Is $7.2B a lot of money for Squarespace?

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Via Squarespace

What should we think about Squarespace’s exit to Permira?

The dance between Permira, a giant bucket of money, and Squarespace, a company that sells website-building tools, has concluded. Squarespace is now owned by Permira for an “aggregated transaction value of approximately $7.2 billion,” according to the company.

TechCrunch has a great ticktock on the deal, explaining how Squarespace managed to juice its exit price from $44 per share to $46.50. That’s not pocket change when we’re discussing a deal valued in the billions.

To understand the deal we need a few more facts. First, what was the premium that Permira paid, and how do the companies calculate the figure?

The revised offer price represents an increase of 5.7% over the previously agreed offer price of $44.00 per share, a premium of 36.4% over Squarespace's 90-day volume weighted average trading price of $34.09 and a premium of 21.8% over Squarespace's 52-week high share price of $38.19 as of May 10, 2024. The transaction also represents over 20x enterprise value / 2025 unlevered free cash flow, representing a significant premium to peers.

Selling for more than a one-third premium over your 90-day average price and more than a one-fifth premium to your 52-week high is not bad.

What did Squarespace have that Permira was willing to pay so much for? The following, per Squarespace’s Q2 2024 earnings:

• Above-median revenue growth: 20%, to $296.8 million from $247.5 million in the year-ago quarter.

• No-bullshit profits: Squarespace turned in $6.1 million worth of net income in the quarter, up from $3.7 million in the year-ago period.

• Lots of cash and cash generation: Squarespace reported cash and equivalents of $270.4 million, and “unlevered free cash flow” of $65.4 million, up 19% compared to its Q2 2023 result.

• Strong SaaS-o-Nomics: The number of “total unique subscriptions” at Squarespace grew 21% year-over-year to 5.2 million.

Looking at all that, I, too, would love to own Squarespace. There’s so much you could do with it! Not only could you up product spend with spare cashflow, you could afford to do that and boost S&M outlays and add a few more points to its growth rate.

Or you could trade some growth (S&M spend, Squarspace’s largest operating cost category), and use the resulting expanded cash flow to buy back shares. They were, recall, trading for a lot less than someone was willing to pay for them.

All told I am skeptical of Squarespace selling itself. Things were going well!

So, did Permira have to pay up more than we would think fair, putting aside the Δ between what the capital vehicle and the public were willing to value the company?

Notably, Squarespace grew faster (20%) in Q2 2024 than it did in the first quarter, expanding from 19% year-over-year topline expansion to 20%. Acceleration, in this economy?

Every point of growth matters. Per Bessemer’s cloud index, the median revenue growth rate amongst public cloud companies have fallen to 15%, with the top quartile clocking in at 22%. Squarespace’s 22% free cash flow margin in the second quarter was also above-median (18%), though somewhat distant from upper-quartile status (27%).

Squarespace therefore deserves a price that is between the median revenue multiple we’re seeing amongst public cloud companies, and what the upper-quartile earns. Those are 6.46x and 10.2x. Let’s arithmetic!

• Squarespace Q2 2024 annualized run rate: $1.19 billion.

• Squarespace valuation at run-rate*median cloud revenue multiple: $7.69 billion.

• Squarespace valuation at run-rate*top quartile cloud revenue multiple: $12.1 billion.

Those are larger numbers than Permira paid. So Squarespace sold cheap? There’s nuance. Squarespace sold off a $400 million business to AmEx this summer. And, we aren’t taking into account the company’s cash position viz its enterprise valuation.

But even with those niggles, Squarespace’s exit feels light. Certainly, it’s a fat premium over what the market said Squarespace was worth, but we’re measuring from the period of time when interest rates were at local maximums. Money is getting cheaper. Valuation multiples could expand a little.

My argument that more time would have yielded a better price is similar to what startups and unicorns say when they decline to go public — we’re waiting for improved market conditions. But Squarespace was already public, and it had crossed every chasm it needed to be survive forever. It was default-alive by a huge margin. And with its growing cash generation and profitability, you wonder what form it will come out of Permira’s ownership shaped to match.

If it gets billions of debt wrapped around its neck, I’ll be cross.