Forescout Technologies (FSCT) is a cybersecurity software company focused on tracking devices in a network and keeping them connected. The company's software can be used to track and manage all sorts of devices, and it's used by many customers as a building block for their internet of things (IoT) networks.
In February 2020, private equity firm Advent International agreed to acquire Forescout for $33 per share, or $1.9 billion; however, Advent got cold feet once the COVID-19 pandemic disrupted the economy, and attempted to walk away from the deal.
Forescout's original buyout deal
When Forescout first announced its buyout in February, the deal's price of $33 per share represented a nice pop from where the stock was trading before the announcement. The private equity company had financing secured, and just needed Forescout's shareholders to approve the deal. The acquisition was expected to be completed by mid-2020.
Why go private? Forescout's business is undergoing a major change as the company transitions from a licensed software model to a subscription software sales model. The company felt that it would be easier to make the business change as a private company, and wanted access to the capital resources of a large financial buyer like Advent International to support its business needs.
Unfortunately, the COVID-19 pandemic changed everything. Financial buyers like Advent felt that they needed to prepare for another financial crisis, and attempted to cut excess spending wherever they could. Although Forescout and Advent had signed an acquisition contract, Advent felt that it could walk away or negotiate because the deal was still pending. Advent claimed that the COVID-19 pandemic created a "material adverse effect" that would be enough cause to void the contract.
Forescout felt differently about the buyout deal and its legal terms. Once Advent stated its intention to walk away, Forescout brought a lawsuit against Advent in order to get a court to compel Advent to fulfill its obligation to acquire Forescout as the contract stated.
Saving the deal
Advent responded to Forescout's lawsuit by counter-suing. Advent accused Forescout of "channel stuffing", which is the process of delivering more products to a customer than they can sell in order to inflate financial performance figures. In other words, Advent accused Forescout of fraud.
And then just before the two sides were due to get their day in court, they announced that they had come to a new acquisition agreement. Forescout agreed to accept $29 per share -- a 12% discount to the prior offer -- and Advent agreed to immediately complete the acquisition. It turns out that while both parties were willing to defend their case, neither wanted to go through the court process, which could have turned ugly.
A good outcome?
In a way, the deal at $29 per share was a good outcome for both sides. Forescout is getting less money, but its shareholders gain certainty -- a valuable thing to have in uncertain times! And Advent is paying 12% less, which amounts to more than $200 million in savings.
Deal-making is extremely difficult during a pandemic. This is especially true for transactions negotiated right before the pandemic, where vastly different assumptions were made about the health of businesses and the economy. Given how much uncertainty has been created, deal-making has slowed to a crawl. Buyers and sellers are waiting to see how things shake out before they are willing to make huge financial decisions for their companies.