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Thoma Bravo makes compelling offer for cybersecurity champion Darktrace

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UK-listed cyber security specialist and recent Armchair Trader tip Darktrace LON:DARK is going private it seems. US private equity firm Thoma Bravo has made an offer for the company at 620p, which is a substantial mark up on Thursday’s closing price. 

I bought Darktrace stock at 461.6p on 11 April just after the company had released some new revenue figures which seem to have revitalised interest in the company. Darktrace was obviously well-positioned to benefit from the massive growth in interest in the cybersecurity sector, as explained in my analysis.

The company was also performing very well in relation to the overall IT sector. The role of Invoke Capital had also been scaled back, making the stock look more attractive. Darktrace has also reported 14 consecutive quarters of income growth. My screens said this was not being reflected in the share price and that Darktrace stock was still spectacularly undervalued. This is how Thoma Bravo can afford to make a 620p offer.

Thoma Bravo has its sights set on Darktrace

Thoma Bravo has been interested in Darktrace for some time, but previous offers had been rejected. Darktrace does, however, seem to be one of several high quality UK stocks which present private equity with tempting targets, as they are so undervalued. The PE firm had previously been in discussions with Darktrace, discussions which were abandoned in 2022.

Darktrace has been very critical of the state of the UK public markets in the recent past.  Management said that its achievements were not being accurately reflected in its share price, especially when benchmarked against US peers. Our own analysis illustrated its strong value characteristics.

The cybersecurity company said that the deal with Thoma Bravo would let it expand more aggressively into overseas markets. The deal also lets Darktrace distance itself further from Mike Lynch, one of its earliest backers, who was extradited to the US to face charges over Hewlett Packard’s acquisition of his software company Autonomy in 2011.

One less high grade tech stock on the London market?

Darktrace originally listed its shares in London three years ago.  The stock tripled in value in the six months after it went public. The company has taken a lot of flak since then, unfairly I feel. London broker Peel Hunt said it was overvalued, while Darktrace was also the subject of a short selling attack by New York hedge fund Quintessential Capital Market, which accused the company of simulated sales numbers.

The new deal, if it goes through, will be good for Darktrace. Thoma Bravo says it can see expansion opportunities for Darktrace in the US, where the fund manager already owns literally dozens of enterprise software businesses.

It has to be said, however, that this will also see another high quality tech business leaving the UK public market, depriving investors of further long term upside. I projected strong medium to long term share price performance for Darktrace in my original share price analysis, but it looks likely that it will soon be in private hands.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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