Look Back on 2024 Private Equity SaaS deals

Operators bemoan the loss of SaaS comps!

In 2024, private equity firms have been actively investing in the Software as a Service (SaaS) sector, executing several significant deals:

Smartsheet (NYSE: SMAR): In October 2024, the work-management software company Smartsheet agreed to an $8.4 billion buyout by Blackstone and Vista Equity Partners. The buyout price represents an 8.1x EV to TTM Revenue multiple and a 41% premium to the volume-weighted average closing price (VWAP) of the company’s stock for 90 trading days ending on July 17, the last full day before media reports of a possible deal. The acquisition price is a 16% premium to the highest closing price twelve months before the announcement. The deal will result in Smartsheet going private about six years after it held its initial public offering at $15 a share on April 27, 2018.

Smartsheet managed an aggressive pivot toward profitability but at the cost of revenue growth. Valuation recovered from the low in 2022 but could not reach the 2021 high-water mark. The acquisition represented a significant win for shareholders and is a well-timed deal for Blackstone and Vista Equity Partners.

Zuora (NYSE: ZUO): On October 17, 2024, Zuora announced an agreement to be acquired by Silver Lake technology-focused private equity firm in partnership with GIC, a Singaporean sovereign wealth fund. The deal values Zuora at $1.7 billion, with shareholders set to receive $10 per share in cash, representing a 9% premium over the volume-weighted average closing price (VWAP) of the company’s stock for the prior 90 trading days. The transaction is expected to close in the first quarter of 2025, after which Zuora will become a privately held company.

Like SmartSheet, Zuora shifted toward profitability in 2021, reaching its highest valuation that year. Although revenue growth recovered in 2022, it fell in 2023 and again in 2024, and profitability reached a new low in the past seven years. Although the premium may seem small, the stock price hit a low of $7.92 shortly after the earnings announcement of the fiscal year ending on January 31, 2024, representing a $1.1 billion market capitalization. The deal value represents a 54% premium over this valuation low point.

Squarespace (NYSE: SQSP): In May 2024, website-building platform Squarespace announced its privatization through a $6.99 billion all-cash transaction with private equity firm Permira . Shareholders received $44.00 per share, representing a 15% premium over its closing price before the announcement. Days later, after shareholder pushback, Permia raised the price to $46 or $7.2 billion. The deal closed on October 17th, 2024.

Squarespace is unique among these four deals because it has been profitable for the three years and five months since its public listing. However, since its IPO, Squarespace has found it increasingly difficult to grow, as shown by its GTM Efficiency increase from $1.88 in 2020 to $3.78 in 2022, although it recovered somewhat in 2023 to $2.33.

Secureworks (NASDAQ: SCWX) Sophos, a cybersecurity firm backed by private equity firm Thoma Bravo, announced on October 21, 2024, its intention to acquire Secureworks, a cybersecurity company majority-owned by Dell Technologies, in an all-cash transaction valued at $859 million. Under the terms of the agreement, Secureworks shareholders, including Dell, will receive $8.50 per share in cash, representing a 28% premium over the 90-day volume-weighted average price.

SecureWorks went public on April 22, 2016, raising $112 million with shares priced at $14.00. This resulted in an initial market capitalization of around $1.12 billion. Dell Technologies acquired SecureWorks in 2011 for $612 million. Following the public offering, Dell retained a majority stake in the company.

Sophos is a British company founded in 1985. It went public on the FTSE in 2015 and was acquired by Thoma Bravo in 2020 for $3.9 billion. Sophos serves the small and medium business market mainly through channel partners. Secureworks serves the enterprise market with an Average Annual Contract Value (ACV) of $150,000. The combination of the two companies offers strong upsell and cross-sell opportunities.

SecureWorks lost $130 million over the past two fiscal years and another $75 million for the nine months through November 1, 2024, leaving it with only $53 million in cash. In August, news broke that Dell Technologies was exploring a sale, although this discussion must have been active internally because of the cash flow situation.

Methodology

I created these charts using ChatGPT, which I believe best demonstrates the trend in the tradeoff between growth and profitability, the resulting relationship to market capitalization, and the Rule of Forty (RO40).

I used this prompt for the visualization:

I am going to give you an Excel worksheet with four lines of data for several years. The line items are Annual Growth Rate, Free Cash Flow margin, Rule of Forty, and Market Capitalization. I want you to plot the Free Cash Flow margin on the x-axis and the annual growth rate on the y-axis. I want the Rule of Forty data points to correspond with the market capitalization size. 

I use Free Cash Flow to measure profitability. Using other metrics, such as EBITDA, does not capture working capital and investing activities and is inappropriate.

About the Author

Eric Mersch has over 25 years of executive finance experience, including twice serving in public company Chief Financial Officer roles. Eric is an equity partner at FLG Partners, where he works as an Interim CFO to venture and private equity portfolio companies, specializing in Strategy and Operations, Strategic Planning, Equity and Debt Fundraising, Go-To-Market Strategies, Financial Planning and Analysis, Business Intelligence, and Accounting and Control. He’s worked with SaaS companies in the Big Data, Cyber-Security, Internet Infrastructure, Open-SourceSoftware, Advertising/Marketing Technology, Mobile Application, Real-Estate Technology, and Payment Processing spaces.

He is the Author of Hacking SaaS - An Insider's Guide to Managing Software Business Success, an Amazon best-seller with sales in over twenty countries.