The proxy materials reveal a flawed process initiated and managed by a conflicted board, conflicted management, and conflicted insiders.
Non-Rolling Shareholders, who collectively own 63% of the Company, should not accept an unfair and opportunistic Arrangement for the convenience of a single minority shareholder.
Q4’s core business is stable, profitable, well positioned for growth and has multiple options for unlocking immediate value and should remain a standalone public company.
NEW YORK, Jan. 12, 2024 (GLOBE NEWSWIRE) -- FINSIGHT Group Inc ("FINSIGHT"), a New York City based financial technology provider that beneficially owns over 2 million or approximately 5.6% of Q4’s outstanding shares and represents approximately 8.9% of the non-rolling shareholders, today called on its fellow Q4 Inc (“Q4” or the “Company”) shareholders to join FINSIGHT in voting AGAINST the Company’s proposed plan of arrangement to be acquired by Sumeru Equity Partners (“Sumeru”) (the “Arrangement”) at a special meeting of Q4 shareholders ("Special Meeting") currently scheduled for January 24, 2024. (All amounts in USD unless otherwise specified).
As outlined in its December 28, 2023 letter to the Q4 board of directors (the “Board”), FINSIGHT believes the Arrangement is a premature and opportunistic transfer of value from the Company’s non-rolling shareholders (“Non-Rolling Shareholders”) to the Company’s private equity investors, senior management, and other insiders (“Rolling Shareholders”).
In its December 28, 2023 letter, FINSIGHT highlighted its concerns and posed several questions to the Board regarding the scope and integrity of the Arrangement process. The Company’s subsequent filing of its Management Information Circular on January 3, 2024 (the “MIC”), failed to adequately address these questions and concerns, and more notably, the MIC affirmed FINSIGHT’s concern that the Board participated in a conflicted and flawed process from the outset. The MIC disclosures and the perspectives of other shareholders shared with FINSIGHT, increased its conviction that the Arrangement should be opposed by all Q4 shareholders.
“We believe Q4’s Rolling-Shareholders are attempting to capitalize on shareholder fatigue, frustration and apathy to garner approval for this ill-conceived transaction. The Company’s disclosures demonstrate to us that the deal process was fraught with potential conflicts and structurally flawed from the outset. The timing of the Arrangement will ensure that long term Non-Rolling Shareholders, who patiently funded over $75 million of spend on sales and marketing and R&D post IPO, will never see the financial upside of Q4’s prolonged restructuring, massive investments, and the additional cost-saving opportunities available today that, based on comparable data, could be immediately accretive to Q4’s share price,” said Leo Efstathiou, CEO, FINSIGHT Group Inc.
“Q4 shareholders have in their power, the ability to vote AGAINST the Arrangement, and instead advocate that a standalone Q4 focus on executing on the many options available to the Company to improve its bottom-line and unlock substantial value for ALL its shareholders. We believe that the CEO Darryl Heaps, perhaps with greater oversight and accountability from a more involved and less conflicted board, can marshal the right people, expertise, and organizational discipline, to more efficiently achieve the Company’s long-term strategic objectives and realize its full potential as a public company,” continued Mr. Efstathiou.
The consideration offered to Non-Rolling Shareholders by Sumeru Equity Partners, Q4 Management, and the other insiders is grossly inadequate.
The Arrangement price of $6.05 CAD per share values Q4 at approximately $193 million, which implies a valuation of approximately 3.0x Annual Recurring Revenue (“ARR”) net of cash equivalents. By contrast, Capital Markets Information Services and Data comparable companies trade at 6.1 to 10.6x ARR1. Factoring in the $79 million of net operating losses (which offset future taxes payable), Sumeru is offering approximately $142 million for $56.4 million of highly recurring revenue (which equates to approximately 2.5x trailing-twelve months ARR).
There is ample data to support that this is an unjustifiably low multiple for a company as well positioned as Q4. In the words of Q4’s CEO Darrell Heaps, Q4 is “…fueled by innovative technology, data and insights” is positioned to deliver “…category-defining growth” and “…build the next great capital markets platform” and “…become a central force in how thousands of companies communicate.”
As an additional data point, one of Q4’s most direct comparables, EQS Group AG, announced within days of the Arrangement on November 16, 2023, that it would be acquired by one of the world’s leading financial sponsors Thoma Bravo (who has over $130 billion of assets under management) at a 57% premium to its previous day’s closing share price, which equated to an over 7x ARR multiple2, over two times the consideration offered for Q4.
Why would Q4, who is comparable in size, with no debt, operating near break-even, and with dominant market share (including +2,500 customers and 58 of the S&P 100), command anything less in a truly arms-length sale process?
Q4 is considerably stronger today than it was at IPO, and yet it is being sold for approximately half its IPO price of $12.00 per share.
The timing of the Arrangement is highly opportunistic, occurring at a low point in the US IPO market cycle, with IPO issuance down over 80% from 2021 peak and over 50% from the average of 2010-2019 levels3.
Since its October 2021 IPO, Q4 successfully increased gross margins by over 1000 basis points, cut over $20 million in run-rate expenses and is on track to break-even in the fourth quarter. During the same period, Q4 invested approximately $30 million in research and development, a significant use of capital funded almost entirely by Non-Rolling Shareholders, who will not realize a return on that use of capital if the Arrangement is completed.
FINSIGHT, along with many of the Non-Rolling Shareholders, has been a shareholder for the bulk of Q4’s life as a public company. Our cost basis is low and will generate a significant positive return on our invested capital. In other words, FINSGHT is “in- the-money” with regard to our investment in Q4 and could simply accept this offer and move on. Despite the fact FINSIGHT stands to benefit financially from the proposed Arrangement, we are adamant in our belief that the Arrangement is not in the short, medium or long-term interests of Non-Rolling Shareholders.
Q4 has been a public company for approximately 26 months. It has spent nearly two thirds of that time focused on restructuring its operations and nearly one third orchestrating what appeared to be a preconceived take-private transaction. With the bulk of the restructuring complete, we genuinely believe Q4 management has the potential to deliver significant near-term results by turning its attention back to execution, growth and monetization of its R&D. Shareholders have been patient with management and the Board while it corrected its own capital allocation and SG&A missteps and put the Company back on track. Now, Non-Rolling Shareholders are being asked to concede in order to allow Rolling Shareholders to reap the returns.
Q4 is a great company with an enviable market position. It has the cash, operating leverage and access to capital to stay the course and deliver substantial returns to shareholders. The Company is prevailing in the face of two global conflicts and significant macro uncertainty due to rising interest rates and persistent inflation. There is no need for this transaction to happen right now, and at these terms, on the eve of Q4 reaching profitability.
The disclosures in the MIC validate our concern that the Q4 Board process was conflicted from the outset, and obstructed a comprehensive sale process to the detriment of Non-Rolling Shareholders.
FINSIGHT brings to the attention of the board and other shareholders the following sequence of events disclosed in the MIC:
- Ten Coves Capital (“Ten Coves”), a private equity financial sponsor and the largest single investor in Q4, began exploring “a range of strategic alternatives” in “late May” 2023.
- By “early June” of 2023, Ten Coves solicited the advice of counsel concerning a transaction that could include “differing treatment for certain shareholders, such as rollover of equity.” This indicates Ten Coves was narrowly focused on the ability to roll their equity from the outset.
- On Friday June 16, the Board decided to formally initiate a process to explore its “Strategic Alternatives.” By that Monday, June 19, the next business day, it retained Raymond James as its financial advisor.
- On June 26, the Board formed a Special Committee that suspiciously did not include any of the Rolling Shareholders, before there was even a transaction to consider and we believe, in anticipation of impending conflicts between the Rolling Shareholders and the Non-Rolling Shareholders.
- On July 4, Q4 signed NDAs with four sponsors, who we were told in the initial announcement were sourced via their “inbound interest” with the Company, as opposed to outbound outreach by the Company or its financial advisor.
- On July 12, in “consultation with Raymond James,” the Special Committee decided it would “engage in a preliminary price exploration exercise” with the four inbound sponsors and arbitrarily “defer any formal sale process until an indication of interest was received from at least one of the Potential Counterparties.”
- On August 4, the Special Committee “noted the Board’s views on the need for certainty to secure an offer within an acceptable range and the risk of one of more Potential Counterparties withdrawing its proposal as a result of the Company commencing a broader sale process.”
In other words, the Special Committee arbitrarily justified its initial inaction to canvas the potential buyer universe and then later relied on the “Rolling Shareholders” desire for “certainty” to justify further inaction to invite outside bidders. - Further, upon the recommendation of counsel, the Special Committee “determined that any discussion between representatives of Ten Coves and potential counterparties should be limited to a discussion regarding the Company’s growth opportunities, go-forward plans, and alignment with Ten Coves on Strategy, and not pricing”.
If Ten Coves, as the largest shareholder, was not advocating for Non-Rolling Shareholders, who was?
- On September 7, 65 days after signing an NDA, Sumeru submitted the “Initial Sumeru Proposal.”
- Between September 12 and November 2, Sumeru and Ten Coves spent 51 days negotiating “governance” and “resolved their differences,” which ultimately led to the Arrangement now under consideration. The MIC also discloses that “in addition to resolving these matters, the Ten Coves Entities expressed interest in investing additional equity capital in the Purchaser in connection with the Closing, in addition to the rollover of all of their Shares, which the Purchaser indicated could be accommodated, subject to certain conditions.”
You read that correctly, the Proxy Materials disclosed that Ten Coves, as the largest and one of the longest tenured, most knowledgeable and most conflicted insiders, explicitly engaged in negotiations with the acquirer to coinvest in the take-private. Having already spent over 5 years invested in Q4, what do they know about the Company’s near-term prospects that the Non-Rolling Shareholders do not? What factors drove the decision to give only some shareholders the opportunity to benefit from the potential upside of the Company and not others?
- Despite describing the sales process as “robust”, on Page 5 of the Proxy Materials, the Special Committee admits that it “considered the identity and potential strategic interest of other industry and financial counterparties for a potential transaction” and “determined that it was unlikely any person or group would be willing and able to propose a transaction that was on terms (including price) more favourable to the Company, the Shareholders and other relevant stakeholders than the Arrangement.”
In other words, the Special Committee somehow concluded that it was in the best interest of the Company and “fair” to the Non-Rolling Shareholders to NOT to explore strategic alternatives and conducted no outbound outreach in order to provide Ten Coves and the Rolling Shareholders the “terms” that served their interests.
- For the avoidance of doubt, the disclosure on Page 8 of the MIC states in plain English: “the Company did not conduct a broad market canvas or formal auction process prior to entering into the Arrangement Agreement to identify potential strategic or other financial counterparties.”
- It is worth highlighting that the MIC gives little mention of Q4’s standalone plan, which Non-Rolling Shareholders are told was a key factor in the Special Committee’s recommendation to support the transaction. Moreover, it gives no substantive mention of any efforts made by the Company to understand or represent the interests of the Non-Rolling Shareholders, who collectively comprise 63% of the Company’s ownership.
FINSIGHT reiterates its concern that the Arrangement process described in the MIC was flawed and was obstructed for the benefit and convenience of the Rolling Shareholders. The transaction timeline in the MIC strongly suggests that Rolling Shareholders planned to roll their equity as part of any transaction, hindering a “robust” exploration of strategic alternatives. A financial advisor retained over a weekend and a price discovery process driven by bargain hunting financial sponsors without any outbound outreach is also not indicative of a “robust process.”
Moreover, FINSIGHT believes the 35-day go-shop period, considerably shorter than the time afforded to Sumeru to work out an arrangement suitable to Ten Coves, was simply “window dressing” and an insincere attempt to provide the Special Committee cover from its failure to act as independent fiduciaries for Non-Rolling Shareholders. Sumeru was afforded 65 days from signing an NDA with Q4, to submit its “Initial Proposal.” The disclosures highlighted that Sumeru then needed an additional 51 days (for a total 116 days from NDA) to work through negotiations specific to Ten Coves to address “governance” and other matters. Meanwhile, participants in the go-shop period had just 35 days to present a superior proposal. Did the Special Committee really believe a superior proposal could be a realistic and feasible outcome in this context?
Nevertheless, only a close read of the materials would reveal that five companies did engage with Q4 during the go-shop period, highlighting how flawed the initial decision to not extend the process was. Given Ten Coves special interests and the limited due diligence window, it should come as no surprise that no alternative transaction emerged from the perfunctory go-shop exercise.
Q4 has a bright standalone future. It has an opportunity to accelerate its growth and unlock significant value for shareholders over the next 12-24 months.
As a seasoned provider of capital markets financial technology, serving potentially hundreds of the same corporate issuers, broker dealers and institutional investors as Q4, FINSIGHT believes it has a credible understanding of the financial services industry and sees tremendous intrinsic value within Q4.
Q4’s business is nearing break-even, with ample access to cash to support the next 12 to 24 months. The Company has thousands of stable corporate clients supported by two competitive moats: supportive regulatory frameworks that require its services, and, largely untapped proprietary data. It generates this data by hosting thousands of virtual events and conference calls, accessed by over 380k investors per quarter, and hosting portals visited by over 18 million monthly active users4. If management were as focused on execution today as it was in 2019 and 2020, we are confident shareholders would see excellent results.
FINSIGHT believes that Q4 can take several steps to catalyze its business, accelerate growth, and unlock value for all shareholders:
- Focus on driving free cashflow by further rationalizing SG&A and reducing R&D, which we believe would instantly be accretive to its valuation. Given the business is near break-even, returning SG&A and R&D to be in line with 2020 levels could generate over $20 million in EBITDA in 2024. Today, the Company supports less than 12% more customers than it did in 2020, while SG&A and R&D has increased 95%.
- Monetize the over $30 million in R&D expenditures and data and increase prices.
- Drive initiatives to begin utilizing Q4’s vast set of proprietary data.
- Explore and implement strategic price increases given Q4’s superior bundled offering, sticky enterprise customer base and limited competition.
- Consider establishing sales channels within the investment banks, comparable to FINSIGHT and virtual data room providers, where it can potentially garner multiples more average revenue per customer (ARPC) than it does selling through budget constrained IR departments.
- Consider moving forward with a dual-exchange listing in the US, as originally planned, which could widen the Company’s potential investor base, improve trading volumes, and unlock liquidity.
FINSIGHT is not seeking an incrementally higher price. It believes the pursuit of any of the above key initiatives as a standalone entity would unlock significant value and enable Q4 to trade more in-line with other companies in its sector. Q4 is an award-winning company with dominant market share. Bolstered by stabilizing market tailwinds, Q4 should attract a premium valuation, and could easily consider strategic alternatives again, if organic growth initiatives have been exhausted.
FINSIGHT appreciates the concerns of several long term shareholders who expressed frustration with Q4’s lack of growth, management’s slow pace of restructuring, the seemingly low ARPC, and outsized spending on SG&A and R&D. FINSIGHT reiterates its conviction that these issues are solvable, with the right level of focus from Q4 management backed by greater accountability from a less conflicted board that is advocating for the long-term interests of all shareholders.
If Non-Rolling Shareholders are successful in defeating the Arrangement, FINSIGHT believes the Board should immediately engage with Non-Rolling Shareholders on a better path forward for Q4. This engagement process should seriously consider the initiatives FINISGHT has proposed, as well as taking shareholder views on the additional skills, expertise and fresh perspective required on the Board, to support management and to hold it accountable for meeting the Company’s strategic objectives.
FINSIGHT believes many other Non-Rolling Shareholders have also lost confidence in the Board and would be supportive of the election of directors who can act as independent fiduciaries for ALL shareholders. If following the defeat of the Arrangement, the Board fails to heed the will of shareholders and constructively engage, FINSIGHT will consider all of its rights and remedies as a shareholder to bring about the changes necessary to unlock Q4’s full potential.
The ‘majority of the minority’ vote requirement enables Non-Rolling Shareholders to seamlessly and discretely reject the Arrangement.
FINSIGHT believes Non-Rolling Shareholders have a real and viable opportunity to vote down the Arrangement, given the concentration of long-term Non-Rolling Shareholders, and the exclusion of Rolling Shareholders from the ‘Majority of Minority’ vote. FINSIGHT believes that based on its discussions with other shareholders, there is significant support for its perspectives on the Arrangement and an opportunity to preserve the upside due to all long-term shareholders – by ensuring Q4 remains a standalone public company.
Fellow shareholders, you do not have to accept this opportunistic value transfer from your pocket to that of the Rolling Shareholders and Sumeru.
The time for action has arrived. FINSIGHT encourages you to VOTE AGAINST the Arrangement today. If you have already voted “For” the Arrangement, you can change your vote online to “AGAINST” using the control number and website that was printed on your proxy or voting instruction form.
Shareholders with questions about their vote can contact Carson Proxy Advisors at 1-800-530-5189 or at info@carsonproxy.com
About FINSIGHT Group Inc.
FINSIGHT Group Inc is a privately held software service provider that serves thousands of the world’s leading institutional investors, investment banks and corporations. Its applications streamline workflows that facilitate hundreds of billions of dollars worth of capital markets activity annually to provide unparalleled visibility and actionable insights into fixed income and equity capital markets.
Advisors
Goodmans LLP is serving as legal counsel, and Gagnier Communications and Carson Proxy Advisors are serving as strategic advisors to FINSIGHT Group Inc.
Shareholder Contact
Carson Proxy Advisors
1-800-530-5189
(416) 751-2066
info@carsonproxy.com
Media Contact
Riyaz Lalani & Dan Gagnier
Gagnier Communications
(416) 305-1459
FINSIGHT@gagnierfc.com
Disclaimer for Forward-Looking Information
Certain information in this news release may constitute “forward-looking information” within the meaning of applicable securities legislation. Forward-looking statements and information generally can be identified by the use of forward-looking terminology such as “outlook,” “objective,” “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “plans,” “continue,” or similar expressions suggesting future outcomes or events. Forward-looking information in this news release may include, but is not limited to, statements of FINSIGHT regarding how FINSIGHT intends to exercise its legal rights as a shareholder of the Company.
Although FINSIGHT believes that the expectations reflected in any such forward-looking information are reasonable, there can be no assurance that such expectations will prove to be correct. Such forward-looking statements are subject to risks and uncertainties that may cause actual results, performance or developments to differ materially from those contained in the statements. Except as required by law, FINSIGHT does not intend to update these forward-looking statements.
Information in Support of Public Broadcast Solicitation
The following information is provided in accordance with the corporate and securities laws of the Province of Ontario and federal laws of Canada applicable therein, applicable to public broadcast solicitations. FINSIGHT is relying on the exemption under section 9.2(4) of National Instrument 51-102 – Continuous Disclosure Obligations ("NI 51-102") to make this public broadcast solicitation. This solicitation is being made by FINSIGHT and not by or on behalf of the management of Q4. The registered office address of Q4 is 99 Spadina Avenue, Suite 500, Toronto, Ontario M5V 3P8.
FINSIGHT has filed this press release containing the information required by section 9.2(4)(c) of NI 51-102 on Q4’s company profile on SEDAR+ at www.sedarplus.ca.
FINSIGHT and Carson Proxy Advisors may solicit proxies in reliance upon the public broadcast exemption to the solicitation requirements under corporate and securities laws of the Province of Ontario and federal laws of Canada applicable therein, conveyed by way of public broadcast, including through press releases, speeches or publications, and by any other manner permitted under the applicable laws. Carson Proxy Advisors has been retained by FINSIGHT to act as proxy solicitation agent to assist with FINSIGHT’s solicitation and to provide certain advisory and related services. FINSIGHT will pay Carson Proxy Advisors a fee of up to $125,000, plus related expenses. All costs incurred for the solicitation will be borne by FINSIGHT.
A Q4 shareholder who has given a proxy has the power to revoke it by depositing an instrument in writing signed by the Q4 shareholder or by the Q4 shareholder’s attorney, who is authorized in writing, or if the Q4 shareholder is a corporation, by an officer, or attorney authorized in writing, or by transmitting, by telephonic or electronic means, a revocation signed by electronic signature by or on behalf of the Q4 shareholder or by the Q4 shareholder’s attorney, who is authorized in writing, and deposited with Computershare Investor Services Inc. at any time up to and including the last business day preceding the day of the Meeting, or in the case of any adjournment or postponement of the Meeting, the last business day preceding the day of the adjournment or postponement, or with the Chair of the Meeting on the day of, and prior to the start of, the Meeting or any adjournment or postponement thereof. A Q4 shareholder may also revoke a proxy in any other manner permitted by law, but prior to the exercise of such proxy in respect of any particular matter. If a Q4 shareholder is a non-registered (or beneficial) shareholder, they can contact their broker or nominee to find out how to change or revoke their voting instructions and the timing requirements, or for other voting questions. Intermediaries may set deadlines for the receipt of revocation notices that are farther in advance of the Meeting than those set out above and, accordingly, the Q4 shareholder must take such steps sufficiently in advance of the date of the Meeting for their Intermediary to act on such revocation. If a Q4 shareholder has followed the process for attending and voting at the Meeting online, voting at the Meeting online will revoke all previously submitted proxies. However, in such a case, the Q4 shareholder will be provided with the opportunity to vote by ballot on the matters put forth at the Meeting. If the Q4 shareholder does not wish to revoke all previously submitted proxies, they are instructed to not accept the terms and conditions, in which case such Q4 shareholder can only enter the Meeting as a guest.
FINSIGHT is a shareholder of Q4. With the exception of the foregoing, to the knowledge of FINSIGHT, neither FINSIGHT nor any associates or affiliates of FINSIGHT, has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in the Proposed Transaction or any other matter to be acted upon at the Meeting.
1 FT Partners December 2023 CEO Monthly Market Update and Analysis.
2 https://www.bloomberg.com/news/articles/2023-11-15/thoma-bravo-nears-deal-for-comms-specialist-eqs.
3 https://site.warrington.ufl.edu/ritter/ipo-data/
4 Company disclosures to shareholders and securities filings.
