Short selling specialist Bex Axler of Spruce Point Capital believes Advent International should rethink its decision to buy software provider ForeScout Technologies. If Advent reconsiders, Forescout shareholders would feel some pain.
ForeScout (ticker: FSCT) provides security software, calling itself a leader in “device visibility and control.” The company arrived on the scene in October 2017, selling stock in an initial public offering at $22 a share.
For investors buying in at the IPO price, ForeScout stock performance looks solid, shares are up about 44%, a little better than the Dow Jones Industrial Average and a little worse than the S&P 500 over the same span. Shares, however, haven’t done much since late 2017.
Private-equity firm Advent entered the scene in February 2020, agreeing to buy ForeScout for about $1.9 billion or $33 in cash. The price to be paid was about a 6% premium to the stock’s average price over the 20 trading days leading up to the deal. It was a small premium. M&A deals are routinely struck at a 20% premium to entice shareholders to accept buyers’ offers.
But things were rocky at ForeScout. Baird analyst Jonathan Ruykhaver noted “recent execution challenges” when reviewing the deal. ForeScout missed Wall Street sales estimates in the third and fourth quarters of 2019.
In a report, Axler said he believes that the onset of the Covid-19 pandemic gives Advent one reason to walk away from the deal. What’s more, he believes “financial forecasts reviewed by Forescout internally may not have been shared with prospective acquirers and that some of these forecasts were materially worse than those known to be disclosed to buyers.”
ForeScout, according to Axler’s review of the deal filings, tried to look at good as possible to Advent.
If Advent reconsiders, shareholders could see the stock fall 20% or more. How did Barron’s arrive at that number? We removed the deal premium and added the decline of the software components in the S&P 500 from the deal date through the end of April. It’s a highly theoretical exercise.
If correct, Axler stands to benefit from the declines. He is short the stock, meaning he’s selling borrowed shares. It’s a shrewd trade to some extent. His downside appears to be capped at $33—the deal price—and the stock has been trading around $32 for weeks. He has bet $1 to try to make $6 or $7.
The stock dropped 1% on news of his bearish report. It isn’t a big move. ForeScout shareholders have already voted and approved the deal.
ForeScout and Advent both declined to comment on Axler’s report or the deal status.
Ruykhaver, for his part, thinks the chances of the deal breaking are small. “Points made by Spruce Point around fundamentals, including sales force turnover, the company’s significant exposure to the government vertical, negative [free cash flow]....were all well-known by analysts and investors prior to the announcement of the Advent acquisition,” wrote the analyst in a Thursday research report. “While we have acknowledged the difference between the plans provided to the acquirers and the illustrative guidance, this has been known for nearly two months.”
This isn’t the first deal tremor investors have felt since Covid-19 infections grew dramatically. Sycamore is trying to walk away from its deal to acquire L Brands (LB) Victoria’s Secret chain. Boeing (BA) is doing the same, trying to nix its deal to buy a controlling stake in the Embraer (ERJ) commercial aerospace business. The entities selling those assets aren’t happy with the decision by the would-be buyers.
L Brand stock cratered on the news, falling 25% the week Sycamore announced its intentions. Shares in Embraer, however, were down about 70% year to date before the Boeing announcement. The stock is actually up about 8% since that news broke.
Write to Al Root at allen.root@dowjones.com
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Short Seller Bets a Private-Equity Firm Will Walk Away From ForeScout Deal - Barron's
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