Darktrace– Cheaper is cheerful.

Darktrace makes the right choice.

• Instead of pulling the IPO, Darktrace dealt with the issues by cutting its valuation significantly and was rewarded with a first-day bounce that will go some way towards restoring the image of the LSE which was badly tarnished by the awful launch of Deliveroo.
• Darktrace is a cybersecurity company that uses pattern recognition (AI) to detect cyber threats which to date has been very successful but is not without risk.
• The nature of its technology means that while it is excellent at spotting previously identified threats and methods when something really novel comes along, it will struggle.
• That does not mean that Darktrace is not a good company as its 38% YoY growth is a testament that the solution that it offers is very valuable to its clients.
• The big problem with this IPO is that Mike Lynch and Sushovan Hussain (ex-CEO and CFO) of autonomy have been involved with the company and are still shareholders.
• Sushovan Hussain has been convicted on 14 counts of wire fraud in the USA and his appeal in August last year failed on all counts.
• Mike Lynch is also currently fighting extradition to the US to face similar charges while at the same time fighting a civil suit brought by HP related to its acquisition of Autonomy in 2011 for $10bn.
• This created a number of investors to have concerns about the company while the usual big banks that lead these transactions did not participate.
• The deal was led by Jeffries, KKR Capital Markets, and Berenberg in a welcome change to the top billing.
• Originally the company was hoping to get a valuation of around £3bn ($4.2bn) which would put the company on and 2021 EV / Sales of 16.8x.
• Following the uproar, press coverage, and investor concerns with regard to some of its investors (see here), there was real concern as to whether the IPO would succeed.
• Clearly staying private was not an option and so to compensate investors for the real or perceived risk of being associated with Mike Lynch and Sushovan Hussain the company reduced the IPO valuation by 43% to £1.7bn.
• This brings the valuation down to 2021 EV / Sales of 9.6x making the company look competitive when compared to its peer group and enough to ensure that investors swallowed whatever concerns they had.
• The result was a strong rally on the first day of trading with the shares settling at £3.30 giving a valuation of £2.2bn and a first-day gain of 32%.
• If the company had insisted on the £3bn valuation, then a 32% gain could easily have been a 26% decline with the shares ending up in the same place as they are now.
• I think that this was a very wise move by the company which clearly had to go through with this transaction and could not delay for another day.
• The IPO can now be called successful and good execution by the company should see a steady rally in the shares over the coming years.
• This will also have helped the LSE salvage some of its tattered reputation, but it is still clear that if a company wants to get the best price for going public then the NYSE or NASDAQ are the places to look.
• I suspect that a number of UK tech companies may still take the US option going forward.