Thoma Bravo has a Proven Ability to Pay and Should Pay More forMagnet Forensics , theFastest Growing AND Highest Quality Public Company that it has Ever Attempted to Acquire- Nellore Believes Important Analyses were Omitted
- Nellore Continues to Believe Intrinsic Value is
C$60 –C$70 - Shareholders urged to Vote the GOLD Proxy AGAINST the Takeover of
Magnet Forensics
Dear fellow shareholders,
As you know,
The proposed acquisition of Magnet would represent the lowest 1-day unaffected premium ever offered by the PE firm, for the fastest growing and highest quality of all of its targets. In a take private transaction, the premium over the current share price represents a one-time payment from the buyer for all of the future return that the seller is being asked to forego. The higher growth rate and free cash flow margin, the higher the rate of return that the seller is being asked to part with.
Yet, somehow,
Using publicly available filings, we read every fairness opinion and spread management projections for 34 take private transactions going back to 2009. We observed that
Further,
We have never seen a Board try this hard to discredit the high growth, cash generative characteristics of their own business. Usually, Boards trumpet those strengths. In every prior transaction where the target has significant free cash flow margins and rapid revenue growth, value is contemplated on methodologies that appropriately adjust for the growth and margin characteristics. Not in Magnet's case, where only absolute revenue and EBITDA multiples, as opposed to growth adjusted revenue and EBITDA multiples, are used. FCF multiples, absolute and growth adjusted, are omitted all together.
Accordingly, we implore the Special Committee to:
- incorporate FCF and growth adjusted FCF multiples in Discounted Equity Analysis, Precedent Transaction Analysis and Public Comparable Analysis
- if the Board insists on using revenue multiples, please adjust the revenue multiples for growth and quality
- The Board of PluralSight conducted such an analysis, by using the Rule of 40 (NTM revenue growth + NTM FCF margin) to adjust revenue multiples for quality (on pg 25): https://www.sec.gov/Archives/edgar/data/1725579/000119312521034420/d118407ddefa14a.htm
- The analysis indicates that the appropriate NTM revenue multiple for a Rule of 60 company is 15x, or
C$67 per share for Magnet. - The Board of Zendesk performed an illustrative present value of future share price analysis each of the fiscal years 2022 through 2024, by applying enterprise value to growth-adjusted EV/NTM revenue multiples adjusted using NTM revenue growth (on pg. 55): https://www.sec.gov/Archives/edgar/data/1463172/000114036122028748/ny20004637x3_defm14a.htm
- conduct and include a premia paid analysis as is customary in take private fairness opinions (and is conspicuously missing in both of your fairness opinions)
We also believe that the Special Committee, or at least its advisors, are aware of the analyses we suggest above and have intentionally omitted them. We can see that they are part of a standard package of analyses presented to every Board and were conducted by the same advisors for KnowBe4¹ and QAD² based on publicly available fairness opinion presentations.
Consider that the current premium offered of 15% can't even compete with 5 months of Magnet's standalone growth. If we were to apply Magnet's unaffected NTM revenue multiple from post Q3 earnings to pre deal announcement of 8.6x and apply it to NTM revenue per Management Forecast as of
Momentum is building against the transaction, as shareholders lineup to vote AGAINST, but we can't stop now. We have the power to preserve the value of our investment - vote AGAINST this unfair transaction using the GOLD proxy.
Sincerely,
Founder & Portfolio Manager
1 https://www.sec.gov/Archives/edgar/data/1664998/000119312522307513/d323857dex99cii.htm pages 19, 22, 23 |
2 https://www.sec.gov/Archives/edgar/data/1036188/000110465921098605/tm2122038d5_ex99c-ii.htm pages 12, 23 |
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