Forescout announced Wednesday that it is suing private equity firm Advent International for allegedly violating the terms of their US$1.9 billion acquisition agreement.
The cybersecurity vendor said Boston-based Advent told them Friday that they wouldn’t be closing the acquisition Monday as had been scheduled due to a “material adverse effect” occurring at Forescout. Forescout said Advent is claiming a closing condition to the transaction had not been satisfied.
However, Forescout said their agreement with Advent explicitly called out the risk of any impacts from the coronavirus pandemic. Forescout therefore argues in a complaint filed Tuesday with the Delaware Court of Chancery that no material adverse effect has occurred, that all closing conditions are satisfied, and that Advent is obligated to close the transaction.
“It is highly disappointing that Advent would attempt to exploit market volatility to renege on its contractual obligations, particularly when the merger agreement explicitly excludes the effects of a pandemic as a material adverse event,” said Theresia Gouw, chair of Forescout’s board of directors, in a statement. “We are taking immediate action to enforce Forescout’s rights and ensure that Advent fulfills its obligations.”
Forescout’s stock is down $2.08 (9.94 percent) to $18.85 per share in pre-market trading Wednesday, giving the company a valuation of $1.03 billion, or $870 million less than what Advent agreed to pay for the acquisition on Feb. 6.
“On May 15, Advent International notified Forescout Technologies that Forescout had not satisfied the closing conditions in the Merger Agreement, and as a result Advent would not be proceeding to consummate the merger on May 18,” Advent said in a statement issued Wednesday morning in response to the lawsuit. “Advent reached this conclusion after an extensive analysis that included information provided by Forescout, the company’s first quarter 2020 financial results and a detailed forecasting exercise to better understand future performance.”
The due diligence process conducted by Advent lasted hundreds of hours over multiple months and Forescout said it shared all relevant information with the private equity firm, including detailed financial and technical information as well as Forescout’s internal estimates and projections. Forescout said it provided Advent with detailed and transparent information in response to its every request.
“I remain confident in the strength of Forescout and its incredible team,” Forescout President and CEO Michael DeCesare said in a statement. “Forescout is in a strong financial position, with $100 million of cash on hand as of March 31, 2020. We are well positioned for success and the fundamentals of our business have not changed.”
But Advent, in its statement, took a different view. “Advent’s analysis, which was shared with Forescout, established that the company has experienced a material adverse effect on its business, financial condition and operational results,” the Advent statement said. “In addition, there has been a disproportionate effect on the company’s business relative to its direct peers, most of which have reported strong financial performance in the current environment. Advent has informed Forescout of its belief that the company will lack the ability to meet its financial obligations as they become due based on its expected post-closing financial condition. Further, we believe the company has failed to operate in the ordinary course in several material respects since the signing of the Merger Agreement.”
“Advent had been engaged in ongoing discussions with Forescout about an alternative transaction, and we are disappointed the company has now chosen to pursue litigation. Advent is prepared to respond and will vigorously defend its position in court,” the Advent statement concluded.
Forescout was sued Friday by vendor Fortinet in US District Court for allegedly violating three patents. Fortinet claimed in a 24-page filing that products such as Forescout’s CounterACT Network Access Control tool violate patents held by Fortinet after its 2018 acquisition of rival Bradford Networks.
On May 11, Forescout announced earnings that came in well short of analyst expectations. The company said that revenue for the quarter ended March 31 fell 24 percent to $57.2 million due to the impact of the coronavirus pandemic on large deals and sales of new perpetual licenses. Analysts had been expecting sales of $78.9 million in the quarter, according to Seeking Alpha.
Meanwhile, Forescout’s GAAP net loss worsened by 78 percent to $61.2 million, or $1.26 per share, far worse than the GAAP net loss of $0.56 per share that analysts had been expecting, according to Seeking Alpha.
The proposed acquisition of Forescout by Advent International was announced less than two-and-a-half years after Forescout first went public. The transaction was overwhelmingly approved by Forescout shareholders in April.