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I hear that PE destroys products and culture to make money at all costs, but i don’t get how that can net them back the >$6 billion they paid for a company with

I hear that PE destroys products and culture to make money at all costs, but i don’t get how that can net them back the >$6 billion they paid for a company with <$300 million yearly revenue and negative profit.

deleted 2y ago
[deleted]
djbusby 2y ago
They gonna increase prices
- njovin 2y ago
  ...likely while worsening the customer experience (less hands-on support, less engineering, less reliability). For a company like SquareSpace unless they're massively overspending and they are rife with inefficiencies I don't see how this works out for the PE firm.
- xyst 2y ago
  not just increase prices but likely saddle the company with mountains of debt (which happens to be owned directly or indirectly by the PE firm). red lobster acquired by Golden Gate PE in cash deal in 2020 [1] red lobster subsequently squeezed for any value at all costs (cuts in labor, switching suppliers) [2] [1] https://www.restaurantbusinessonline.com/financing/asian-investors-buy-control-red-lobster https://www.restaurantbusinessonline.com/financing/asian-inv... [2] https://www.cnn.com/2024/05/03/food/red-lobster-seafood-restaurant-bankruptcy/index.html https://www.cnn.com/2024/05/03/food/red-lobster-seafood-rest...
  - throwaway5752 2y ago
    https://www.nytimes.com/2023/04/28/opinion/private-equity.html https://www.nytimes.com/2023/04/28/opinion/private-equity.ht...
  - mason55 2y ago
    Yes, that is the core PE playbook. 1. Acquire loan to buy company 2. Take money that was being spent on growth and use it to make the payments on the debt 3. Try to decrease operating costs while maintaining revenue or increase revenue while maintaining operating costs (or some combination) 4. Sell the company for more than you paid based on the improved profit margins The key is finding a company who's still spending on growth but isn't really growing. If the company is actually still growing then you're going to have trouble making your money back if you cut growth activities (because your initial price would be higher due to implied growth in the future). The challenge is in step three. Can you increase revenue or decrease operating costs without sacrificing too much goodwill? If you do too much to scare away suppliers or customers then step 4 is hard and the whole thing blows up.
- rchaud 2y ago
  ..and fire people ...and have more site downtime
pyoung 2y ago
I think they just load up on debt, so they aren't really buying it with their money. But what I don't understand is how they get people to loan them money when they know that they are just going to strip mine the company for all valuable assets and leave a shell of a company for the lenders to fight over.
- JumpCrisscross 2y ago
  > how they get people to loan them money when they know that they are just going to strip mine the company Because on average, target firms of leveraged buyouts become more productive [1]. That lets them pay back shareholders and lenders in most cases. The reason public perception is off is the size effect and availability heuristic. The first shows that big deals do badly [2]. The second means the last widely-reported deal is likely to stand in for private equity in the public consciousness [3]. Add in inflation, which makes each sticker price seem more historic than it is, and the fact that the last deal in a cycle is doubly cursed by being financed and priced at precisely the wrong time and you have a consistent pattern of the most recently-memorable deal being a clusterfuck. [1] https://www.jstor.org/stable/43495362 https://www.jstor.org/stable/43495362 [2] https://www.sciencedirect.com/science/article/abs/pii/S0304405X04000327 https://www.sciencedirect.com/science/article/abs/pii/S03044... [3] https://en.m.wikipedia.org/wiki/Availability_heuristic https://en.m.wikipedia.org/wiki/Availability_heuristic
  - whimsicalism 2y ago
    Public perception is negative because profitability is usually reached by cutting unnecessary jobs and projects in the poorly run firm. People don’t like their jobs being cut
    - JumpCrisscross 2y ago
      > Public perception is negative because profitability is usually reached by cutting unnecessary jobs and projects in the poorly run firm I think private equity-induced lay-offs seem to create more negative PR than corporate ones, but I have no hard numbers. (Private equity in healthcare has also been an unmitigated disaster, which obviously doesn't help its image.)
matwood 2y ago
They have 1800 employees and have been dancing around profitability each quarter. Also, yearly revenue is ~1.2B. PE is thinking with some ok management they can turn this around pretty quickly with some efficiency changes and keeping the ~18% YoY sales growth.
JumpCrisscross 2y ago
Squarespace spent 40% of revenue and nearly 60% of gross profit on marketing and sales last quarter [1]. You could literally generate over $200mm in free cash flow by cutting marketing in half. This is a forced pivot from growth to sustaining a good business. [1] https://d18rn0p25nwr6d.cloudfront.net/CIK-0001496963/d08174f7-541b-45e6-989e-ac8bd043eae5.pdf https://d18rn0p25nwr6d.cloudfront.net/CIK-0001496963/d08174f...
- billyhoffman 2y ago
  It would be interesting to get better SaaS metrics, specifically on customer churn. I can't find that in the linked document. They are growing, but how much of that marketing spend is needed for growth vs just maintaining the customer base? I don't know what the customer makeup of Squarespace is. It could be that by volume their typical customers are business that fail a lot, or have a high amount of churn (think sole proprietorships, businesses with 1 - 10 employees without in house tech experience, or part-time/side businesses like Etsy or Instagram stores). Depending on the makeup, a significant amount of this marketing could be required just to maintain a constant customer base.
  - JumpCrisscross 2y ago
    > could be that by volume their typical customers are business that fail a lot, or have a high amount of churn...significant amount of this marketing could be required just to maintain a constant customer base If this is the case, Permira and its lenders are bailing the public out of a shit business on their own dime.
- dehrmann 2y ago
  Probably not a good time to be a podcaster.
- satvikpendem 2y ago
  I was in the same program as the SquareSpace founder (we went to the same college but about a decade or so apart) and that program's professor talked to the founder quite a bit about their strategy for marketing, and he was lamenting that they spent so much money on Super Bowl ads, lol.
ttcbj 2y ago
It looks like in FY2023, Squarespace reported about $1B in revenue, a loss, but about $230M in cash flow from operating activities.[1] It is growing, which helps a lot. Mainly when I look at this, I think "it doesn't seem like its that easy to make money in PE these days." Maybe in the 80s there were lots of large corporations that were so poorly run that you could buy them with debt, cut costs, and make lots of money (see RJR Nabisco/Barbarians at the Gate, that was a terribly run company). But in regards to this deal, someone raised $6B, had to find a place to put it, and found the pickings were pretty slim. Still, someone apparently thinks they can cover the debt service with the cash flow. https://investors.squarespace.com/news-events-financials/investor-news/news-details/2024/Squarespace-Announces-Fourth-Quarter-and-Full-Year-2023-Financial-Results-and-500-Million-Share-Repurchase-Authorization/default.aspx https://investors.squarespace.com/news-events-financials/inv...
phonon 2y ago
Next step is they buy out Squarespace's competitors. Then they move everyone to the same platform, after cutting expenses by 50%, and doubling prices. I assure you there is a spreadsheet somewhere that runs through all this....once that is done, they do an IPO in 5 years to cash out.
- deleted 2y ago
  [deleted]
tschellenbach 2y ago
those are quarterly revenue numbers. they are at >1B in revenue
solatic 2y ago
> PE destroys products and culture to make money at all costs Not always true. Certainly your impression is based on something real, i.e. people like Carl Icahn and other 1980's corporate raiders. But the fundamental way in which PE can add value is by forcing leadership change and removing the pressure (from public markets) to deliver better numbers every quarter, to instead make deep cultural change and deep investments in the business that will take years to pay off. One of the better examples from recent years was Dell: https://www.crn.com/news/data-center/dell-s-public-journey-from-private-equity-buyout-to-vmware-share-swap https://www.crn.com/news/data-center/dell-s-public-journey-f... .
- randerson 2y ago
  Dell is an outlier because it it was reacquired in part by its founder Michael Dell, who was presumably motivated by pride to not destroy his namesake brand. I'm interested in hearing other PE success stories where the product isn't ruined as a result.
  - solatic 2y ago
    Blackstone's acquisition of Hilton Hotels is another well-known success story, all the more inspiring because the LBO debt was issued in 2007, right before the 2008 recession: https://thestrategystory.com/2021/04/10/blackstone-hilton-lbo/ https://thestrategystory.com/2021/04/10/blackstone-hilton-lb...
tim333 2y ago
Fire half the staff, double the prices to users?

deleted 2y ago

[deleted]

djbusby 2y ago

They gonna increase prices

njovin 2y ago
...likely while worsening the customer experience (less hands-on support, less engineering, less reliability). For a company like SquareSpace unless they're massively overspending and they are rife with inefficiencies I don't see how this works out for the PE firm.
xyst 2y ago
not just increase prices but likely saddle the company with mountains of debt (which happens to be owned directly or indirectly by the PE firm). red lobster acquired by Golden Gate PE in cash deal in 2020 [1] red lobster subsequently squeezed for any value at all costs (cuts in labor, switching suppliers) [2] [1] https://www.restaurantbusinessonline.com/financing/asian-investors-buy-control-red-lobster https://www.restaurantbusinessonline.com/financing/asian-inv... [2] https://www.cnn.com/2024/05/03/food/red-lobster-seafood-restaurant-bankruptcy/index.html https://www.cnn.com/2024/05/03/food/red-lobster-seafood-rest...
- throwaway5752 2y ago
  https://www.nytimes.com/2023/04/28/opinion/private-equity.html https://www.nytimes.com/2023/04/28/opinion/private-equity.ht...
- mason55 2y ago
  Yes, that is the core PE playbook. 1. Acquire loan to buy company 2. Take money that was being spent on growth and use it to make the payments on the debt 3. Try to decrease operating costs while maintaining revenue or increase revenue while maintaining operating costs (or some combination) 4. Sell the company for more than you paid based on the improved profit margins The key is finding a company who's still spending on growth but isn't really growing. If the company is actually still growing then you're going to have trouble making your money back if you cut growth activities (because your initial price would be higher due to implied growth in the future). The challenge is in step three. Can you increase revenue or decrease operating costs without sacrificing too much goodwill? If you do too much to scare away suppliers or customers then step 4 is hard and the whole thing blows up.
rchaud 2y ago
..and fire people ...and have more site downtime

pyoung 2y ago

I think they just load up on debt, so they aren't really buying it with their money. But what I don't understand is how they get people to loan them money when they know that they are just going to strip mine the company for all valuable assets and leave a shell of a company for the lenders to fight over.

JumpCrisscross 2y ago
> how they get people to loan them money when they know that they are just going to strip mine the company Because on average, target firms of leveraged buyouts become more productive [1]. That lets them pay back shareholders and lenders in most cases. The reason public perception is off is the size effect and availability heuristic. The first shows that big deals do badly [2]. The second means the last widely-reported deal is likely to stand in for private equity in the public consciousness [3]. Add in inflation, which makes each sticker price seem more historic than it is, and the fact that the last deal in a cycle is doubly cursed by being financed and priced at precisely the wrong time and you have a consistent pattern of the most recently-memorable deal being a clusterfuck. [1] https://www.jstor.org/stable/43495362 https://www.jstor.org/stable/43495362 [2] https://www.sciencedirect.com/science/article/abs/pii/S0304405X04000327 https://www.sciencedirect.com/science/article/abs/pii/S03044... [3] https://en.m.wikipedia.org/wiki/Availability_heuristic https://en.m.wikipedia.org/wiki/Availability_heuristic
- whimsicalism 2y ago
  Public perception is negative because profitability is usually reached by cutting unnecessary jobs and projects in the poorly run firm. People don’t like their jobs being cut
  - JumpCrisscross 2y ago
    > Public perception is negative because profitability is usually reached by cutting unnecessary jobs and projects in the poorly run firm I think private equity-induced lay-offs seem to create more negative PR than corporate ones, but I have no hard numbers. (Private equity in healthcare has also been an unmitigated disaster, which obviously doesn't help its image.)

matwood 2y ago

They have 1800 employees and have been dancing around profitability each quarter. Also, yearly revenue is ~1.2B. PE is thinking with some ok management they can turn this around pretty quickly with some efficiency changes and keeping the ~18% YoY sales growth.

JumpCrisscross 2y ago

Squarespace spent 40% of revenue and nearly 60% of gross profit on marketing and sales last quarter [1]. You could literally generate over $200mm in free cash flow by cutting marketing in half. This is a forced pivot from growth to sustaining a good business. [1] https://d18rn0p25nwr6d.cloudfront.net/CIK-0001496963/d08174f7-541b-45e6-989e-ac8bd043eae5.pdf https://d18rn0p25nwr6d.cloudfront.net/CIK-0001496963/d08174f...

billyhoffman 2y ago
It would be interesting to get better SaaS metrics, specifically on customer churn. I can't find that in the linked document. They are growing, but how much of that marketing spend is needed for growth vs just maintaining the customer base? I don't know what the customer makeup of Squarespace is. It could be that by volume their typical customers are business that fail a lot, or have a high amount of churn (think sole proprietorships, businesses with 1 - 10 employees without in house tech experience, or part-time/side businesses like Etsy or Instagram stores). Depending on the makeup, a significant amount of this marketing could be required just to maintain a constant customer base.
- JumpCrisscross 2y ago
  > could be that by volume their typical customers are business that fail a lot, or have a high amount of churn...significant amount of this marketing could be required just to maintain a constant customer base If this is the case, Permira and its lenders are bailing the public out of a shit business on their own dime.
dehrmann 2y ago
Probably not a good time to be a podcaster.
satvikpendem 2y ago
I was in the same program as the SquareSpace founder (we went to the same college but about a decade or so apart) and that program's professor talked to the founder quite a bit about their strategy for marketing, and he was lamenting that they spent so much money on Super Bowl ads, lol.

ttcbj 2y ago

It looks like in FY2023, Squarespace reported about $1B in revenue, a loss, but about $230M in cash flow from operating activities.[1] It is growing, which helps a lot. Mainly when I look at this, I think "it doesn't seem like its that easy to make money in PE these days." Maybe in the 80s there were lots of large corporations that were so poorly run that you could buy them with debt, cut costs, and make lots of money (see RJR Nabisco/Barbarians at the Gate, that was a terribly run company). But in regards to this deal, someone raised $6B, had to find a place to put it, and found the pickings were pretty slim. Still, someone apparently thinks they can cover the debt service with the cash flow. https://investors.squarespace.com/news-events-financials/investor-news/news-details/2024/Squarespace-Announces-Fourth-Quarter-and-Full-Year-2023-Financial-Results-and-500-Million-Share-Repurchase-Authorization/default.aspx https://investors.squarespace.com/news-events-financials/inv...

phonon 2y ago

Next step is they buy out Squarespace's competitors. Then they move everyone to the same platform, after cutting expenses by 50%, and doubling prices. I assure you there is a spreadsheet somewhere that runs through all this....once that is done, they do an IPO in 5 years to cash out.

deleted 2y ago
[deleted]

tschellenbach 2y ago

those are quarterly revenue numbers. they are at >1B in revenue

solatic 2y ago

> PE destroys products and culture to make money at all costs Not always true. Certainly your impression is based on something real, i.e. people like Carl Icahn and other 1980's corporate raiders. But the fundamental way in which PE can add value is by forcing leadership change and removing the pressure (from public markets) to deliver better numbers every quarter, to instead make deep cultural change and deep investments in the business that will take years to pay off. One of the better examples from recent years was Dell: https://www.crn.com/news/data-center/dell-s-public-journey-from-private-equity-buyout-to-vmware-share-swap https://www.crn.com/news/data-center/dell-s-public-journey-f... .

randerson 2y ago
Dell is an outlier because it it was reacquired in part by its founder Michael Dell, who was presumably motivated by pride to not destroy his namesake brand. I'm interested in hearing other PE success stories where the product isn't ruined as a result.
- solatic 2y ago
  Blackstone's acquisition of Hilton Hotels is another well-known success story, all the more inspiring because the LBO debt was issued in 2007, right before the 2008 recession: https://thestrategystory.com/2021/04/10/blackstone-hilton-lbo/ https://thestrategystory.com/2021/04/10/blackstone-hilton-lb...

tim333 2y ago

Fire half the staff, double the prices to users?