November 30, 2023

Shares in Darktrace, the British artificial intelligence and cybersecurity company, slumped by 30% after US private-equity firm Thoma Bravo walked away from a potential takeover of the business, whose founder, Mike Lynch, is fighting extradition to the US on fraud charges.

Despite full-year results that showed an increase in sales, helping the Cambridge-based company turn last year’s heavy losses into profit, investors sold off Darktrace stock in droves on Thursday, as the chances of a money-spinning takeover evaporated.

Under City takeover rules, Thoma Bravo cannot return with an offer within six months, except for if certain conditions are met, such as a rival bidder entering the fray, or an agreement being reached directly with the Darktrace board.

As Darktrace’s stock tumbled by nearly a third to 353.6p in morning trading on Thursday, ShadowFall, a hedge fund that has taken big bets on its shares falling, said the end of Thoma Bravo’s interest vindicated its belief that the company was overvalued.

But in a statement accompanying Darktrace’s annual results, its second as a public company after last year’s stock market float, the chief executive shrugged off the dissolution of talks that could have triggered £200m in payouts for senior managers.

“Being listed on the London Stock Exchange is exactly where we want to be right now,” said Poppy Gustafsson, a former protege of Lynch, who still owns more than 12% of the company, together with his wife.

Lynch’s legal travails have cast a shadow over Darktrace, despite his day-to-day involvement with the business ending earlier this year.

The billionaire, who has been described as Britain’s answer to the Microsoft founder Bill Gates, is expected to learn within weeks whether he has won the right to appeal against extradition to the US, where he is facing charges over the $11bn sale of his tech business Autonomy to Hewlett-Packard in 2011.

His former lieutenant, the one-time Autonomy chief financial officer Sushovan Hussain, has been jailed over the same deal.

When it floated on the stock market last year, Darktrace admitted there was a risk it could face potential money-laundering charges, should the proceeds of the Autonomy sale be found to have helped fund its growth.

In the UK this year, the high court ruled that Lynch – had duped HP into paying far too much for Autonomy, resulting in the US buyer taking a punishing $9bn writedown on the value of its acquisition.

The case focused on accounting trickery allegedly used by Autonomy staff to paint a false picture of how well its software was selling, including bringing forward revenues that should not yet have been booked.

In Thursday’s full-year result, Darktrace was at pains to be upfront about the timing of revenue accounting, revealing that $3.8m of revenue should have been booked in 2021, rather than reported in its 2022 first-half results.

Despite the disclosure, the company reported a strong operating performance, as sales soared by nearly 46% to $415m, turning last year’s $144m pre-tax loss into a $5m profit.

“Since listing on the public markets, we’ve turbo-charged our growth by adding ground-breaking products to our platform, including our new Prevent [cyberdefence software] offerings.

“We have a proven business model, which is generating cash. Today’s results are yet another example of our strong performance.”

Darktrace has been dogged by criticism from ShadowFall, a company that specialises in short-selling (betting against) companies it thinks are overvalued and currently holds a short position against the cybersecurity firm.

“Since our first short in September 2021, Darktrace has been a significant contributor to the ShadowFall Fund,” said ShadowFall’s managing partner, Matthew Earl.

“For some time, we have struggled to satisfy ourselves of its investment quality. We see this morning’s announcement [ending its takeover interest] as supportive of our view, and continue to believe that there are numerous issues with Darktrace, including accounting, governance, and cultural concerns.”

Darktrace has divided opinion since last year’s float, soaring in value within six months as its conservatively priced float price of 250p shot up to 945p.

It has since suffered huge falls after criticism from City analysts and ShadowFall, followed by a sharp rise in its stock market value, from £2.6bn to £3.6bn, on Thoma Bravo’s bid interest.

By mid-morning on Thursday, its market capitalisation was back down to just over £2.5bn.

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