Darktrace/Thoma Bravo: cash bid would chase away the shadows

Darktrace promises to identify threats lurking shadily in IT systems, as its name implies. The UK cyber security group has some shadows of its own. The business is something of a black box and shareholder Mike Lynch is fighting extradition to face criminal charges in the US. The volatile shares are twice their float price but have halved since their September peak.

Thoma Bravo may offer investors a way to step back into the light. The US buyout group has made a bid approach. This lifted the stock, valuing the group at £3.4bn.

Broadly, cyber security is a good investment in a dangerous era. The financial metrics of Darktrace are up there with highly rated peers. Yet even after the pop from a potential takeover offer, the shares were valued at just six times 2023 revenues. That was two-thirds lower than CrowdStrike of the US.

The darkest cloud shadow drifting across the landscape is controversy over Lynch. Earlier this year, he lost a case brought by Hewlett-Packard. The legacy IT group bought software business Autonomy from him and others for $11bn in 2011. HP’s successor claims the value was fraudulently inflated.

Lynch has no management role at Darktrace. But he helped create the business, which employs several ex-Autonomy staff, including chief executive Poppy Gustafsson.

Critics have questioned Darktrace’s financial reporting as they did that of Autonomy. Why, for example, is R&D spending — which is equivalent to 13 per cent of sales — only half what CrowdStrike spends? Higher reliance on artificial intelligence and lower UK wages are questionable justifications. Short seller ShadowFall also thinks customer churn rates are higher than officially stated.

Thoma Bravo will know all this. It will also be aware that Darktrace sales still rose by almost half last year.

The buyout group has stumped up large premiums for its growing cyber security portfolio. Public investors should also seek a decent mark-up on the rolling average price of this volatile stock. Lynch’s 4.3 per cent stake is at present worth £146mn. His legal fighting fund, which is already substantial, may be about to get bigger.

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