Adam Belsher, CEO of Magnet Forensics, which specializes in data recovery software, in Waterloo, Sept. 26, 2013.Fred Lum/The Globe and Mail
Magnet Forensics Inc.’s independent directors defended the company’s planned $1.8-billion buyout by private-equity giant Thoma Bravo Friday after one of its largest shareholders came out against the deal.
The two members of the Magnet board’s independent special committee that oversaw the process – Carol Leaman and Jerome Picket – said in a statement that investment bank Morgan Stanley “ran a robust and fair process” that saw the company reach out to eight other potential bidders and drive up the purchase price through negotiations with Thoma Bravo.
The deal is Magnet’s best strategic course, representing “a compelling opportunity compared to the risk” of remaining a standalone company, they said. The company is based in Waterloo, Ont.
Thoma Bravo agreed last month to pay $44.25 a share to holders of subordinate voting shares and $39 apiece to the three holders of multiple voting shares – chief executive officer Adam Belsher, his co-founder and chief technology officer Jad Saliba, and chairman Jim Balsillie, although the trio will roll most of their holdings into the deal. Thoma then plans to merge Magnet with another company it owns, Grayshift LLC.
The committee acknowledged what The Globe and Mail previously reported, that Magnet had tried to buy Grayshift last year. It was outbid by Thoma Bravo.
While Magnet is a leading provider of search tools for computers and digital workflows used by law enforcement agencies and corporations to investigate cybercrimes, Atlanta-based Grayshift specializes in extracting data from mobile devices for similar purposes. Many clients use both and the two vendors frequently partner on sales efforts. The idea of combining to create a “category killer” drove Magnet’s interest in buying Grayshift, and later selling to Thoma.
The independent directors stated that Magnet’s “current capabilities related to mobile extraction are limited, which was considered a key challenge to future growth.” They said that not partnering with a mobile-extraction company would result in “strategic and execution risks of maintaining the status quo,” including greater competition from other digital forensics providers. That would represent “a long-run threat to the company’s continued growth.”
The caution signs for the business paint a different picture than the company’s track record, reflecting concerns that the sector could be redrawn by new competition and deep-pocketed private-equity firms that typically buy and consolidate players in both emerging and mature sectors.
Magnet has been a consistent performer financially since it went public in spring 2021 and is one of the few fast-growing tech companies to be profitable. It has consistently beaten earnings forecasts and its stock has been one of the best performers among the 20 technology companies that went public on the Toronto Stock Exchange from mid-2021 to the end of 2022, before a sector-wide selloff.
On Thursday, Silicon Valley hedge fund Nellore Capital, which owns 1.2 million subordinate voting shares – 9.99 per cent of the class – said Magnet was selling “for far too low a price.”
Nellore said it would prefer Thoma to buy into Magnet via a private placement of 13.2 million shares and contribute Grayshift into the public entity so “all parties, including subordinate voting shareholders, would participate in the future value creation and have exactly the same cash economics at stake.”
The fund said it would support a takeover if the board changed deal terms requiring Thoma to “pay a fair price that can compete with probable standalone long-term returns” that Magnet would bring, laying out arguments it is worth up to $84.80 a share. Otherwise, Nellore said it will oppose the deal, which requires majority support from both classes of investors.
The special committee stated that the deal announced Jan. 20 “offers the most compelling value creation opportunity for all shareholders” and “crystalizes attractive value for Magnet shareholders, while relieving them of the risk of continued ownership” including the effects of competition, consolidation, market conditions and access to capital.
The purchase price was 15 per cent above the previous day’s close, 41 per cent above its 90-day average price, and 160 per cent higher than its $17-a-share initial public offering price. But it was also below the stock’s $65.80 record high reached in August, 2021.
Nellore founder Sakya Duvvuru said in an e-mail that independent directors had relied on consensus estimates by analysts that were “overly conservative” and that they didn’t reach out to enough potential private-equity buyers. While he acknowledged “it is obvious” that Thoma could pay the most given potential synergies with Grayshift, “we aren’t being compensated sufficiently for those synergies.”
The independent directors said Thoma initially bid $34 a share on Oct 6, or 43 per cent higher than the previous close, for all stock. Only one other canvassed suitor did extensive due diligence, and none submitted bids by the Dec. 6 deadline.
Meanwhile, Magnet’s stock was rising. On Dec. 13, it closed at $43.33, the same day Thoma upped its bid to $40. Thoma agreed to increase its offer for subordinate voting shares in part because the multiple voting stockowners agreed to take a lower price for their 28.9-million shares.
The committee also received an opinion from CIBC World Markets, saying that the fair market value of Magnet shares was between $36.50 and $48.75 each.
Editor’s note: This article has been updated to provide clarification to Nellore founder Sakya Duvvuru's comments. Mr. Duvvuru noted “independent directors are relying on consensus estimates which are overly conservative,” not that the position of independent directors is overly conservative, as previously published.