Why Don’t Go-Shops Go Anywhere? Ask Management…

M&A may be ice cold in most sectors, but it’s at least lukewarm in the world of middle market technology. Take for example, the recent heated auction for SumTotal Systems. There’s also the go-shop struggle for Greenfield Online, and Symphony Technology Group’s purchase of MSC Software.

My eyes happen to be on Thoma Bravo’s bid for Entrust, the fate of which will be decided by vote on Friday. Not because of Entrust’s technology, per se, but because of the sale process’ inherent conflicts of interest.

The publicly-traded digital security business company received three bids during the go-shop period for its agreed-upon sale to Thoma Bravo. Notably, Thoma Bravo’s already-sweetened bid for $1.85 per share is below a previously rejected $3 per share offer from an unnamed strategic.

For unknown reasons, the board deemed those three go-shop bids inferior. Thomas Kirchner at Seeking Alpha suspects that that curious decision has everything to do with management. See, the deal was structured as what I’ve heard some analysts call a “BIMBO”: Buy-In-Management Buyout.

In other words, the management gets to buy into the buyout. It’s a pretty common practice, with the management team set to receive a “success fee” and equity stakes in the company (which they would receive regardless of the buyer). But in the Thoma Bravo deal, the management team also gets to keep their jobs. That’s not be the case with the three go-shop offers, according to a letter from dissenting Entrust board member Douglas Schloss of Rexnord Management.

The management-supported buyout has always confused me, since it does seem to incentivize management teams against their fiduciary duties of selling at the highest possible price. If they’re receiving equity as part of the deal, and a lower deal value means potentially more equity or a larger paycheck, they should be considered part of the buy side. In this case, Entrust’s Strategic Planning Committee told Thoma Bravo it could no longer speak with the management regarding the terms of their future employment during the diligence process. But according to the proxy filing, the committee apparently backed down from that.

That all adds up to some CEO rage from shareholders. It doesn’t make Thoma Bravo look too hot either, even though the firm is really just trying to do what every buyout firm claims it does: Take advantage of low valuations on good, undervalued companies. Given recent M&A numbers, it doesn’t seem too many have succeeded in walking the walk.