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Jad Saliba and Adam Belsher at the Magnet Forensics office in Waterloo, Ont., on Dec 21, 2011.Fred Lum/The Globe and Mail

A campaign by one of Magnet Forensics Inc.’s MAGT-T largest shareholders to stop a $1.8-billion takeover of the Waterloo, Ont., tech company appears to be gaining momentum.

Four North American investment managers told The Globe and Mail in the past week they are not happy with the proposed deal, which would see U.S. private equity giant Thoma Bravo LP buy the cybercrime investigation software maker, take it private and merge it with Atlanta-based Grayshift LLC. Three of those firms said they will vote against the deal.

The four together own more than 625,000 subordinate voting shares. They said they agree with Silicon Valley hedge fund Nellore Capital Management LLC, which last week sent a dissident proxy circular to solicit votes against the deal. Nellore is Magnet’s largest outside investor, with 1.3 million shares, or 10.6 per cent of that class of stock.

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Two of the funds have bought into Magnet since the deal was announced Jan. 20; the rest, including Nellore, owned their stakes beforehand. To proceed, the deal must receive a majority of votes from each of the subordinate and multiple voting share owners.

Nellore and the other investors say they love Magnet and its long-term prospects and want to remain owners. They believe the premium offered to subordinate shareholders is too low and that the three multiple voting shareholders – Magnet chief executive officer Adam Belsher, chief technology officer Jad Saliba and chair Jim Balsillie – are getting a sweeter deal.

While Thoma has agreed to pay $44.25 per share to subordinate shareholders, multiple voting share owners only get $39 a share. But they also get to roll 55 per cent of their equity into the private company. Thoma plans to combine Magnet with portfolio company Grayshift.

Even though the multiple voting shareholders would get less, Nellore argues in a circular to shareholders the leadership trio’s remaining shares in the combined company would be worth much more and “they will enjoy supercharged returns” for years, while multiple voting shareholders would “only get an unreasonably low cash price.”

“Fortunately, we have the power to block this deal, and we should!” Nellore founder Sakya Duvvuru wrote, arguing Thoma should instead either invest in Magnet by selling Grayshift to the company in exchange for stock, or dramatically hike its offer.

“There are a lot of people that feel the same way that I do and I think that’s really good news,” Mr. Duvvuru in an interview. Mr. Duvvuru, who introduced The Globe to the four fellow investors, said he had spoken to 10 in total that are unhappy.

But the known share tally of dissidents is still well short of the amount needed to block the deal. Other than Nellore there are few shareholders with large stakes; one of the biggest, Mawer Investment Management, sold its one-million-plus shares last year.

The Globe was unable to verify the identities of the other six investors and is withholding the identities of the four interviewed because they are describing matters that are confidential to their firms.

A Thoma Bravo spokeswoman declined to comment.

In an e-mailed statement, Magnet spokesman Dan Gagnier said the deal was supported by analysts “as an excellent outcome for shareholders.” He noted: “Rollover requirements are normal practice” in private equity deals “in order to share risk with and incentivize” leaders of acquired companies.

The takeover stems from efforts by Magnet to make an acquisition of its own shortly after going public in spring 2021. Magnet, co-founded in the early 2010s by Mr. Belsher – like Mr. Balsillie, an ex-BlackBerry Ltd. executive – and Mr. Saliba, a former Waterloo police officer, made its name selling software to law enforcement agencies who used it to investigate cases of human trafficking, child exploitation and other crimes. Magnet later expanded into corporate investigations.

The company won a following among investors after posting strong revenue growth while also turning profits. But while it was a leading provider of search tools used to pry into computers and digital workflows, it frequently partnered with Grayshift, whose strength was extracting data from mobile devices.

Magnet’s leaders figured that by buying Grayshift, they could create a full-service “category killer.” But after approaching Grayshift in September, 2021, Magnet lost out in a subsequent bidding process to Thoma. Three months after Thoma bought Grayshift, the company approached Magnet last Oct. 6 to try to buy it as well.

Thoma originally offered $34 a share, which a committee of independent Magnet directors pushed up by 30 per cent for subordinate shareholders through what they called “robust“ negotiations. But Magnet’s share price increased by twice as much (62 per cent) over that period. That meant while Thoma’s original bid was 43 per cent above the market price, the offer to shareholders in January had just a 15.4-per-cent premium.

Mr. Duvvuru criticized the independent directors for not running a thorough process, saying there should have been 25 private equity firms interested in Magnet, not just the two invited to bid.

He also pointed to Magnet’s internal financial forecast – provided to CIBC World Markets for its fairness opinion on the deal. The forecast reveals that the company expects much stronger revenue growth, cash flow and operating profit performance than analysts do, and Mr. Duvvuru said Magnet should have waited to hold the vote until after publishing 2022 year-end numbers and a 2023 forecast.

Follow Sean Silcoff on Twitter: @SeanSilcoffOpens in a new window

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