Dealmaking roars back with a Splunk

One thing to start: Rupert Murdoch is stepping down as chair of Fox and News Corp. His eldest son Lachlan will become sole chair of News Corp and continue as executive chair and chief executive of Fox, from mid-November.

In today’s newsletter: 

• Cisco’s $28bn Splunk takeover

• Private equity credit in Paris

• Mike Ashley, Archegos, and Morgan Stanley

The big winner’s from Splunk’s sale

Activist investor Starboard Value is on a winning streak with its technology bets.

The New York-based firm welcomed the news on Thursday that Splunk, in which it disclosed a five per cent stake last year, is being acquired by Cisco for $28bn.

Jeff Smith’s hedge fund built up a position in Splunk when shares were trading around $70 and said it believed the company could potentially double its valuation. It was right on the money.

Shares in Splunk closed up more than 20 per cent at $144 on Thursday following the deal’s announcement. According to securities filings that show Starboard holdings as of June, the firm owned more than $4mn of the company’s shares.

Splunk adds to another winning bet Starboard has made in software: Salesforce. Shares in the company are up more than 40 per cent since the firm disclosed its investment in October 2022.

US private equity giant Hellman & Friedman, which invested $1.38bn in Splunk to build a 7.5 per cent stake at about $116 per share, will also be celebrating the news. The gain is solid, especially after it borrowed $280mn against its shares to juice its equity returns.

But investors aren’t the only ones reaping big gains. The Splunk transaction is also a huge win for boutique investment firms.

Tidal Partners, the advisory group created by ex-Centerview executive David Handler, acted as financial adviser to Cisco, helping him get one over on his former firm with which he’s embroiled in a bitter legal fight. Frank Quattrone’s Qatalyst Partners, another small advisory practice, worked with Splunk on the deal .

Cisco, meanwhile, will have to wait and see if Splunk turns out to be a winning investment.

The company is betting that the software maker, which listed in New York at a $1.6bn valuation just over a decade ago, will kick-start its efforts to expand beyond its cash cow router business.

Founded in 2003, Splunk is used by companies to mine through large sets of data and detect security breaches that could affect their businesses.

The rationale for the transaction is fairly simple: the huge rise of artificial intelligence has created new opportunities as well as new security threats that companies will have to deal with. Cisco, a giant in networking equipment, wants to show it’s changing with the times and hopes to eventually compete with the likes of Microsoft.

But whenever there’s a lot of hype around one particular sector, there’s always the risk of overpaying.

The private equity conference where no one talked about private equity

Thousands of dealmakers and investors travelled to Paris this week to attend IPEM, which the organisers claimed was Europe’s largest ever private equity conference.

Industry executives enjoyed the usual jam-packed schedule of investor meetings and champagne receptions, including a late-night private viewing at the Louvre hosted by Eurazeo.

Some DD readers may remember last year’s conference in Cannes, where, even as attendees indulged in champagne on the French Riviera, the general feeling was that the “golden age” of private equity could soon be coming to an end.

This time, they seemed to be avoiding the subject altogether.

Instead, luminaries including Blackstone boss Steve Schwarzman and Apollo Global Management’s co-president Jim Zelter took the chance to flaunt their firms’ credentials in the once-niche world of private credit.

The buccaneering Barbarians at the Gate now want to be viewed more like your local bank. For Schwarzman, lending to some companies is an almost risk-free trade that can deliver double-digit returns.

“If you can earn 12 per cent, maybe 13 on a really good day in senior secured bank debt, what else do you want to do in life?” Schwarzman said on the conference’s main stage.

The returns on offer in private credit were “unprecedented”, Zelter added.

The attractiveness of credit and infrastructure relative to traditional leveraged buyouts is prompting smaller players to weigh deals to buy or merge with peers that have these offerings, such as CVC’s recent purchase of Dutch infrastructure manager DIF Capital, as DD revealed.

A combination of the ongoing process of consolidation and the difficulties some firms are having fundraising means the industry is likely to look very different in a few years. 

Mike Ashley gets Hwanged

At first glance, Mike Ashley and Bill Hwang don’t appear to have much in common.

The former is the hard-charging founder of British discount retailer Sports Direct, who once allegedly concluded an epic drinking contest with colleagues by vomiting into a pub fireplace. 

The latter is the devout Christian founder of Archegos Capital Management, the US family office whose 2021 collapse led to billions of dollars of losses for Wall Street banks and criminal charges for Hwang.

Both men do share a penchant for building stakes in companies using derivatives, however. Ashley’s listed retail conglomerate Frasers Group has now alleged that Morgan Stanley mistakenly equated it to Archegos when trying to enforce an “arbitrary” $1bn margin call against it.

Frasers sued the US bank in London in 2021 for allegedly acting in bad faith when it tried to force the retailer to close derivative positions it had entered to build up a position in German fashion group Hugo Boss. 

Now, Ashley’s company is trying to drag Morgan Stanley chief executive James Gorman into the legal spat, asking a New York court to compel the 65-year-old banker to produce documents and testimony for its proceedings against the bank.

In legal filings, Fraser’s claims that in “the wake of the Archegos debacle” — which triggered nearly $1bn of losses for Morgan Stanley — the US bank “re-evaluated” the retailer’s derivatives position in Hugo Boss on the mistaken assumption that Ashley’s group operated like a family office.

While the stand-off apparently cost Frasers a cool €50mn as it transferred the position to other brokers, the incident clearly hasn’t cooled the company’s appetite for stakebuilding. 

Frasers, now led by Ashley’s 33-year-old son-in-law Michael Murray, has been on a buying spree this year, snapping up positions in UK-listed rivals such as AO World, Asos and Boohoo.

DD hopes for all involved that no bank attempts to margin call Mike Ashley again anytime soon.

Job moves

• Rothschild & Co has named Andrew Yearley, previously a managing director of restructuring and capital solutions at Lazard, as global co-head of restructuring in New York.

• Kurt Baker, a former executive of Millennium Management and Morgan Stanley, is launching a multi-manager hedge fund, Bloomberg reports.

Smart reads

The FTC makes its case Private equity roll-ups can have serious consequences for consumers, workers and businesses, Federal Trade Commission chair Lina Khan argues in an FT op-ed.

The big IPO question The rollercoaster listings of Arm, Instacart and Klaviyo raise the question of what free float threshold is so low that it impairs the process, former investment banker Craig Coben writes in an Alphaville post.

Blurred lines As Sam Bankman-Fried prepares to go on trial next month, his old lawyers at Sullivan & Cromwell — which is now managing the bankruptcy of his collapsed crypto exchange FTX — are under scrutiny from the defence, The New York Times reports.

News round-up

FTC lawsuit targets serial acquisitions by private equity (FT)

Venture firm GGV Capital to split off China business after US pressure (FT)

Magellan Midstream holders approve $18.8bn sale to ONEOK (Reuters) 

LSE Group chief hits back at ‘clickbait’ criticism of the City (FT)

US beauty firm Coty to move forward with Paris share sale (Bloomberg) 

UK banks: valuations disappoint despite rising profits (Lex)