Forescout Technologies FSCT
Advent overpaid $33/share for Forescout — management buried weaker forecasts and Q1 sales fell 24%; renegotiating 35-50% lower or paying the $112M break fee both beat closing.
Thesis
Spruce Point urges Advent International to slash its $33/share, $1.8bn buyout of Forescout Technologies (FSCT) by 35-50% or walk away, even after paying the $111.7M termination fee. The forensic core: Forescout's deal proxy reveals management prepared four financial plans but appears to have shared only the most optimistic with prospective acquirers, withholding an 'Illustrative Guidance' that projected an 18% Q1 revenue decline. Actual Q1 FY20 sales then came in at $57.2M, down 24.3% — confirming the buried forecast and predating the pandemic excuse. A Q1 2020 restructuring and surprise revolver drawdown may also breach merger forbearance covenants. With cybersecurity peer Avira just acquired at 2.2x sales versus Forescout's 4.7x, and applying a pandemic-adjusted 3x peer multiple, FSCT shares are worth $13-21 — 35-60% below the deal price.
SCQA
Advent International agreed on Feb 6, 2020 to acquire chronically unprofitable cybersecurity vendor Forescout Technologies for $33/share — a $1.8bn buyout at 4.7x FY20 sales, financed by $400M of Owl Rock debt and approved by FSCT shareholders.
Per the proxy timeline, management appears to have withheld its more pessimistic 'Illustrative Guidance' and Preliminary Alternate Plan from buyers; actual Q1 sales then collapsed 24% YoY, predating the pandemic, and a surprise restructuring plus revolver drawdown may breach forbearance covenants.
Advent should treat the disclosure failures, restructuring, and credit-line drawdown as Material Adverse Effect grounds — using them to renegotiate the deal price 35-50% lower, or walk away and absorb the $111.7M termination fee.
Walking nets Advent ~$286M after the break fee; revaluing FSCT at 4.7x pandemic-adjusted Illustrative Guidance gives ~$26/share, while a 3x peer-discount multiple implies $13-21/share — 35-60% downside from $33.
The three reasons
- 1
Forescout hid its pessimistic 'Illustrative Guidance' from buyers; Q1 sales then collapsed 24% YoY, confirming the buried forecast
- 2
Comparable cybersecurity deal Avira closed April 2020 at 2.2x sales — less than half Forescout's 4.7x take-out multiple
- 3
Net of the $111.7M break fee, Advent saves ~$286M of overpayment by walking away from the deal
Primary demands
- Advent should renegotiate the $33/share deal price 35-50% lower
- Advent should consider abandoning the transaction outright and pay the $111.7M break fee
- Use the undisclosed Illustrative Guidance, possible covenant breaches, and pandemic as renegotiation leverage
- Conduct independent diligence on customer relationships (e.g., FOIA requests to government clients)
KPIs cited
Pattern membership
Precedents cited
- Investcorp acquisition of Avira (April 2020) at ~2.2x sales — profitable cybersecurity comp
- Forescout Q3 FY19 preannouncement (Oct 2019) — 9% sales miss triggered ~37% single-day stock drop
- Pre-COVID software M&A median NTM revenue multiple of 4.7x (cited from deal proxy)
Composition what's on the 55 slides
Slide gallery ·
Notes
Unusual short-seller posture: rather than a pure price-down campaign, Spruce Point lobbies the acquirer (Advent International) directly via two open letters to head of tech investing Bryan Taylor (April 30 and May 12, 2020), bundled with a ~42-slide forensic deck. The thesis hinges on the deal proxy timeline — arguing management shared only the optimistic 'Target Plan' with buyers while withholding the more pessimistic 'Preliminary Alternate Plan' and 'Illustrative Guidance.' Q1 FY20 results released May 12 (sales -24.3%) confirmed the buried forecast and triggered this report. Also alleges potential Forbearance Covenant breaches via Q1 restructuring and revolver drawdown that could constitute a Material Adverse Effect. Author Ben Axler (Managing Partner). Cover image is unusually striking — camouflaged sniper with owl and rat — earning a higher visual score than the otherwise-template body slides. Outcome: Advent did renegotiate; deal closed at $29/share in August 2020.