Be careful what you wish for, goes the popular axiom.
Short sellers of British cybersecurity firm Darktrace PLC (LSE:DARK) will be licking their wounds today after the FTSE 250-listed group accepted a US$5.3 million takeover bid from US private equity firm Thoma Bravo.
Darktrace’s directors have unanimously recommended the offer, with the price a 148% premium to its IPO price of 250p on 30 April 2021.
While it’s true that Darktrace’s shares have performed well recently (50% higher year to date prior to today’s 18% post-takeover-announcement rally), the stock has been consistently attacked by short-selling hedge funds for a variety of reasons.
Matthew ‘Dark Destroyer’ Earl of hedge fund Shadowfall amassed a large short position in Darktrace late last year on a bearish bet on its churn rate, leadership team and corporate culture.
Earlier that year, Darktrace faced an attack from another short seller called Quintessential Capital Management.
Quintessential’s accusations of accounting shortfalls within Darktrace led to Big Four accountant EY launching an investigation into its financial reports.
The investigation came up empty, but the whole ordeal undoubtedly added unquantifiable negative sentiment around the group.
The fact that Darktrace was co-founded by Mike Lynch, who faced extradition to the US last year under civil and criminal charges relating to the sale of his software firm Autonomy to HP, has only added fuel to the short sellers’ fire.
According to ADVFN data, Darktrace currently has a 1.55% net short position. Certainly not at the very top of the most-shorted list, but still no small beer.
They now face having their shorts wiped out as the market rallies around Darktrace to match the substantial premium represented by Thoma Bravo’s bid.
It’s unclear if the bid and subsequent surge in share prices took Darktrace bears by surprise, but there’s every chance that it did.
With private equity wolves circling undervalued British companies more than ever, the Darktrace saga shows that take privates have emerged as another layer of risk to betting against British mid-caps.