Instructure Sale Update: No bids received, a third of investor shares now against sale
//At midnight last night the Instructure 1Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. “go-shop” period, where the company could solicit and accept a superior bid to Thoma Bravo’s bid, ended with no new bids and a revised proxy statement. At the same time, there is much more investor protest against the sale, both from named investors and anonymous ones. A third of investors appear to be against the sale.
Revised Proxy Statement
As part of the process, Instructure has revised the proxy statement that is used to inform shareholders of relevant details leading up to the vote. They have also filed details about the end of the go-shop period.
To date, no party has submitted an alternative proposal to acquire Instructure.
At the direction of Instructure’s Board of Directors, representatives of J.P. Morgan, Instructure’s financial advisor, broadly solicited and contacted third parties that Instructure and J.P. Morgan believed might be interested in a possible alternative transaction, approaching a total of 24 potential buyers during the go-shop period to determine their interest in exploring a potential transaction with Instructure, including 9 parties with whom Instructure had discussed a potential strategic transaction prior to the execution of the merger agreement. Instructure and its financial advisor engaged with a total of 55 parties regarding a possible transaction.
The revised proxy also describes details on the shareholders’ vote:
- The vote is scheduled for February 13, 2020.
- The Directors and Executive Officers control approximately 10.1% of outstanding share and have already indicated they will all vote FOR the merger agreement (technical nature of the acquisition) and FOR the executive compensation plan.
- The vote for the merger agreement is binding – they must get a majority of shareholder votes to complete the acquisition, but the vote for the executive compensation plan is non-binding (advisory).
More Investors Come Out Against Sale
At the same time, a fourth large investor (this one with a 1.5% share) has come out against the sale. As described by Bloomberg:
Thoma Bravo’s agreement last month to buy Instructure for $47.60 per share sharply undervalues the company, Lateef Investment Management said in a letter to the board. Instructure is worth at least $60 per share — and that’s before factoring in the value of deductions it can make to lower its taxable income, Lateef said in the letter, a copy of which was obtained by Bloomberg. [snip]
“Goldsmith staying on as CEO seems like a conflict of interest where he’s putting his own interests ahead of shareholders,” Tran said. “We don’t think Dan has done a good job with Bridge and this deal rewards him rather than hold him accountable.” Bridge is Instructure’s employee development software division.
It looks like the protest goes beyond even the big four, again according to Bloomberg:
At least four stockholders — Praesidium Investment Management, Rivulet Capital, Lateef Investment Management and Oberndorf Enterprises — have written letters to the board expressing concerns about the sales process and possible conflicts of interest in the deal. Several other investors expressed their dissatisfaction with the deal to Bloomberg on the condition of remaining anonymous because their corporate policies prevent them from discussing their views with the media.
“The number of large, long-term, diligent shareholders which have expressed opposition to the proposed merger speaks for itself,” said Oberndorf Chairman William Oberndorf, whose firm owns a 3.8% stake in Instructure. “The management and the board have lost the trust of shareholders and now face the prospect of a failed shareholder vote.”
This is just the second time in his 40-year investing career that he has written a letter to express concerns about a management team or board for what he said was a failure of their fiduciary duties.
Additional Details
If approved by shareholders, the deal is expected to close before the end of March, 2020, allowing for final regulatory approval (anti-trust, primarily) and filing of final legal paperwork.
The big differences in this new no-shop phase are that Instructure may not actively solicit new bids and that the termination fee, should Instructure walk away from the Bravo agreement, rises from $29 million to $63 million.
The deal is not dependent on securing financing. This doesn’t mean that Thoma Bravo will not get debt financing for Instructure, but it does mean that their bid is secured with cash funds.
This one is still worth watching.
For more details on the information disclosed in the proxy statement, see the posts “Insights From Instructure Preliminary Proxy Statement” and “Instructure Sale: Two large investors against deal and claiming conflicts of interest (update – Three)“.
Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.
Of course, those investors coming out against the sale aren’t likely because of concerns for market or customer impact, but rather because they simply feel the price is too low.
Should Thoma Bravo raise their price, then objections could very will melt away. According to Yahoo! Finance, INST has ~38M shares outstanding. 1.5% of that is 570K shares. Each dollar higher is more than $1/2M to Lateef and about $1.5M to Oberndorf, with each dollar representing a >2% increase in return over the agreed $47.6 strike price.
If there is room for a higher return on the books (such as additional cost cutting, tax reduction, etc.) then the current investors will fight for the higher price, as they feel the value is already there, but unrecognized. The disagreement doesn’t seem to be about strategic direction, higher industry upside, or better choices. It’s just about Thoma Bravo allegedly getting too much value from the current share holders on too low a price. Thoma Bravo could raise their offer, or they could go into the vote daring shareholders to turn it down (given reportedly no other bidders).
What would be interesting is, if it goes to vote and gets rejected, what would the next life for INST look like, with an exec team that seems out of ideas and ready to bail after a collectively short time on the job.
What’s been fascinating about this discussion is how little Josh Coates gets mentioned. Josh stepped down as CEO as a first step toward liquidating his large stock position in Instructure. Josh hand-picked Dan Goldsmith for president, with a promise of the CEO role shortly thereafter. Of the “10.1% of shares controlled by the directors and executive officers who will vote FOR the merger agreement,” nearly all are held by Josh. Josh has never shown a true passion for education. He wanted to build a technology company, take it public, and then cash out. The last part has been problematic as the chairman of the company. The only way to convert the stock to cash is to sell the company, which was his plan from the beginning. This story isn’t about Dan Goldsmith or Thoma Bravo. They are just willing participants. It’s about Josh finding a way to walk away with his $100 million in cash.
Rhegan – Thank you for bringing this up. You are right, the story is about the history of Instructure and Josh Coates. I have worked with Canvas for years, but I was always shocked at how inappropriate and disconnected Josh. Every year at InstructureCon he would be derogatory and make off color comments about people. Once, he offended women, adjunct professors, and the deaf in the span of 5 mins. He never interacted with customers, and I heard he worked part time. What kind of CEO does that? What kind of Board lets a CEO do that? It seems that Josh never liked Instructure or cared about education. Look at the facts too, Josh was leading the sale, he makes 2 million dollars selling stock on November 13th above the sale price and then Instructure announces they are selling the company on November 14th. Seriously! It is all about the money for Josh Coates. Thank goodness he is gone.