Thoma Bravo to Buy Cybersecurity AI Firm Darktrace for $5.3B

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Chicago-based Thoma Bravo said its proposed purchase of the Cambridge, England-based cybersecurity AI vendor would accelerate Darktrace’s organic growth and allow it to pursue acquisitions and leverage the private equity firms’ operational best practices. The 620 pence per share ($7.75 per share) deal offers a 20% premium over Darktrace’s Thursday closing price of 517 pence per share ($6.50 per share).

“Darktrace’s operating and financial achievements have not been reflected commensurately in its valuation, with shares trading at a significant discount to its global peer group,” the company said in a regulatory filing Friday. “The acquisition provides an opportunity for Darktrace shareholders to receive the certainty of cash consideration at a fair value for their shares.”

Darktrace’s stock is up 93 pence ($1.16 per share), or 18%, to 610 pence per share ($7.63 per share) in Friday afternoon trading on the London Stock Exchange. The company’s board of directors pledged to vote their shares – which represent 3.1% of all shares outstanding – in favor of Thoma Bravo’s purchase, and KKR and Summit Partners agreed to back the deal with their 11.3% of outstanding shares.

“The proposed offer represents an attractive premium,” Darktrace Chairman Gordon Hurst said in a statement. “The proposed acquisition will provide Darktrace access to a strong financial partner in Thoma Bravo, with deep software sector expertise, who can enhance the company’s position as a best-in-class cyber AI business headquartered in the UK.”

What Thoma Bravo Plans to Do With Darktrace

Thoma Bravo said it plans to continue operating Darktrace as a stand-alone business group and doesn’t expect to undertake any material restructuring, material headcount reduction, or change in location to Darktrace’s headquarters. But the private equity firm will reduce noncritical administrative costs. The two sides entered into a confidentiality agreement around the proposed acquisition on March 27.

“Darktrace is at the very cutting edge of cybersecurity technology, and we have long been admirers of its platform and capabilities in artificial intelligence,” Thoma Bravo Partner Andrew Almeida said in a statement. “Thoma Bravo has been investing exclusively in software for over 20 years, and we will bring to bear the full range of our platform, operational expertise and deep expertise of cybersecurity.”

The proposed deal comes just 19 months after Thoma Bravo halted earlier efforts to buy Darktrace due to the two sides failing to reach an agreement on terms. Darktrace said Friday that it has previously reviewed and rejected unsolicited offers from Thoma Bravo since the company didn’t fairly represent the value of the its business. Darktrace declined an Information Security Media Group interview request (see: Thoma Bravo, Darktrace Ax Deal Over Disagreement on Terms).

Thoma Bravo said its plans to review Darktrace’s business and operations in the six months after the deal closes to implement operational best practices and create a best-in-class software franchise. The private equity firm wants to grow Darktrace’s research and development organizations and accelerate the company’s top-line growth.

“Our technology has never been more relevant in a world increasingly threatened by AI-powered cyberattacks,” Darktrace CEO Poppy Gustafsson said in a statement. “In the face of this, we are expanding our product portfolio, entering new markets and focused on delivering for our customers, partners and colleagues.”

The private equity firm intends to support Darktrace’s management team as it continues to grow the company as an independent business. Thoma Bravo said it hasn’t discussed any form of incentivization arrangements with any Darktrace employees, but it intends to put appropriate arrangements in place following completion of the acquisition.

“The existing management and employees of Darktrace will be key to the success of Darktrace going forward and will continue to contribute to the long-term success of Darktrace,” Friday’s regulatory filing says.

How Darktrace Stacks Up to the Competition

Darktrace has made just one acquisition in its 12-year history, acquiring attack surface management firm Cybersprint for $53.7 million in February 2022 to give customers insights that help eliminate blind spots and detect risks. The acquisition was intended to enrich existing Darktrace products with external vulnerability data and accelerate Darktrace’s entry into new areas such as proactive AI cybersecurity.

The take-private agreement with Thoma Bravo comes almost exactly three years after Darktrace completed a London Stock Exchange initial public offering that raised $199.4 million on a $2.05 billion valuation, Crunchbase found. Darktrace’s valuation has increased nearly by nearly two and a half times since going public in April 2021, despite the economic downturn and internal challenges.

Those challenges included bombshell allegations in early 2023 from short seller Quintessential Capital Management that Darktrace overstated its sales, margins and growth rates in financial statements. The company brought in Ernst & Young in February 2023 to review its financial process and controls, and while EY found systems that could be improved, Darktrace didn’t need to restate any of its financials (see: Darktrace Taps EY to Probe Finances Amid Short-Seller Claims).

Despite that, Darktrace has enjoyed massive growth in recent years. Sales in the quarter ended March 31 jumped 26.5% on a year-over-year basis to $176.1 million. Darktrace projects revenue growth of at least 25.5% in the fiscal year ending June 30, 2024, thanks to strong ARR to revenue conversation and a stable exchange rate environment, according to the company.

Darktrace had a balanced geographic footprint in the six months ended Dec. 31, 2023 – 35% of business came from the United States, 16% of business came from the United Kingdom, 25% came from the rest of Europe and 25% from the rest of the world. The company says it had more than 9,400 customers as of March 31, up 12% on a year-over-year basis, and employs 2,300 people with offices in 24 nations.

Darktrace’s net profit skyrocketed from just $581,000 in the six months ended Dec. 31, 2022, to $52.5 million in the six months ended Dec. 31, 2023. The company’s profitability has been aided by continued scale efficiencies, ongoing discretionary cost management and a more favorable foreign currency exchange environment.

The company’s technology has received mixed reviews from analysts. Forrester rated Darktrace’s network analysis and visibility capabilities 11th out of 13 vendors evaluated. Forrester praised Darktrace for simplifying the deployment process with point-and-click capability but said the firm’s user interface values flash over functionality and has confusing visualizations and limited visibility into network traffic.

Thoma Bravo has capitalized on market turmoil to buy publicly traded cybersecurity vendors at a discount, scooping up identity governance firm SailPoint for $6.9 billion in August 2022 along with identity and access management firms Ping Identity for $2.8 billion in October 2022 and ForgeRock for $2.3 billion in August 2023. The private equity firm subsequently combined Ping and ForgeRock under the Ping brand.