UK cybersecurity firm Darktrace confounded much the scepticism that had led to it downgrading its IPO valuation from the £3 billion originally targeted to £1.7 billion by gaining 32% during its first day of trading on Friday. The IPO share price of 250p saw gains of 44% to 360p at one point before closing the session at 330p. That represented a gain of 32% over its first day as a public company, equating to a market capitalisation of £2.3 billion.
The biggest issue for institutional investors being courted by the Darktrace IPO was the heavy involvement of Mike Lynch. The businessman is fighting extradition to the USA on fraud charges related to the sale of his big data analytics company Autonomy to Hewlett-Packard for $11 billion in 2011.
The new owners wrote off $8.8 billion of that valuation just a year later, accusing Lynch and Autonomy’s CFO Sushovan Hussain of artificially inflating the company’s revenues. Mr Hussain was convicted by a San Francisco court. Mr Lynch has defied the U.S. court’s command to travel to the USA for his own trial and is fighting attempts to extradite him.
Invoke Capital, the venture fund Lynch founded after the sale of Autonomy, presumably financed by that windfall, was the early seed investor in Darktrace, which was born out of its start-up incubator programme. Lynch and his wife own 16.2% of Darktrace and didn’t sell any of their equity stake through the IPO. Until recently Lynch sat on the company’s board of advisors and was a director until being indicted in 2018.
The connection with Mr Lynch put a damper on the run-up to the IPO and reportedly caused unease among potential investors. The situation also meant any bank that worked on the IPO had to file a suspicious activity report with authorities which was enough to put off the ‘top tier’ of investment banks, who weren’t involved. Instead, secondary investment banks Berenberg, Jefferies and KKR Capital worked on the floatation.
But despite the challenges, Darktrace has pulled off a PR coup. While Deliveroo, the last major tech IPO in London, saw its value plunge by almost 30% when its shares started trading, Darktrace has pulled off the inverse.
Darktrace’s share price ‘popping’ on its market debut will go down as a coup for chief executive Poppy Gustaffson, who previously worked for Autonomy. Especially since the IPO prospectus was forced to warn the company risked a “potential liability in relation to possible money laundering offences arising out of its historic funding” by Invoke.
It remains to be seen if Darktrace can maintain the positive momentum of its first day as a public company. Independent institutional stockbroker Numis last month questioned just how popular Darktrace’s products were with its clients. Darktrace published a churn rate, clients who don’t renew their contracts, of 8% but Numis queried how accurate that will prove to be over time.
Numis analysts believe that number may be temporarily much lower than it eventually proves to be because Darktrace locks clients into 3-year contracts and it currently has a rapid growth rate. Other analysts have raised a flag over the 6% of revenues the company ploughs back into research and development, which is much lower than competitors spend keeping up with fast-moving developments in cybersecurity.
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