Thoma Bravo considers taking Darktrace private

Monday 15th August 2022

Thoma Bravo, a US-based technology private equity group, is considering a bid to privatise Darktrace, a cyber security technology company advised by former Autonomy head Mike Lynch.

Thoma Bravo — a leading software and technology PE fund with a 40+ year history of providing capital and strategic support to experienced management teams. One of the world’s most active investors in cyber security companies, with a specialised set of dealmakers targeting the sector. CEO: Orlando Bravo; AUM: $114bn.

Darktrace — a British-American information technology company that specialises in AI-based cyber security which protects against ransomware and cloud attacks. The firm is a pioneer of autonomous response technology and has solutions that enable faster detection and response than conventional enterprise cybersecurity products, which depend relatively more on human input. c.7000 customers. CEO: Poppy Gustafsson

Key points

• Thoma Bravo and Darktrace are in preliminary talks of a possible cash offer for all 710.8m outstanding shares, which has a current market capitalisation of £2.67bn.
• Thoma Bravo’s recent takeovers in the US come at multiples of more than 10x trailing 12-month sales, while Darktrace currently trades below such valuation multiples.
• Shares rose 20% on the announcement.

Darktrace Financials

• Net Profit: $5.9m in H2 2021, vs net loss of $48.4m in H2 2020.
• Revenue: $193min H1 2022, up 52% from H1 2021.
• Revenue growth projections: 29%-32% in the fiscal year ending June 30, 2023, dampened by the weakness of the sterling to the dollar.
• Sales: expected to jump to at least $417m in fiscal 2022, up 48% from $281.3m in fiscal 2021.

Potential Investment Rationale

A #1 ranked solution in Intrusion Detection and Prevention Software, Network Traffic Analysis tools, and Network Detection and Response tools, and with strong financials to match, Darktrace is an attractive investment opportunity. They have been pursuing growth organically and inorganically through landing several large corporations including McLaren and the brewing business AB InBev and through purchasing Cybersprint in February 2022 for $53.7m, attack surface management vendor, to help give customers more insight to eliminate blind spots and detect risk.

Cybersecurity Landscape

Due to their perceived resilience to broader economic issues, Cybersecurity deals have been a bright spot in an otherwise challenged dealmaking environment for technology companies. Thoma Bravo has been capitalising on this market downturn, acquiring publicly traded cybersecurity vendors at a discount such as SailPoint in August 2022 for $6.9bn. UK companies in particular are being increasingly targeted due to their lower trading multiples compared to their US counterparts.

Concerns with Darktrace

• Lynch, the British software entrepreneur who co-founded Darktrace in 2013, has been charged with 14 counts of conspiracy and fraud linked to the $11.6bn sale of Autonomy to Hewlett-Packard in 2011; he denies any wrongdoing. In January, the UK home secretary Priti Patel approved the extradition of Lynch to the US after the High Court in London rejected an attempt by his lawyers to win more time to consider the order.
• Filings show that Invoke, founded in 2012 by Lynch and has funded several UK tech start-ups, financed Darktrace’s first two years of operations. Lynch stepped down as a director of Darktrace in 2018 but continued to serve on the company’s advisory council until 2021. In the year ending June 2020, Darktrace paid Invoke more than $3m on top of $2m paid in the two previous years.

Darktrace Trading History

• APR21: IPO’s on the LSE at 250p, raising $199.4m on a $2.05bn valuation.
• SEP21: The share price more than triples, peaking at 985p.
• OCT21: The firm entered the FTSE 100.
• DEC21: The stock plummets and returns to the FTSE 250 after a sell note by Peel Hunt claiming that the company was only worth half its value. The gulf lay between its marketing and what it could offer. Stocks plummeted further following a big investor’s cheap sale of a part of their investment.
• FEB22: Share price rises more than 40% after Russia invaded Ukraine and fears of global cyberwarfare proliferated.

Next Steps

ThomaBravo has until September the 12th to decide whether to abandon talks or make a formal bid.

Financial Advisors

Darktrace — Jefferies and Lazard.

References

FT / MSSPAlert / Pymnts / Computing.co.uk / BankInfoSecurity

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More Thoma Bravo Deals:

• Thoma Bravo $6.9bn SailPoint acquisition
• Thoma Bravo acquires Bottomline for $2.6bn
• KKR completes $3.8bn Barracuda acquisition

Cybersecurity IPOs:

• May 2018 — Avast, endpoint security behemoth, raised $827.2m on a $3.3bn valuation
• June 2015 — Sophos, platform security vendor, raised $125m on a $1.6bn valuation.