Darktrace announces £75mn share buyback after short seller attack

British cyber security group Darktrace said on Wednesday that it would buy back up to £75mn worth of shares, after coming under attack from a short seller that accused it of accounting irregularities.

The London-listed company said plans to acquire up to 35mn shares was an attempt to boost its stock, which has tumbled more than a fifth since the start of the month.

The company’s announcement comes a day after New York-based hedge fund Quintessential Capital Management published a detailed report outlining claims about potential irregularities in contracts with resellers and customers, predominantly dating from before Darktrace’s public listing in 2021.

The short seller’s move caused Darktrace’s share price to tumble 20 per cent, though it recovered by 7 per cent on Wednesday morning following news of the share buyback scheme, to 225p.

Darktrace had initiated planning for the buyback last week, but accelerated the process after this week’s events, according to a person briefed on the company’s arrangements. An agreement with the investment bank Jefferies was only finalised on Tuesday, according to Darktrace’s statement.

Quintessential has pointed at connections between the business practices of Darktrace and Autonomy, the UK software company with which Darktrace shares many ties. Autonomy was accused of irregular accounting practices relating to its $11.7bn sale to Hewlett-Packard in 2011.

Darktrace said in a public statement on Tuesday that it had never been contacted by the authors of the Quintessential report. It said the company had “full confidence” in its accounting practices and the “integrity of our independently audited financial statements”.

The UK tech group, which enjoyed a fleeting three-month stint in the FTSE 100 index in 2021, had already seen its share price fall more than 14 per cent this month after it cut its full-year revenue forecast, warning that challenging macroeconomic conditions were having an impact on customer growth. It has lost more than half its value since August last year.

Darktrace said its share buyback programme would run until the end of October, with the aim of reducing the total issued share capital thereby inflating the value of the stock.

“The Board believes that this share buy-back programme is the best use of Darktrace’s surplus cash in current market conditions,” the company said in a statement, noting it has $368mn in cash.

“Through this programme, we are pleased to be returning value to shareholders, while maintaining a strong cash position so we can fund continued investments in the business, including in scaling and diversifying our R&D teams.” 

One long-term investor in the company said that they were “concerned” by the recent short attack, but added that Darktrace’s response showed that management believed in the company and was therefore willing to “buy when others are selling”.

The UK hedge fund Shadowfall also has a public short position against Darktrace and has claimed that the company overestimates its potential customer base and underspends on research and development compared with its peers.