Instructure CEO Dan Goldsmith Resigns and New Approach for Bravo Acquisition

Last week: Check out this wild 72-hour period of news on Instructure.

This week: Hold my beer.

It looks like we now have a better idea of why Instructure delayed the shareholders’ vote by two weeks when accepting the revised (3% higher) proposal from private equity firm Thoma Bravo. To give time to put several pieces together. Today Instructure announced that CEO Dan Goldsmith is resigning effective March 6 and that there is a revised agreement for the Bravo that does not require convincing the majority of shareholders to approve the deal. The February 25th shareholders’ vote has been cancelled.

In the first announcement:

Instructure (NYSE: INST) today announced that Dan Goldsmith has informed the Board of Directors of his intent to step down as CEO and as a member of the Board of Directors. Goldsmith will remain with the Company until March 6 to help with the transition. The Company will form an Office of the CEO comprised of a group of the most senior executives to lead the business in the interim until a successor can be named. The Board will hire an executive search firm to assist in its process to evaluate candidates to succeed Goldsmith.

This announcement came out first, and I thought it odd to not name an interim CEO. CEO-by-committee for a publicly-traded company leading into a shareholders’ vote? But then the second announcement came out:

Instructure (NYSE: INST) (the “Company”) today announced that its Board of Directors has approved and recommends a revised definitive agreement to be acquired by Thoma Bravo, LLC (“Thoma Bravo”), under which Thoma Bravo will acquire all outstanding shares of Instructure for $49.00 per share in cash. Under the terms of the revised agreement, Thoma Bravo will promptly commence a tender offer on or before February 24, 2020 to acquire all outstanding shares of Instructure’s common stock. Following completion of the tender offer, Thoma Bravo will complete a second-step merger in which any remaining common shares of Instructure will be converted into the right to receive the same per share price paid in the tender offer.

What this means is that instead of Bravo’s proposal of $49.00 per share to be voted upon by all shareholders on February 25th, Instructure’s board and Bravo have changed the game. Now Thoma Bravo will make a tender offer by February 24th to buy a percentage of the company’s stock and allow other investors to sell their stock to Bravo at that offer’s price in the second step. There are some details I need to research on the mechanics here, but this clearly is a method to allow Bravo to acquire Instructure and take them private without going through the full shareholders’ vote. And when and if they complete the takeover, the executive deck will have been cleared to allow Bravo to appoint new leadership.

There will still be an approval process for that tender at that price, and the deal is not set in stone. The vote will be different, however, than the current one that had been scheduled.

Note that the announcement of Goldmith’s resignation was titled “Instructure Announces Leadership Transition” without naming new leadership.

Background

This move comes after a wild 72 hours late last week and the originally-planned shareholders’ vote on Thursday (February 13th) for Bravo’s $47.60 per share offer. Keep in mind that 94+% of Instructure shares are institutionally-held – by hedge, family, and investment funds – and that virtually all votes would have been submitted ahead of time. No Iowa Caucus here with live voting in the meeting. On Wednesday, Bloomberg broke the news that Instructure did not have the votes to approve the deal. Wednesday night the board met and considered a revised Bravo proposal of $48.50 per share but rejected that proposal and delayed the vote until Friday. On Thursday the board met again and this time accepted Bravo’s second “best-and-final” offer of $49.00 per share while delaying the vote by two weeks, until February 25th. At the same time, the board announced that CEO Dan Goldsmith was giving up 48% of his unvested Restricted Stock Units (RSUs).

One of the primary concerns from investors and from two influential proxy advisory services (ISS and Glass Lewis) was that the sales process was flawed and that the people negotiating the deal had conflicts. As described by Mike from the NonGaap blog:

So what happened on January 25, 2019 that hinted the Company unofficially put themselves up for sale?

The Company filed an 8-K disclosing they made major, equity-heavy changes to their compensation program:

– Company paid 2018 annual performance bonuses in the form of restricted stock units (RSUs) instead of cash, setting the value of the RSUs at 125% of the amount of cash bonus earned.
– The Compensation Committee discontinued its compensation practice of establishing an annual cash bonus program and granting annual equity grants.  As a result, Instructure does not expect to pay annual cash bonuses or make annual refresh equity grants to its executive officers for fiscal years 2019 through 2022.  In its place, the Compensation Committee granted a multi-year RSU grant that vests quarterly over four years.
– The Compensation Committee also allowed all Instructure employees the option to receive an RSU in lieu of 20% of their base salary.

Mike concluded:

How did it distort incentives? There’s a lot of incentive to trigger accelerated vesting with change of control. Why wait 4 years to vest all that equity when an acquisition triggers a change of control accelerated vest? It also, gives CEO Dan Goldsmith some leverage when negotiating with prospective buyers.

Those four years of stock-based awards would immediately vest and be paid upon the sale of the company to Thoma Bravo. Furthermore, Dan Goldsmith hired his sister as Chief Strategy Officer in April, after the new incentive plan was in place and after the company had started the sales process. Dan Goldsmith also has installed a mostly-new executive team over the past year. The net effect was that the new executive team would receive millions of dollars (or tens of millions) after having been at the company for a year or less (21 months in Dan’s case, 13 as CEO).

Instructure’s Pushback

Instructure, for its part, filed unusually-detailed descriptions of the sales process in updated proxy statements, and the company even publicly argued that investors and proxy advisory services were completely wrong. The core of their argument has been that the process started 13 months ago and involved talks with 60+ companies considering the acquisition of Instructure.

This background is important to understand today’s news.

Aggressive Strategy

I think there must have been a change in the board’s perspective last week, convincing them that there was no clear path to getting a majority of shareholders’ vote at the prices that Thoma Bravo was willing to pay with a straight up-or-down vote. Most shareholders, along with ISS and Glass Lewis, protested the entire process and questioned motivations, but everyone has a price.

At the same time, the board seems to have no appetite to back off of the plans and remain a publicly-traded company. The conclusion seems to be we still want the same thing, so try a different approach while acknowledging that CEO Dan Goldsmith was not the right person to lead the company.

One other note – with these aggressive moves, I have to believe that Thoma Bravo has much bigger plans than simply buying a few more Portfoliums while divesting Bridge. Bravo is sitting on a pile of cash ($12+ billion in their latest round), and there are likely bigger plans that depend upon this Instructure acquisition. We’ll have to see.

For those who have not followed corporate acquisitions before: No, this is not typical. I’ve talked to several people in the investment community who have noted that they have never seen a sales process like this before. And there will be much more to the story as the new tender offer comes out.

Update 2 (Feb 18): Added paragraph clarifying that there will still be an approval process for the new deal approach.

Update 1 (Feb 18): Both Raymond James and SunTrust analysts note that this two-step agreement increases the likelihood of the final sale going through. Brian Peterson of Raymond James goes further to note:

It’s also interesting that the board previously rejected the $48.50 tender (mostly on the account of the likelihood of a deal passing and the impact on employees/customers), but has accepted a similar type of offer only at a $0.50 higher price point. Clearly the dynamics are fluid with CEO Dan Goldsmith stepping down, which on the margin may also increase the likelihood of voting for the deal. At the same time, our conversations with fundamental investors suggest that $49 was not a sufficient share price, with the belief that Canvas could ultimately be a rule of 40 SaaS company in a few years. While there are still questions on how the path to value creation would work with a new management team (and a Bridge divestiture), we do see a path for value creation for Canvas as a standalone entity.

Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.