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Small shareholders abandoned as private equity muscles in on Nitro. What’s the scam?

by Kim Wingerei | Mar 29, 2023 | What's the scam?

Private equity funds taking listed companies private is never an act of benevolence. They spot an undervalued company, buy it, strip assets where possible, take out the cash, borrow to the hilt and sack as many of the staff as they can get away with; and then presto, a couple of years later, the company is re-listed or on-sold, at great profit.

It’s a great scam if you can afford it, but not so much for minority shareholders who just have to take what they get and lose out on the value uplift.

Nitro Software Ltd (ASX:NTO) is a relatively unknown Australian tech success story. It’s not quite an Atlassian, but reached a market cap close to $1 bill in October of 2021. Nitro sells PDF solutions to big corporates in competition with software giant Adobe, and has been doing well, with a large number of Fortune 500 companies as customers.

Nitro’s share price has, however, dropped along with most of the tech sector over the last 18 months, and the market cap is now $562m.

After a long and convoluted take-over battle, that’s the price Potentia Capital will end up paying as the highest bidder. Nitro’s board supported the eventual under-bidder (Aludo, a Canadian software company) almost until the end. The bidding started at $1.58 per share and ended up at $2.20. A bit of drama along the way as both bidders cried foul, asking the Takeover Panel to adjudicate, which it (politely) declined to do.

Potentia Capital is an Australian fund led by private equity and tech investment veterans Andrew Gray and Tim Reed – both best known for their involvement with MYOB, another Australian tech success story taken private.

On 28 February, Nitro announced the annual results for 2022, showing revenue growth of 31%, cash receipts of US$71 mill (up 39%), no debt and plenty of cash in the bank. Not a company in need of rescue! Quite the contrary, according to CEO Sam Chandler:

Nitro remains confident in the scale of the market opportunity in the years ahead, with FY2022 being another year of strategic investment in the company’s core operation.

So why sell, then? Why would the board not want to continue and develop the business and have all shareholders benefit in that growth?

Sam Chandler was a co-founder of the business and retained a substantial shareholding. Today the company announced that Chandler and CFO, Ana Sirbu, are leaving the company with immediate effect. Let the private equity game begin…

Disclosure: this writer is (was) a small shareholder of Nitro.

Kim Wingerei is a businessman turned writer and commentator. He is passionate about free speech, human rights, democracy and the politics of change. Originally from Norway, Kim has lived in Australia for 30 years. Author of ‘Why Democracy is Broken – A Blueprint for Change’.

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