Most corporate acquisitions, particularly when a company is taken private (acquired off public market by private equity or strategic acquirer), lead to multiple complaints from shareholders about whether the deal is fair. But what is happening with 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. seems much more serious based on recent SEC filings from two investors with a combined 12.7% position, where they both come out against the deal and complain about conflicts of interest and inconsistent public statements. The sale is not a done deal, and these filings also give useful insight on Instructure value and strategy.

Rivulet Capital 13D

For quick background, Rivulet Capital, a hedge fund that owns more than 5% of Instructure’s outstanding shares, filed a 13D SEC form with their position on Dec 5th, as reported by Reuters.

We “strongly oppose the proposed going-private transaction” where Thoma Bravo would pay $47.60 a share for the company, the filing said, adding that it “significantly undervalues the Company.

Moreover it was wrong to run a “rushed, 3-week strategic alternatives process over the Thanksgiving holiday” and have a proposed 35-day go shop period that would include more holidays, Christmas and New Year’s, the hedge fund wrote in the filing.

Instructure 8K

Instructure then filed with the SEC on Dec 6th an 8-K form about their acquisition process, in an apparent effort to refute these Rivulet claims, describing that the process started on January 20, 2019. In that filing, Instructure described that it has been formally working with an investment banker and considering buy-out options since January.

Instructure initially signed JP Morgan as its formal advisor in January, entertained 19 separate financial firms or strategic companies “that expressed interest in a possible acquisition of, or investment in, the Company”, and received several offers before announcing the agreement with Thoma Bravo.

The Company conducted a comprehensive and deliberate process, lasting eleven months and ultimately involving 40 parties, 19 of which signed non-disclosure agreements and engaged with the Company, before entering into the Merger Agreement. In order to ensure that the transactions contemplated by the Merger Agreement maximizes value for its stockholders, during the period that began on December 4 and will continue until 11:59 PM (Pacific Time) on January 8, 2020 (the “Go-Shop Period”), the Company will be actively soliciting acquisition proposals and will consider any proposal that the Board determines in good faith, would, if consummated, be more favorable, from a financial point of view (after considering all legal, regulatory and financing aspects of the proposal), to the stockholders of the Company (in their capacity as such) than the transactions contemplated by the Merger Agreement.

This filing, however, seems to have made matters worse with at least two large investors, not better.

Rivulet Capital 13D/A

On Dec 9th Rivulet sent a letter to the Instructure board (also filed with SEC), pointing out that they are not activist investors and have never filed a 13D before in their eight-year history. In addition, Rivulet calls out how unique Instructure was with its “compelling alternative” in the market.

We invested in Instructure because we admire the company, and we see plenty of opportunity for continued growth and success. With Canvas, Instructure has developed the market-leading learning management software product for the higher education market. The Canvas story has provided an incredible lesson about the success that comes from a focus on innovation, putting students first, and offering a compelling alternative to a greedy incumbent that was run for the enrichment of management and shareholders. Unfortunately, with the announced sale of the company to Thoma Bravo, Instructure is providing a different sort of lesson to its customers and shareholders. Here, it appears that the company has run a rushed strategic review process that was designed to result in a sale to management’s chosen buyer at a low price…in order for management to save their jobs and enrich themselves in the years ahead. It is outrageous.

Rivulet then argues that Instructure does not have an “urgent need to sell” and could be patient, even questioning the motives for a quick sales process.

Instructure does not need additional capital. There is no urgent need to sell to private equity unless they are willing to pay a particularly attractive price. And yet, the proposed take-private transaction appears to be a wonderful deal for Thoma Bravo. They are buying a great company, at an attractive price, and they will spend the next few years focusing the business on the education vertical, growing market share, and increasing margins. It is likely to be an even better deal for senior executives. These executives will be executing the exact same strategic plan that many shareholders have been encouraging the company to pursue in the public markets. However, they could personally end up making substantially more money executing this plan ‘in partnership’ with their chosen private equity sponsor, depending on the terms of their future employment agreements.

Praesidium 13D/A

Late yesterday (Dec 12th), activist investor Praesidium wrote a letter to the Instructure board (also filed with SEC) that they, like Rivulet, plan to oppose the proposed sale and have serious concerns with the process and potential conflicts of interest. They first pointed out that they own approximately 7.5% of outstanding shares, then described the Instructure potential.

As you are aware, Praesidium has been an investor in Instructure and has been constructively engaged with the Company and the Board for almost a year. Prior to and during this period, the Praesidium team spent countless hours analyzing Instructure’s financials, its competitive positioning and the broader education market. Our original and ongoing work has led us to believe, and we continue to believe, that the Company’s education business is a unique and valuable asset. Canvas’ technology is best-in-class resulting in high competitive win rates and near-perfect customer retention. This has allowed Canvas to garner close to 38% share in the US higher education market. The continued runway in the US and abroad should allow Canvas to grow in the mid-teens for the next few years. In addition, Canvas’ positioning as a trusted partner presents a tremendous opportunity to create an unrivalled [sic] education platform with the opportunity to expand into adjacent areas organically and roll-up smaller companies in what is a currently fragmented market. As we have presented to you in the past, this dominant position in a single vertical should allow for the business to be run very profitably and generate significant free cash flow.

Praesidium then called out that Instructure publicly claimed they had commenced the sales process in November, which directly contradicts the 13K filing that they started in January, and that Instructure “rebuffed” several large PE firms with claims of no process.

The Company recently filed an 8-K (described in more detail below) in which it claims to have “conducted a comprehensive and deliberate process, lasting eleven months” (emphasis added). We believe this is inconsistent with certain public statements made and actions taken by the Company over the past year, which cast doubt on the validity of such claims. On November 14th, the Company stated in a press release that “[t]he previously scheduled financial analyst day on December 3 has been canceled to allow management and the board to explore these strategic alternatives for the company.” However, if the Company felt the need to cancel the analyst day in order to focus on running a process, why would it have even scheduled an analyst day in the first place if it was actually engaged in a process since January? Casting additional doubt on the validity of the Company’s claimed timeline, Praesidium has learned that multiple interested firms were rebuffed by the Company during this purported review period, including three large, reputable private equity firms. Praesidium understands these firms reached out to the Company only to be turned away under the guise that no process was being conducted by Instructure at that time.

Much of the letter described the process to separate the Bridge product line and business line, with shareholders not getting a chance to see the details of that strategy. But the core argument was about conflicts of interest with the team chosen to conduct negotiations.

Perhaps even more alarming, we have heard deeply concerning reports that CEO Dan Goldsmith has expressed to shareholders his unwillingness to work for certain potential acquirers, which means he may have put his own interests ahead of Instructure shareholders. This is not the first time we have seen this type of behavior from Dan. He hired his own sister as Chief Strategy Officer and may have additional motivation to enrich and protect her as well.

Clearly, the composition of this [core negotiating] team is highly inappropriate and considerably undermines the integrity and fairness of the sales process. Each member of the “core team” had a potential conflict of interest in running this process that the Board should have recognized. We believe these conflicting relationships represent a severe misalignment of interests with Instructure shareholders and interfered with the team’s ability to objectively oversee the review process. By its own admission, the Board rejected at least one bid for Instructure in the past year at a price higher than the $47.60 offered by Thoma Bravo. If the Board were truly interested in running a full and fair process to obtain the best price for the benefit of the Company and its shareholders, it should have formed an independent committee of the Board tasked with overseeing this process.

Keep Watching

Note that Instructure has not responded to these letters yet, and we will share any updates as they occur – there are at least two sides to this story.

I realize this might seem like a lot of inside baseball about financial transactions, but this situation is about much more than share price and could get into a legal issue. I am not a financial or legal expert, but the Instructure sale to Thoma Bravo is not a done deal. There is more to come before we see resolution on the possible acquisition.

And Another One

Update 12/19: Another investor with large holding, Oberndorf Enterprises (OEL) with a 5.9% stake in Instructure, came out against the sale with a letter to the board and public release.

OEL has recommended the appointment of an independent special committee with newly chosen legal and financial advisors. The committee should thoroughly review the details of the sale process to date, fully disclose to shareholders all the “clear milestones and target dates focused on profitability and growth” which the management team referenced on its October 28th earnings call, and devote full time and attention to all the Company’s strategic alternatives. We believe these steps may help shareholders make an informed decision as they vote on any proposed merger agreement.

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.