Fight brews over Magnet Forensics’ proposed $1.8 billion acquisition by Thoma Bravo

Magnet Forensics office
Magnet Forensics shareholder contests deal; independent Magnet directors push back.

Independent Magnet Forensics directors are pushing back after one of Magnet’s largest investors, Nellore Capital Management, came out against the company’s proposed sale to Thoma Bravo.

Nellore announced on February 9 that it opposes the Canadian cybersecurity firm’s acquisition by American private equity giant Thoma Bravo on the grounds that the current price tag undervalues Magnet.

In response, independent Magnet directors published their own statement this morning defending the deal, arguing that the acquisition as outlined comes at a quality price following a competitive process, and offers the best path forward for Magnet.

“What we hate is that public shareholders are being forced to part with their shares entirely, and for far too low a price.”
-Nellore Capital Management

Thoma Bravo struck a deal in January to buy Kitchener-Waterloo-based Magnet for $1.8 billion CAD, take the publicly-traded company private, and combine it with fellow digital forensics firm Grayshift. This disagreement regarding the acquisition comes ahead of a March shareholder vote on the transaction.

Thoma Bravo has agreed to pay $44.25 per share to holders of Magnet’s subordinate voting stock, an amount that came at a more than 15 percent premium to Magnet’s January 19 closing price.

As part of the deal, Magnet co-founders CEO Adam Belsher and CTO Jad Saliba, along with chairman Jim Balsillie, have agreed to a price of $39 per share for their respective stakes in Magnet—lower than the price to be paid to subordinate shareholders—but will roll over most of their shares into stock in the acquired company. Belsher, Saliba, and Balsillie currently own all multiple voting shares and more than 95 percent voting control of the company.

Thoma Bravo’s acquisition of Magnet is expected to close by the second quarter of 2023. Though Magnet’s board and controlling shareholders unanimously support the deal, the transaction remains subject to shareholder and other customary approvals, and requires majority support from both classes of investors, which will vote on the matter in March 2023.

Magnet develops digital investigation software that acquires, analyzes, and shares evidence from a variety of devices, catering to thousands of law enforcement, government, military, and corporate organizations around the world. Founded in 2010 by a former cop and ex-BlackBerry executives, Magnet trades on the TSX as ‘MAGT.’

Nellore owns 1.2 million subordinate voting shares in Magnet, approximately 10 percent of the class. As the Silicon Valley hedge fund noted in its statement, the firm plans to vote against the Thoma Bravo deal because the price is “simply too low.”

“We love Adam and Jad, we love Magnet’s business and we even love the industrial logic of combining with Grayshift,” stated Nellore. “What we hate is that public shareholders are being forced to part with their shares entirely, and for far too low a price.”

RELATED: TSX-listed Magnet Forensics to be acquired by Thoma Bravo in $1.8 billion CAD deal

Magnet’s independent special committee, which consists of independent Magnet directors Carol Leaman and Jerome Pickett and was formed following receipt of Thoma Bravo’s first offer, oversaw the negotiation process, has pushed back against Nellore’s argument.

In a statement, Leaman and Pickett claimed that Morgan Stanley “ran a robust and fair process” that involved reaching out to eight other potential buyers, and ultimately led to the company securing a higher purchase price than the $34 per share amount that Thoma Bravo initially offered.

According to Leaman and Pickett, the Thoma Bravo deal “represents a compelling opportunity compared to the risk of continuing to execute as a standalone company without having consummated a transaction such as a combination with Grayshift.”

For its part, Nellore said it would rather see Thoma Bravo buy into Magnet via a private placement of 13.2 million shares and merge Grayshift into the existing Magnet entity, permitting all shareholders to “participate in the future value creation and have exactly the same cash economics at stake.”

The statement from Magnet’s independent directors also confirms a prior Globe and Mail report that Magnet had previously sought to buy United States-based Grayshift last year before being outbid by Thoma Bravo.

UPDATE Feb 13: Nellore reiterated its concerns in a letter published on February 13 that it said was in response to the special committee’s presentation from February 10.

In the letter, Nellore founder Sakya Duvvuru called for the special committee to “either publish the management forecast today (so that shareholders can review and have time to make investment or divestment decisions ahead of the company’s accelerated meeting record date), or move the record date to after March 10th when Q4 results come out.”

“If you do neither, well, then we know that you are trying to get a structurally unfair, undervalued and opportunistic transaction to the finish line as soon as possible.”

Feature image courtesy Magnet Forensics.

Josh Scott

Josh Scott

Josh Scott is a BetaKit reporter focused on telling in-depth Canadian tech stories and breaking news. His coverage is more complete than his moustache. He was also the winner of SABEW Canada’s 2023 Jeff Sanford Best Young Journalist award.

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