Skip to main content

The two leading independent proxy advisory firms have issued conflicting recommendations on the proposed $1.8-billion buyout of Magnet Forensics Inc. by U.S. private equity giant Thoma Bravo LP.

On Monday, Institutional Shareholder Services endorsed the deal, saying “cautionary support for the proposal is warranted” after it heard from the company and the deal’s main opponent, Nellore Capital Management LLC, a Silicon Valley hedge fund that is the largest owner of Magnet subordinate voting shares. It concluded shareholders “should operate under the assumption that the offer presented is the best one available.”

But late Tuesday, Glass Lewis & Co. made the opposite recommendation. “We do not believe there exists adequate cause for investor support at this time,” it said. A third, lesser-known proxy advisory firm, Egan-Jones Proxy Services, also supports the deal. Proxy advisory firms’ opinions often influence shareholder votes -

Each side praised the report that supported its position and vilified the one it didn’t. Sakya Duvvuru, founder of Nellore, which owns 11 per cent of the subordinate voting stock, thanked Glass Lewis in an e-mail for its “careful, independent consideration” of his firm’s arguments “and the strong recommendation to vote against the transaction. It was much more fact based and straight forward than ISS’ shaky recommendation of ‘cautionary approval.’”

After saying Monday it was pleased by ISS’s “well-considered recommendation,” Magnet ripped into Glass Lewis, saying in a press release it made “several fundamental errors and omissions in arriving at its conclusions, displaying a lack of understanding of Magnet’s business, its peers, competition and other risks to its business, without taking into account the risks of non-completion, including the possibility of a significant decline in Magnet’s share price as a result of current market volatility and uncertainty.”

The deal, which goes to a shareholder vote March 23, requires majority support from both classes of investors – multiple and subordinate voting. The three multiple voting shareholders – chief executive officer Adam Belsher, chief technology officer Jad Saliba and chair Jim Balsillie – support the deal.

Under the terms, unveiled in January, Thoma Bravo will pay $44.25 a share to subordinate voting shareholders and $39 a share to multiple voting stockholders of Waterloo, Ont.-based Magnet, which makes cybercrime detection software primarily used to unearth evidence from desktop computers and digital workflows.

The multiple voting trio are rolling over 55 per cent of their stock into a new privatized entity. Thoma Bravo then plans to merge that with portfolio company Grayshift LLC, which makes similar digital tools for mobile devices. The idea is that the merger would create a “category killer” in the space. Magnet had previously tried to buy Grayshift before it was outbid by Thoma. That deal closed in July. Soon after Thoma began to pursue Magnet.

Nellore has complained the offer to subordinate voting shareholders, which amounted to a 15-per-cent premium over its last prior trading price, is too low. It would prefer either a much higher price or that Thoma Bravo roll Grayshift into Magnet in exchange for stock in a still-public company. Nellore has also said that despite getting a lower price for their stock, the multiple voting shareholders will end up owning a block of stock in a company that will become much more valuable over time than what subordinate voting shareholders get. Four other shareholders recently told The Globe they also don’t support the deal. The Globe is not disclosing the identities of the four because they are describing matters that are confidential to their firms.

Magnet has been one of the top performing stocks among the 20 technology companies that went public from mid-2020 through late 2021 on the Toronto Stock Exchange, and one of the few to generate both strong revenue growth and profits.

Magnet has said the deal provided an “excellent” outcome for shareholders and that rollover requirements are common in private equity deals. The independent directors who oversaw the sale, Carol Leaman and Jerome Pickett, have defended the deal, noting they negotiated the price up by 30 per cent from Thoma Bravo’s initial bid in a “robust” process. They have also said absent the deal, Magnet would lack the mobile evidence-extraction capabilities Grayshift would bring, presenting “strategic and execution risks of maintaining the status quo” including greater competition from other digital forensics providers.

The company, whose executive suite is stocked with BlackBerry Ltd. alumni, has consistently beaten analyst estimates and its own internal projections, including last week, when it reported fourth quarter revenue of $31-million – up 45 per cent year over year – and $9.5-million in adjusted operating earnings, more than double the amount in the same period a year ago. The company’s internal financial forecast reveals it expects much stronger revenue growth, cash flow and operating profit performance than analysts do in the coming years.

In its report, Glass Lewis said Nellore “has successfully highlighted a number of persuasive concerns here, including shaky procedural depth and something of an uncertain value proposition.” It stated the independent directors and outside advisers that handled the deal justified the price based on analyst projections rather than the company’s own, rosier internal forecasts. That approach “seems to offer oddly short shrift to the company’s demonstrated performance under sitting management” and “weighs heavily on Magnet’s representation of the current arrangement,” Glass Lewis stated.

The proxy advisory firm said the fact that Magnet has traded above the takeout price for much of the past few weeks “compounds our concern with transactional timing and derived value” as the impact of another strong quarter on the stock “is necessarily obscured” by the pending deal.

Glass Lewis also said the fact only one other potential suitor delved substantially into the business during the sale process means that it “may not have been suitably engineered to generate the greatest possible value for Magnet’s current performance and prospects under extant market conditions.”

It maintained that a deal with Thoma is “predicated on a sound thesis. Nevertheless, we believe an array of more granular considerations, including procedural depth and transparency, transaction timing, valuation factors and a fairly underwhelming quantitative case from Magnet, collectively weigh against investor support here.”

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe