Deal for Canvas Owner Instructure Hits Another Snag

Dec 20, 2019

A third shareholder in Instructure, the publicly traded provider of the Canvas learning management system used by colleges and K-12 schools, has come out against a proposed $2 billion sale of the company to a private equity firm.

The group, Oberndorf Enterprises, intends to vote against the sale to Thoma Bravo if and when the deal is put to a vote, according to a statement Wednesday. Oberndorf says it sent a letter to two Instructure board members detailing concerns with the sale process and conflicts of interest involving members of the board and management team.

An Oberndorf representative declined to comment beyond the letter. The investment firm is chaired by Bill Oberndorf, a San Francisco-based philanthropist and political donor.

This latest protest follows similar public opposition to Instructure’s sale from Rivulet Capital, which owns about 5 percent of the company’s shares, and Praesidium Investment Management Co., which owns about 7.5 percent of shares.

A report issued Wednesday by investment bank D.A. Davidson estimated that Oberndorf owns about 6 percent of shares.

The irate investors have said Instructure rushed the sales process with little transparency and that the sale—about six times Instructure’s expected 2020 revenue—undervalues the company. Instructure’s Canvas product dominates the higher education LMS market with an estimated 35 percent share and continues to take business away from one-time industry leader Blackboard. Blackboard itself went from a publicly traded company to private equity owned in 2011.

The Praesidium letter alleges that the team who ran the sales process might have conflicts of interest that didn’t result in the best deal for Instructure. The letter says that Instructure’s CEO, executive chairman, chief legal officer and one director ran the team.

The executives on the team might have picked a worse deal for shareholders but one that pays off for them, according to the letter. Plus, CEO Dan Goldsmith may have picked a deal that protects the job of his sister, Jennifer, who is Instructure’s chief strategy officer.

The director who participated on the team, Kevin Thompson, has previously done business with Thoma Bravo. Thoma Bravo helped to take Thompson’s SolarWinds IT management software company from a publicly traded company to a privately held one.

The shareholders against the deal want Instructure to extend a 35-day window negotiated with Thoma Bravo to allow for other bids. That window ends Jan. 8.

Instructure issued a statement on Nov. 14 to say it was exploring “strategic alternatives” in regard to Canvas and its corporate learning platform Bridge, which Praesidium estimates has generated $25 million in revenue and cost more than $70 million in losses. Instructure then announced the Thoma Bravo deal on Dec. 4.

In a filing issued that day to the U.S. Securities and Exchange Commission, Instructure said the search for a buyer was underway before it had informed the public. It engaged J.P. Morgan as a financial adviser in January 2019 and entered non-disclosure agreements with 19 financial partners and strategic parties between June and December.

In a Dec. 23 SEC filing, Instructure offered a detailed timeline of the communication and events leading up to its decision to take the offer from Thoma Bravo. Over the course of this year, the company had been in discussion with dozens of interested buyers, beginning on Jan. 8. The first interested party offered to pay $53 to $55 per share, a range that was later revised down to $49 to $51. The board declined the offer on Jan. 30, and at the time said that while it would not actively solicit further offers, it would be open to discussing opportunities.

Those conversations resumed in April, and throughout the rest of the year, Instructure fielded interest from numerous parties including Thoma Bravo. In October, the company set up a transaction committee to advise on offers. Thoma Bravo initially submitted a proposal to acquire the company for $50 per share on Oct. 31. It was later revised to $47.60 a share, which the board decided on Dec. 2 was “its best and final offer.”

A December report from investment bank SunTrust Robinson Humphrey said the deal undervalues Instructure, saying $2.5 billion was more appropriate. But it did not expect a much better bid. “We believe the likelihood of a competitive bidding process that leads to materially higher price is not high,” the report stated.

Should Instructure call off the deal, the company is liable for a termination fee of either $29 million or $64 million, depending on the circumstances of the cancellation.


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