Silicon Valley-based Sumeru Equity Partners will need to at least double its offer to take Q4 Inc. QFOR-T private if it hopes to win support from one of the Toronto tech company’s largest shareholders.
New York-based Finsight Group Inc., which owns roughly 5.6 per cent of Q4, called on fellow shareholders of the investor relations software provider on Friday to reject Sumeru’s roughly $257-million takeover bid. Finsight originally opposed the offer last week in an open letter to Q4’s board of directors, saying it “should remain a standalone public company.”
Since then, Q4 has published a management information circular detailing why the company supports the transaction, and proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis both recommended shareholders approve the deal at a special meeting set for Jan. 24.
However, Finsight said Friday the offer remains “grossly inadequate.”
Major investor in technology company Q4 opposes plan to go private
Q4 trades on the Toronto Stock Exchange, and the $6.05 a share bid represents a 36-per-cent premium to the value of the company’s shares before the offer was announced, though that is also only about half of the $12 a share Q4 was worth when it went public in October, 2021. Yet Finsight is primarily concerned with the methodology behind the offer price, which values Q4 at roughly three times its annual recurring revenue of US$56-million.
Similar companies, Finsight said, are valued at between 6.1 and 10.6 times their annual recurring revenue. For example, Finsight points to the November, 2023, acquisition of Germany-based EQS Group AG by software investment giant Thoma Bravo in a US$434-million deal that valued EQS at more than seven times its annual recurring revenue.
“Why would Q4, who is comparable in size, with no debt, operating near break-even, and with dominant market share command anything less,” Finsight said.
ISS, in its report, said the valuation Sumeru used to arrive at its offer for Q4 “appears credible.” The ISS report also cited Finsight’s view that the company’s business plan to remain independent represents “a compelling alternative” to a sale, but added “the standalone case is not an inherently safe path.”
Investors holding 34 per cent of Q4 stock, including chief executive officer Darrell Heaps, have already agreed to roll over their shares as part of the deal, meaning they do not have to relinquish their equity in the company. However, at least two-thirds of Q4 shareholders must approve the Sumeru offer at the special meeting, including a majority of investors who aren’t rolling over their shares.
Finsight is among those non-rolling investors, with 2.2 million Q4 shares it says represent roughly 8.5 per cent of those eligible to be cast at that meeting. Finsight said it is “in-the-money” on Q4, meaning it would “stand to benefit financially” from the deal and could “simply accept this offer and move on,” but nonetheless remains “adamant” that the offer “is not in the short, medium or long-term interests of non-rolling shareholders.”
Q4′s management information circular “gives little mention” of any plan to remain independent, Finsight said, but “Q4 has a bright standalone future.” (Finsight underlines the word “standalone” for emphasis).
Rolling shareholders “are attempting to capitalize on shareholder fatigue, frustration and apathy to garner approval for this ill-conceived transaction,” Finsight CEO Leo Efstathiou said in a statement. “There is no need for this transaction to happen right now, and at these terms, on the eve of Q4 reaching profitability.”
In response to e-mailed questions, Mr. Efstathiou said an initial offer of six to 10 times annual recurring revenue – implying a valuation between $500-million and $800-million – “would have given us more confidence that Sumeru and the rolling shareholders weren’t lowballing the non-rolling shareholders.”
“Q4 is one of Canada’s gems and it isn’t a going-concern risk,” Mr. Efstathiou said. “There is no imperative to sell it today.”