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After a contentious legal dispute that involved allegations of channel stuffing, Advent International's proposed acquisition of Forescout Technologies is back on.
Forescout announced Wednesday that the vendor's board approved a revised acquisition agreement in which the private equity firm will purchase all outstanding Forescout shares at $29 per share. The original Forescout acquisition agreement, which was announced in February, was for $1.9 billion, or $33 per share, approximately 30% higher than the vendor's closing price of $25.45 on Oct. 18, 2019.
But in May, Advent called off the acquisition just three days before the deal was scheduled to close, claiming the security vendor experienced a "material adverse effect" that prevented it from meeting the closing conditions. Forescout disputed the claim, saying the acquisition agreement explicitly covered any risks associated with the COVID-19 pandemic, and filed a lawsuit against Advent in the Delaware Court of Chancery for violating the terms of the agreement.
'Channel stuffing' alleged
Following Forescout's lawsuit, Advent accused Forescout of channel stuffing -- an unethical and potentially illegal practice in which a company sells more products to a distribution channel partner than the partner is reasonably able to resell. Channel stuffing is used by companies to inflate their sales and revenue numbers for a given reporting period, which can lead to false SEC filings; in 2006, McAfee paid a $50 million fine for engaging in channel stuffing that overstated the vendor's revenue by 131% during a three-year span.
In June, Advent took legal action of its own; in the same Delaware court, Advent subpoenaed documents from Merlin International, a Forescout reseller partner based in Vienna, Va. Advent said it received an email from an alleged whistleblower who accused Forescout of engaging in a channel stuffing scheme during the fourth quarter of 2019 with Merlin.
Advent's complaint claimed Forescout's fourth-quarter revenue was inflated by "an abnormal transaction" with Merlin. In a statement to CRN, Merlin denied the allegations and said it had been dragged into the middle of the legal dispute between Forescout and Advent. Forescout also denied the allegations.
The details of the alleged channel stuffing scheme, as well as the identity of the whistleblower, remain unclear. However, in May SearchSecurity received a statement from Ben Axler, founder and chief investment officer at investment firm Spruce Point Capital Management, regarding the allegation:
"In light of Forescout's disappointing Q1 2020 results, and evidence that suggests the possibility of channel stuffing by selling hardware at negative margin, we continue to believe it's in the best interest of the buyers to terminate the purchase agreement rather than reward management with any takeover premium for its failures," Axler wrote via email.
When asked for evidence of the allegation, Axler emailed a link to a Spruce Point report that speculated the vendor's "deeply discounted" sales in the first quarter this year were evidence of channel stuffing. SearchSecurity did not publish that portion of Axler's statement in its article because at the time there was no evidence supporting the allegation, and Advent had not yet taken legal action against Forescout.
Spruce Point had publicly criticized the Forescout acquisition when it was first announced, and released a statement in April urging Advent to abandon the deal.
SearchSecurity contacted Advent regarding the channel stuffing accusation and the status of its probe. The company did not respond at press time.
Revised agreement 'best path forward' for Forescout acquisition
Despite the allegation and contentious legal disputes, Advent and Forescout buried their swords. As part of the new acquisition agreement, the two companies reached a settlement for the pending litigation in the Delaware Court of Chancery.
Despite a reduction in the sale price by $4 per share, Theresia Gouw, chair of Forescout's board of directors, said the board unanimously approved the revised agreement and recommended it to shareholders. "We believe revising the terms of the previously announced transaction is the best path forward for Forescout because it removes the significant ongoing distraction of the pending litigation and delivers immediate and certain value to Forescout's shareholders," she said in a statement.
Bryan TaylorManaging partner, Advent
Advent partnered with private equity firm Crosspoint Capital Partners as an advisor on the deal. Under the agreement, Greg Clark, managing partner of Crosspoint Capital Partners and former CEO of Symantec, will join Forescout's board and Nicholas Noviello, former vice president and CFO of Symantec, will join Forescout as COO.
"Advent and Forescout worked in good faith to reach a solution that could benefit all stakeholders," Bryan Taylor, managing partner and head of Advent's technology investment team, said in a statement. "We look forward to helping Forescout continue to deliver world-class cybersecurity solutions to customers for years to come."
The revised acquisition is expected to close in the third quarter.
Security news writer Arielle Waldman contributed to this report.