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Adam Belsher CEO of Magnet Forensics, which specializes in data recovery software in Waterloo, Ont., Sept. 26, 2013.Fred Lum/The Globe and Mail

One of the largest investors in Magnet Forensics Inc. MAGT-T has come out against the Waterloo, Ont., tech darling’s impending $1.8-billion sale to U.S. private equity giant Thoma Bravo.

Silicon Valley hedge fund Nellore Capital, which owns 1.2 million subordinate voting shares, or 9.99 per cent of the class, said in a statement Thursday, “we love” Magnet’s management team, business, long-term prospects, and even strategy to merge Magnet with Thoma Bravo-owned Grayshift LLC, which would follow the takeover. “What we hate is that public shareholders are being forced to part with their shares entirely and for far too low a price.”

A Magnet spokesman declined to comment.

Under terms of the deal, announced last month, Magnet CEO Adam Belsher and co-founder Jad Saliba, the chief technology officer, plus chairman Jim Balsillie – the former co-CEO of BlackBerry – would roll over 55 per cent of their 28.9 million multiple voting shares into the deal and receive $39 apiece for their remaining shares. Subordinate voting shareholders would get $44.25 a share. The two-price deal was struck at the behest of a special board committee that pushed to benefit subordinate stockowners, given the supervoting trio will continue to benefit.

Magnet’s board and controlling shareholders unanimously support the deal, which is subject to a $50-million break fee payable by the Canadian company to the buyer and $70-million in reverse if either terminates. A majority of each share class must approve the deal in a vote to be held next month.

Nellore said in a statement it would prefer to see Thoma buy into Toronto Stock Exchange-listed 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.”

Nellore would support a takeover if the board changed deal terms requiring Thoma to “pay a fair price that can compete with the probably standalone long-term returns” Magnet would bring, laying out arguments it is worth up to $84.80 a share. Otherwise, Nellore will vote against the deal, the statement said.

Nellore, founded by Sakya Duvvuru, a former partner with Chamath Palihapitiya’s Social Capital LP, has US$500-million in assets including stakes in tech companies Microsoft Inc., Alphabet Inc. and Canada’s Shopify Inc. and Copperleaf Technologies Inc. Mr. Duvvuru said in an interview Magnet “had all the characteristics” including culture, product, innovation and finances to “eventually become a really big long-term winner.”

Magnet was one of 20 Canadian technology companies to go public on the TSX during an unprecedented rush of new issues from mid-2020 to late 2021. It is fast growing, stocked with ex-BlackBerry executives and profitable. Its stock has outperformed others that went public in that stretch, although it is well off its August, 2021, high.

Mr. Duvvuru noted investors will not have the benefit of Magnet’s 2023 forecast or fourth-quarter earnings report before casting votes. “We would have loved to have gone back to Jan. 19 and continued on as happy long-term shareholders,” he said, adding he believed the stock will be worth $100 in three years. “Nobody will pay that today. All we have in our power to do is to block the current deal.”

Nellore’s position presumes Magnet continues its current trajectory as a leading provider of search tools for computers and digital workflows used by law enforcement agencies and corporations to investigate cybercrimes. But Magnet had also tried to buy Grayshift to address a shortcoming in its offering, as the Atlanta company’s strength is extracting data from mobile devices. Many clients use both and the two complementary vendors partnered on sales efforts.

After Thoma outbid Magnet last year to buy Grayshift, it was likely evident to the Canadian company its intended target could become a rival by developing or buying its own competing tools, resulting in a costly battle, one industry observer said. Instead, the winning and losing bidders were soon in talks to create a category killer after Thoma’s June takeover of Grayshift. The Globe and Mail is not identifying the source as they are not authorized to discuss the matter.

The combined company is expected to go public again once favourable market conditions return.

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