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Shadow of doubt

17 February 2021 By Aimee Donnellan

Cybersecurity companies make money out of weeding out carefully concealed threats. Yet there is no shortage of things to worry potential investors in Darktrace’s listing. Top investor Mike Lynch is facing extradition on fraud charges, members of its senior management and board have ties to him, and some banks are steering clear of the float. That makes the Cambridge-based group the ultimate test of a hot market for initial public offerings.

Darktrace, which sells anti-hacking software, should be an IPO banker’s dream. Set up just in 2013, its revenue nearly doubled in 2019 to over 106 million pounds, it boasts clients such as Coca-Cola and Siemens, and could be worth 4 billion pounds. Yet UBS, which was hired as lead bookrunner alongside Jefferies, has dropped out, after its compliance department was unable to complete a suspicious activity report on the group, Sky News says. Goldman Sachs last September declined to pitch for the deal, according to Sky. Darktrace is now using Jefferies, Berenberg and KKR, none of which is ranked in the top 10 in Europe’s equity league tables, according to Refinitiv data.

Lynch’s troubles could have consequences for Darktrace. He is fighting a U.S. extradition related to Hewlett Packard’s $12 billion purchase of Autonomy in 2011, and is accused by the U.S. Department of Justice of inflating the British group’s revenue. He and his investment fund, Invoke Capital, own around 40% of Darktrace. If he is convicted, he might end up having to sell his half of the stake to pay legal fees or fines. Darktrace’s business may also suffer if he is extradited and the U.S. fraud trial spooks clients. Lynch denies all of the charges and is contesting the extradition.

The Cambridge-based group could be doing more to separate itself from Lynch. He still sits on Darktrace’s advisory board. Its ranks are chock-full of Autonomy alumni, including Chief Executive Poppy Gustafsson, who worked as corporate controller at the UK firm. Darktrace Chairman Robert Webb was also Autonomy’s chairman. Its board includes a former Autonomy general counsel, Andrew Kanter. Darktrace, which declined to comment, is making some changes: Webb will be replaced by Gordon Hurst, a former Capita executive, Sky reckons. However, it would be better to delay the float until after the trial, or until its management and ownership is less closely linked with Lynch.

Still, now is a good time to list. Fund managers are clamouring to buy fast-growing technology stocks, of which there are relatively few in Europe, as demonstrated by the success of THG, an online seller of beauty and nutrition products whose shares have risen 50% since its offering. Darktrace will test that appetite to the limit. That the company is pushing ahead despite so many red flags suggests investors may be prepared to pinch their noses and buy anyway.


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