Glass Lewis Recommends AGAINST Magnet Forensics Takeover by Thoma Bravo, Siding with Nellore Capital

• Leading Independent Proxy Advisor Cites "Inadequate Valuation"
• Calls Current Premium "Marginal" and Management's Quantitative Case "Unconvincing and Questionably Sourced"
• Highlights Other Issues Including "Procedural Depth and Transparency, Transaction Timing, Valuation Factors and a Fairly Underwhelming Quantitative Case from Magnet"
• Fails to see this as a "Convincingly Attractive Procedural Outcome… as The Board Pressed Forward with Thoma Bravo on an Effectively Exclusive Basis on Nearly At-Market Terms" Despite the Availability of a Materially Higher Internal Forecast
• Determines Current Offer May Reflect No Value for Grayshift Synergies
• Nellore Clarifies 'Bought Votes' Language in its Circular

PALO ALTO, Calif., March 15, 2023 /PRNewswire/ - Nellore Capital Management LLC ("Nellore"), the largest holder of subordinate voting shares ("SV Shares") of Magnet Forensics Inc. (TSX: MAGT) ("Magnet"), today announced that independent proxy advisor Glass Lewis & Co. ("Glass Lewis") has recommended that Magnet Forensics shareholders vote AGAINST the takeover by Thoma Bravo, citing "inadequate valuation."

Glass Lewis is recognized as a leading independent proxy voting and corporate governance advisory firm in both Canada and the United States. Hundreds of major institutional investment firms, mutual funds and fiduciaries throughout North America rely upon its analyses and recommendations. The independent Glass Lewis recommendation, based on a careful review of the facts and arguments, is intended to assist shareholders in making choices regarding proxy voting decisions.

"I am pleased with Glass Lewis' thorough, independent consideration of Nellore's arguments and the firm advice to vote against the transaction. The Glass Lewis analysis is fact-based and its recommendation much more straightforward than a shaky 'cautionary approval' from another proxy advisor. I encourage all institutional investors to carefully read the report in its entirety" said Nellore's Founder and Portfolio Manager Sakya Duvvuru.

In its detailed 10-page report, Glass Lewis stated:

• "We [Glass Lewis] believe the sum of available factors suggests the proposed premium is, at best, marginal, that key points of management's quantitative case are, in equal turns, unconvincing and questionably sourced and that other perspectives, including those pointedly promulgated by Nellore, suggest the proposed consideration is unlikely to represent full, compelling value for unaffiliated Magnet investors, particularly given the presence of further synergistic benefits which may accrue to Thoma Bravo and the Rolling Shareholders after closing."
• "We [Glass Lewis] see limited cause for unaffiliated investors to endorse a proposal which may reflect no pending synergies with Grayshift and which seems to only fractionally eclipse Magnet's stand-alone trading value"
• 'We [Glass Lewis] believe an array of more granular considerations, including procedural depth and transparency, transaction timing, valuation factors and a fairly underwhelming quantitative case from Magnet, collectively weigh against investor support here. Our view in this regard is reinforced by the fact that Magnet's own projections — which management has routinely exceeded, to particularly great effect in recent periods — suggest that the Company expects continued top line growth, sturdy margins and strong free cash flows."
• "We [Glass Lewis] are concerned the disclosed process — which appears to have involved substantive diligence with only one other party, generated no alternative bids and advanced on marginally adjusted terms despite material changes in the Company's stand-alone trading value — may not have been suitably engineered to generate the greatest possible value for Magnet's current performance and prospects under extant market conditions."
• We [Glass Lewis] note Magnet recently announced favorable 4Q2022 results on March 9, 2023, materially outstripping consensus estimates, drawing a fresh fusillade from Nellore and contributing to an additional surge in trading value which left the Company fully $0.25 over deal value at market close on the same day. This ultimately compounds our concern with transactional timing and derived value, as the full concomitant stand-alone impact of another quarter of significant beats against consensus estimates is necessarily obscured by the pendency of the Thoma Bravo transaction.
• "Despite this shift and the availability of an internal forecast which indicated Magnet would likely continue to soundly beat then-current consensus estimates, the board pressed forward with Thoma Bravo on an effectively exclusive basis on nearly at-market terms, ultimately securing a price representing a premium of just 2.1% over Magnet's late-process unaffected trading high of CAD 43.33 on December 13, 2022. We [Glass Lewis] fail to see this as a convincingly attractive procedural outcome, even if Thoma Bravo is the most likely suitor following its strategic investment in Grayshift."
• "We [Glass Lewis] share the concern [of Nellore] that Magnet's circular presses forward with several themes that seem to depart from management's own expectations and the Company's historical performance. For example, we would highlight the following:
• Magnet highlights a 10.3x NTM revenue multiple ultimately based on a mean consensus CY2023 revenue estimate of US$126 million, despite a now-codified internal projection of US$133 million;
• Magnet highlights a 51.0x NTM EBITDA multiple ultimately based on a mean consensus CY2023 EBITDA estimate of US$26 million, despite a now-codified internal projection of US$28 million; and
• Magnet does not seek to reconcile or discuss its own forecast in any meaningful fashion within the primary circular, and does not include a discussion of recent operational performance or any convincing reasoning as to why investors should rely on consensus estimates which very rarely seem to accurately approximate the Company's operational outcomes (e.g. beats against consensus revenue and EBITDA estimates for seven consecutive quarters, including beats of 7.1% and 61.0% for 4Q2022 revenue and EBITDA, respectively)."
• "Coupled with the remainder of our quantitative concerns, we [Glass Lewis] believe this approach — which seems to offer oddly short shrift to the Company's demonstrated performance under sitting management — weighs heavily on Magnet's representation of the current arrangement."
• "We also note that three comparable companies identified by Nellore as having similar combined revenue growth rates and profit margins (i.e. TheTradeDesk, Adyen and Doximity) traded at 2023 estimated revenue multiples of 10.8x, 19.7x and 10.7x, respectively. Taken together with Magnet's previously discussed pre-announcement trading patterns, these metrics arguably further undermine the reference ranges utilized in certain of the disclosed analyses of MS and CIBC"

Separate from the Glass Lewis report, Nellore advises shareholders that their vote is especially important because the Magnet employee shareholders voting on the arrangement, even excluding the Rolling Shareholders, are subject to very significant conflicts of interest and represent 12% of what are supposed to be disinterested votes. The table below, setting forth information from Magnet's proxy circular, shows the "Convertible Consideration" to be received by these holders, in absolute terms and relative to the values of their shareholdings. The values, and the proportions, are significant. The median conflicted shareholder makes roughly C$2.3mm (the mean is C$2mm), with median Convertible Compensation triggered by the transaction relative to shareholding value of 3x (the mean is 40x).

References in Nellore's proxy circular to "bought votes" and strong-arming of employee shareholders referred only to these benefits, and the conflicts of interest affecting the shareholders, and were not intended to suggest any other incentives or pressures.

While these employees are technically allowed to vote, because their Convertible Consideration is either less than 5% or their shareholding is less than 1% of the SV share class, the spirit of achieving a simple majority of disinterested shareholder votes is violated. In the case of Angelo Loberto, who alone makes up 9% of the SV share class vote, Nellore believes his Convertible Consideration triggered by the transaction is just barely below 5% and his future employment compensation post transaction is NOT considered in this calculation. Again, we acknowledge that this is legally allowed. But is it fair in determining if disinterested shareholders want to take this deal? Don't let the Conflicted Votes determine our financial outcome!

Time is running out. Please vote the GOLD proxy today AGAINST the takeover, to ensure your vote is counted at the Meeting of Shareholders. The voting deadline for the GOLD proxy is 5:00 p.m. (Toronto Time) on March 20, 2023. If you have already voted another proxy, you can still vote the GOLD proxy AGAINST the takeover. Only the later-dated vote will be counted. 

If you require assistance with voting your shares, please contact Carson Proxy Advisors:
North American Toll Free Phone: 1-800-530-5189; Local (Collect outside North America): 416-751-2066 Email: [email protected]

Nellore Capital Management invests in entrepreneurially managed, competitively advantaged technology businesses globally for the long term.

SOURCE Nellore Capital Management LLC

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