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U.S. private equity giant Thoma Bravo is acquiring waterloo-based cybercrime software maker Magnet Forensics and combining it with Grayshift LLC of Atlanta. Magnet CEO Adam Belsher (pictured) will become CEO of the combined company.Fred Lum/The Globe and Mail

U.S. private equity giant Thoma Bravo has agreed to buy cybercrime software maker Magnet Forensics MAGT-T, a darling of Canada’s technology scene, for $1.8-billion and will merge it with another company it owns.

Thoma Bravo said Friday it will pay $44.25 per share to holders of subordinate voting stock in Waterloo, Ont.-based Magnet, which sells digital investigation software used by law enforcement agencies and corporations to investigate cybercrimes. That is a 15.4-per-cent premium to closing price Thursday.

It will also pay $39 a share to the three holders of Magnet’s multiple voting shares: co-founders Adam Belsher and Jad Saliba, and chairman Jim Balsillie. The trio, who own 28.9 million supervoting shares and hold 95-per-cent voting control, agreed to the lower price at the behest of a special board committee that pushed to benefit subordinate shareholders. The trio will roll 55 per cent of their shares into stock of the acquired firm.

Magnet’s board and controlling shareholders have unanimously agreed to the deal, which is subject to a $50-million break fee payable by the Canadian company to the buyer and $70-million in reverse from Thoma if either terminates the deal. Holders of both share classes must approve the deal in a vote to be held in March.

Once the takeover is complete, Thoma will combine Magnet with Grayshift LLC of Atlanta, which it bought in 2022. That will bring together two frequent partners that have complementary capabilities: While Magnet predominantly provides search tools for computers and digital workflows, Grayshift’s strength is in extracting data from mobile devices. The combination will create a more formidable rival to Israel’s Cellebrite Mobile Synchronization Ltd.

The deal is a different outcome from what Magnet had originally sought: Magnet was a leading bidder to buy Grayshift last year, but was outbid by Thoma, said a source familiar with the situation. Within three months after that takeover closed last June, the winning and losing bidders were in talks to create what the source described as a category-killer in digital forensics and cybersecurity. The Globe and Mail is not identifying the source as they are not authorized to discuss the matter.

Mr. Belsher said in a media release that the combination “will unlock tremendous value for our customers by further integrating and expanding our product suite, which will result in more seamless workflows in the recovery and analysis of critical digital evidence to investigations and ultimately contribute to our shared mission of the pursuit of justice.”

Mr. Belsher will be CEO of the combined company and the deal guarantees executive positions for Mr. Saliba, Magnet’s chief technology officer, and Grayshift founders David Miles and Braden Thomas, plus a board seat for Mr. Balsillie. The source said the combined company, to be domiciled in the U.S., will probably make acquisitions and likely go public again once market conditions improve.

The offer is below stock price estimates from some analysts, which have singled Magnet out as a top Canadian tech pick. National Bank Financial analyst John Shao has a $50-per-share target. Mr. Shao said in an e-mail while he originally anticipated a higher offer, “for the management who are also the major shareholders and will remain at key positions at the new company, the premium is indeed important but the fast lane to gain that market leadership is surely attractive.”

Magnet has emerged as one of the leading tech companies in the Waterloo area since the decline of BlackBerry Ltd., and its senior ranks are heavily populated by its former executives, including Mr. Belsher and Mr. Balsillie, who co-led the smartphone pioneer in its heyday.

Mr. Belsher cofounded Magnet in 2010 with Mr. Saliba, a former Waterloo police officer. They started by selling software to law enforcement agencies who used it to investigate cases of human trafficking, child sexual exploitation and other crimes. Magnet later expanded into corporate cybercrime investigations, signing Chevron Corp. and Bank of America Corp. and others as clients.

Magnet won a following among shareholders after going public in spring 2021 for not only posting strong revenue growth but also turning a profit, unlike many tech companies. Magnet earned net income of $1.4-million in the third quarter ended Sept. 30 while revenue of $25-million was up 41 per cent year over year.

Magnet went public during an unprecedented boom for new tech issues on the TSX from summer 2020 through the end of 2021 as demand for digital companies soared during the pandemic. Magnet raised $115-million in its initial public offering – the first for a Waterloo company on the TSX in 15 years – which closed in May, 2021.

The market has shifted dramatically since: Valuations for tech companies cratered over mounting economic concerns and rising inflation and interest rates. Magnet was no exception: Thoma’s offer is well below Magnet’s all-time high stock price of $65.80 in August, 2021. But Magnet also held up better than most other Canadian tech companies thanks to its strong financial performance, trading at more than double its $17 IPO price this week.

The takeover is part of a larger trend afoot in the tech sector. With tech companies trading at multiyear lows, flush private equity firms including Thoma – one of the world’s largest with US$120-billion under management – have been actively pursuing buyouts. Deals have been relatively slow to materialize as there remains a gap between what buyers are willing to pay and managers and boards think their companies they are worth. If troubling economic conditions persist, many tech companies are expected to relent this year.

Morgan Stanley advised Magnet’s special committee on the deal and CIBC Capital Markets provided it with an independent valuation. Law firm Blake, Cassels & Graydon advised Magnet while Dentons Canada advised the special committee. Kirkland & Ellis and McMillan provided legal advice to Thoma.