negotiations took six months and culminated in an early March agreement: Okta would buy Auth0 for about $6.5 billion in stock—a sum amounting to nearly a sixth of Okta’s $35 billion market valuation. Still unprofitable, the company’s share price tanked 20% on the news as investors worried about overpayment on a premium price tag. But the stock has since recovered, and, on Monday, after the yearslong pursuit and repeated advances, McKinnon finally got his wish: Okta’s acquisition of Auth0 officially closed.

“We agreed on good terms for the people I represent—the investors, the shareholders, the employees, etc.” says Pace, who is set to run Auth0 as an independent unit within Okta.

“What had become super clear is how distinct and complementary we were, even though we’ve been trying to build this developer stuff,” McKinnon says. Ben Horowitz, an early Okta investor and board member and namesake cofounder of the venture capital firm Andreessen Horowitz, agrees, saying the combo will “bring together the best” of both worlds: Okta’s core identity software and Auth0’s developer-centric offerings.

While Pace has overcome his earlier merger misgivings, McKinnon stresses that he will be working tirelessly to avoid the sorts of pitfalls that wreck so many Big Business buyouts. Sounding a touch like the romantic whose love is finally requited, he says, “Once we figured out the valuation, which took some work, I’ve been on a kind of sky high ever since.”