ABST - Event-Driven Radar: Higher Offer Is Absolute(ly) Possible

2023-05-30 05:12:58 ET

Summary

• Cybersecurity software vendor Absolute Software is getting acquired by Crosspoint Capital Partners at $11.50/share.
• One of ABST’s largest shareholders Edenbrook Capital has recently come out, arguing that the bid is low-ball and undervalues the company.
• Edenbrook estimates the company’s fair value to be more than double current offer levels.
• Given the pressure from the activist, there is a chance of a price bump here.

Event-Driven Radar is a series of articles dedicated to specific investment ideas where I expect short-/medium-term catalysts to help drive up the share price of the companies. The key aim of these articles is to succinctly highlight interesting investment situations, including their key aspects and risks. Some of these ideas will be readily actionable while others will have clear potential to turn into attractive setups.

Today's article covers the pending acquisition of Absolute Software ( ABST ).

What Happened?

Absolute Software, a $602m market cap cybersecurity software vendor, is getting acquired by private equity firm Crosspoint Capital Partners for $11.50/share. The company's share price jumped upon the announcement several weeks ago and has been trading in line with the acquisition bid. The transaction will require approval from two-thirds of ABST's equity holders, with the shareholder meeting scheduled for June 29. Last week, one of the company's largest shareholders Edenbrook Capital (owns 10%) sent a letter to the company, arguing that the current bid has been low-balled and significantly undervalues the company vs. other cybersecurity software industry transactions. The activist has speculated that a strategic player might potentially step in with a higher bid:

As the Company has taken pains to discuss publicly many times over the last few years, Absolute has significant strategic value because of its undeletable presence in the firmware of over half a billion devices, its ability to use that presence to protect other software that sits on the application layer through its Persistence offering, and increasing industry needs for solutions that solve both secure endpoint and secure access needs in an integrated fashion, which Absolute does.

[…]

Perhaps another enterprising buyer, realizing how cheaply the Board is willing to sell the Company, will come along and bid a higher price.

What Does ABST Do?

ABST provides endpoint cybersecurity software which allows organizations to track the location and view the usage of devices (such as laptops) as well as remotely control them. The company also offers software providing secure remote access, such as VPN. ABST holds a dominant position in the endpoint tracking, visibility and control sub-segment of the cybersecurity software market. ABST's software modules are embedded into the BIOS (i.e. a boot system) of most of the existing personal computers (c. 600m devices globally). Presence on the BIOS level makes it impossible to delete the company's software in case of a cyberattack/security breach. Given that BIOS firmware is generally stored on a chip with limited memory, there is no/limited room for other - potentially competing - firmware to be installed on a given BIOS chip.

ABST has historically been a high-margin, relatively fast-growing and cash flow-generative business. The company has steadily compounded its ARR in recent years, with a 12% CAGR during FY19-FY21 (end in June) and a 71% growth in FY22 driven primarily by the large acquisition of NetMotion. ABST's gross margins stood at 81-88% in FY19-FY22. ABST's adjusted EBITDA has grown at a 42% CAGR during FY17-FY21, with an incremental 75% growth in FY22 (25% margins). More recently, ABST's topline/ARR growth has been negatively impacted by softening customer demand amid a deteriorating macroeconomic environment. In Feb'23, the management revised its adjusted revenue growth guidance for FY23 from 15-17% to 10-12%.

How Much Is ABST Worth?

While referring to a number of recent cybersecurity industry transactions (see table below), the activist Edenbrook Capital has argued that ABST's fair value is at c. $25/share, more than double the current offer levels. ABST currently trades at a 3.6x EV/TTM ARR multiple and 14.9x on TTM adjusted EBITDA basis (25% margins). Edenbrook has highlighted that other cybersecurity software acquisitions have been performed at significantly higher EV/TTM ARR multiples:

It's worth highlighting that the target companies provided by the activist are not directly comparable as they operate in different sub-segments of the cybersecurity software space, including identity and access management (FORG, PING and SAIL), email security ( PFPT ), network security policy management ( TUFN ), incident response (MNDT) and cybersecurity awareness training ( KNBE ). Having said that, While none of Edenbrook's listed transactions are directly comparable to ABST, Tufin Software Technologies - a peer which was acquired at 6.7x EV/TTM ARR - has displayed a similar growth and margin profile to that of ABST. TUFN's gross margins stood at 79-81% in FY19-21 while the company has grown its ARR at 17% CAGR during the same time span. Worth noting that, unlike ABST, TUFN has been unprofitable on an adjusted EBITDA level. At 6.7x TTM ARR, ABST would be worth $25.16/share or 121% above current share price levels.

It's worth highlighting that Crosspoint's bid values ABST below the 4.0x-5.8x EV/TTM ARR range during FY20-FY22. The current bid also comes at a significant discount to the 6.2x TTM ARR multiple where ABST's $340m acquisition of NetMotion was completed in Jul'21.

The Acquirer

Crosspoint Capital Partners is a cybersecurity, privacy and infrastructure software-focused PE firm. The potential acquirer seems credible and the risk of it walking away from the transaction is low. The firm is led by former Symantec CEO Greg Clark and an ex-Bain Capital executive Ian Loring. Crosspoint raised $1.3bn for its debut fund in Apr'21. Several of Crosspoint's investments in cybersecurity software companies are listed below:

• Significant stake acquired in RSAC in Mar'22. The investment was made alongside Clearlake Capital and Symphony Technology Group.
• Forescout bought for $1.9bn in Feb'20 in partnership with a large PE firm Advent International.
• McAfee acquired for $14bn in Nov'21 alongside an investor group comprised of Advent, Permira, CPP Investments, GIC and ADIA.

The Activist

Edenbrook Capital is a hedge fund running a concentrated portfolio with a total AUM of c. $300m. Absolute Software is Edenbrook's sixth-largest position. The shareholder has a limited track-record of activism. Edenbrook previously pushed back against the management privatization at Hemisphere Media Group claiming that the bid significantly undervalued the company. Hemisphere's shareholders eventually approved the transaction at original terms.

Takeaway

ABST currently presents an interesting event-driven setup. Given the pressure from a large shareholder, there is a chance of Crosspoint raising the current bid to appease ABST's equity holders and make the activist go away. There is also a possibility of other strategic buyers emerging with competing bids. While there is no guarantee the setup will end up with a price bump, ASBT's visually low valuation suggests that the there might be headroom for a higher offer here.

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