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U.S. Workplace Software Maker Smartsheet Attracts Buyout Interest
Smartsheet, a prominent U.S. company in the workplace collaboration software industry with a valuation of $6.3 billion, is reportedly entertaining acquisition interest from several private equity firms. According to inside sources, the Bellevue, Washington-based firm has enlisted the services of Qatalyst Partners to assess these overtures. The company has not yet confirmed if it will initiate a sale process or choose to remain independent.
The uptick in interest from buyout firms is attributed to the reactivation of private equity deals in the technology and services sectors—areas previously slowed by high interest rates affecting leveraged buyouts in early 2023. Notably, private equity transactions saw a 41% increase during the first half of the year, primarily due to several take-private deals.
Smartsheet provides a platform that enables organizations to manage, track, and automate workflows, offering more advanced features compared to basic tools like Microsoft Excel. It primarily serves large corporations with intricate operations, including industry giants such as Pfizer, Cisco, and American Airlines. Approximately 85% of the Fortune 500 companies reportedly use Smartsheet's services. In contrast, rivals like Asana and Monday.com focus on smaller enterprises.
The company’s growth strategy involves significant investments, resulting in robust sales but also operational losses. However, these losses are gradually narrowing as Smartsheet enhances its profit margins. In the fiscal year ending January 31, the company reported revenue of $904 million, a notable rise from $714 million the previous year. Concurrently, pre-tax losses diminished from $213 million to $96 million. As of April's end, Smartsheet had $334 million in cash reserves and no debt.
One critical challenge for buyout firms eyeing Smartsheet is the difficulty in securing traditional financing for companies with a high cash burn rate. Consequently, some buyout firms are resorting to "shadow banks"—investment entities operating outside conventional banking regulations. These lenders offer loans based on a company’s sales performance, known as annual recurring revenue loans, rather than cash flow. Despite providing a financing alternative, these loans carry higher risk. For instance, Vista Equity is currently negotiating to relinquish control of educational software platform Pluralsight to its lenders after a similar loan turned problematic post-acquisition.
