"A Stalinist show trial"
Audax countersues, saying H.I.G. drove their business into the ground
Happy Sunday. Here’s what we’ve got today…
No headline deals again this week as we dive deep on Audax’s countersuit in the ongoing dispute with H.I.G. — back to the usual structure next week
The week’s deal sheet, plus a look at WeWork’s bankruptcy filing
Last week, we covered H.I.G. Capital’s lawsuit filed against Audax Group, which alleged the firm’s 2021 sale of telecom analytics provider Mobileum to H.I.G. was propped up by financial misrepresentations, falsified invoices, and made-up clients.
In response, Audax filed a countersuit of its own. Their principal claim: “H.I.G. promptly ran what was a high-performing business into the ground.” Then, in an attempt to pass off the blame, targeted Audax as their scapegoat.
Rather than accept liability for the $250 million of damages H.I.G. says it’s entitled to, Audax wants restitution for the value destroyed from its own $100 million minority stake (roughly 24 percent ownership), rolled over at the time of sale.
Retrading the Deal
Before hitting the fraud allegations, Audax begins its countersuit with an accusation that, nearly immediately post-close, H.I.G. launched a concerted effort to renegotiate the purchase price.
They say that H.I.G. attempted to materially alter the deal’s economics by weaponizing the purchase price adjustment — a standard post-close true-up to account for changes in working capital, cash, and indebtedness.
H.I.G. came to the table with a claim that it was owed more than $16 million, or nearly 7 percent of its contributed equity. Support for that claim was essentially non-existent, says Audax, though their filing did not elaborate. The final adjustment turned out to be just $500,000.
A second dispute related to payment of discretionary bonuses to Mobileum management. While the business failed to hit performance targets, H.I.G. opted to pay out anyway. A reasonable stance given the recent change of ownership and probable desire to prevent turnover.
What was unreasonable, according to Audax, was H.I.G.’s insistence that Audax pay the full bonus amount. They took the position, for reasons not outlined in the filing, that Audax should contribute additional capital beyond the pro rata share they would have effectively covered through their minority ownership, had Mobileum treated the payments as a normal operating expense.
The third prong of H.I.G.’s alleged renegotiation strategy related to escrow accounts, some of which held earnout balances from prior Mobileum add-ons completed under Audax ownership. Should the earnout targets be achieved, the escrow account would pay out the contingent portion of the earlier acquisition’s purchase price to the seller. But, if the earnout targets were missed, Audax says it was contractually entitled to take back the full escrowed amount.
They claim that H.I.G. instead demanded that the escrow balances be returned to Mobileum, even if their payout criteria weren’t met. Audax says it reached a seemingly strange compromise in which the firm agreed to lend a portion of the escrow account release to the increasingly cash-strapped Mobileum.
Audax’s take is that the purchase price renegotiations probably would have happened no matter what, but that H.I.G.’s lawsuit was directly related to its own post-close strategic blunders:
The countersuit calls out a host of questionable business decisions made in the months following H.I.G.’s assumption of ownership. Most of which, Audax says, were done without the proper consent of the Board (of which Audax held two seats).
Nearly immediately, H.I.G. is said to have forced Mobileum to raise prices, against the advice of management. Concurrently, they kicked off an initiative to simplify the business’ product portfolio, doing away with previously standard customizations and bespoke solutions provided to Mobileum’s enterprise clients.
Internally, H.I.G. led a reduction in force that impacted more than 80 customer-oriented personnel, concentrated within delivery and support functions.
Per Audax, the predictable outcome was a disastrous hit to client relationships, with Mobileum customers simultaneously suffering a loss of service and reduction in support, while being told they had to pay more for the pleasure.
The filing notes that, through the first half of 2023, revenue is down 25 percent year-over-year.
Reacting to the deteriorating situation, H.I.G. inserted itself further into Mobileum’s operations, including the institution of daily calls with management.
The firm also made the decision to redirect CEO Bobby Srinivasan to internal operational and analytical assignments, away from the client-facing role he’d occupied for the life of the company.
The move further hurt sales, says Audax, forcing H.I.G. to reverse course and send Srinivasan back out into the field, only to then again change their mind and bring him back in for a second time.
After the yo-yo-ing reassignments, H.I.G. made the decision to strip Srinivasan of his executive role and place him on paid leave.
His replacement is new Interim CEO Mike Salfity, a longtime H.I.G. operating partner, whose appointment rankled Audax: paraphrasing, why replace an industry veteran with a first-time CEO whose prior role was as a fintech product leader?
While this was happening, Mobileum’s senior ranks became a revolving door. According to Audax, H.I.G.’s “toxic working environment” drove out an add-on executive (the target’s CEO), Mobileum’s Head of European Sales, the company’s Chief Human Resources Officer, and a number of key senior engineers.
H.I.G. also showed the door to Audax-hired CFO Andrew Warner. His replacement then lasted less than a year, at which time H.I.G. brought on a third CFO.
Audax makes no qualms about its opposition to the most recent appointment, who, coming from a corporate development background, they say lacks the accounting and operational expertise required.
Mobileum’s team page currently lists Ripu Singh as CFO, though his own LinkedIn notes his position as Chief Transformation Officer. His extensive corporate development background lines up with the Audax complaint.
The Kibott Affair
H.I.G.’s initial complaint centered in large part around a particular client, Kibott, which it said was a sham business created by Audax to pad revenue through the sale process.
Audax unsurprisingly disputes that claim, and, along with echoing many of the points covered in last week’s note, says H.I.G. managed to destroy a perfectly healthy client relationship.
Unhappy with payment terms and pushing to collect receivables, H.I.G. is said to have forced its way into Mobileum’s client touchpoints, coming over the top of its own management team:
Audax says H.I.G. misunderstood the Kibott relationship, which, it says, was strategically sound and with a counterparty that had “substantial financial backing.”
Sham Earnings or a Sham Investigation?
H.I.G.’s suit outlined a “forensic investigation” it had completed, which, per its telling, uncovered the widespread financial fraud perpetrated by Audax.
Audax’s take is that H.I.G. blew through millions of dollars in professional fees on a bogus witch hunt that it cooked up as a diversion from its own failings.
They say the investigation’s only purpose was to support the current “Stalinist show trial.”
H.I.G.’s own legal filings provide some credence to that accusation. They acknowledge that, under their ownership, Mobileum maintained the same accounting and revenue recognition policies that it’s now calling fraudulent, and continued to engage Kibott, the business they now say is an Audax scam.
All of which, Audax says, is proof that there was no misrepresentation on their part.
Audax also took issue with H.I.G.’s structuring of the investigation as a Special Committee of Mobileum’s Board of Directors. The minority shareholder was excluded from the Special Committee proceedings, which, it says, was a clear violation of Mobileum’s Limited Partnership Agreement (LPA) that entitled the firm to a seat on every Board committee.
The Special Committee proceeded to turn over its findings to H.I.G.’s outside counsel. A maneuver, Audax says, that constituted a prohibited related party transaction under the terms of the LPA:
Audax, in effect, helped foot the bill to sue itself.
Meanwhile, Lenders Get Antsy
On Thursday, Bloomberg reported that a group of lenders to Mobileum has added Houlihan Lokey to its advisory team as scrutiny over the company’s financial reporting grows, citing unnamed sources close to the matter.
Houlihan joins the group’s earlier retention of Milbank LLP as legal counsel.
Financing for H.I.G.’s Mobileum acquisition included $380 million first-lien and $160 million second-lien term loans via a Jefferies-led arranger group. In June, Moody’s downgraded Matrix Parent, Inc. (dba Mobileum) to Caa1, citing a negative outlook due to “internal operational challenges.”
• Bain Capital agreed to acquire Guidehouse, formed via the 2018 carve-out of PwC’s U.S. public-sector consulting business, from Veritas Capital for $5.3 billion.
• RidgeLake Partners agreed to buy a minority stake in Gridiron Capital, a New Canaan, CT-based middle market private equity firm.
• Telecom Italia approved KKR’s €22 billion offer for its landline network, against the wishes of Vivendi, its largest shareholder.
• TJC is in negotiations with Roundtable Healthcare Partners over a deal for its portfolio company Tidi Products, a Michigan-based provider of medical devices and infection prevention products that could be worth around $900 million.
• Carlyle is preparing an exit for Tokiwa, a Japanese pharmaceutical and cosmetics manufacturer, with Jefferies and SMBC Nikko hired to lead a process that could fetch around $1 billion.
• Central Garden & Pet (Nasdaq: CENT) acquired TDBBS, a Richmond, VA-based manufacturer of natural dog treats and chews, from owner Bregal Partners.
• Comvest Partners agreed to sell Systems Control, a Michigan-based energy management and power system operations engineering design firm, to Hubbell for $1.1 billion.
• Palo Alto Networks agreed to buy Talon Cyber Security, an Israel-based cybersecurity firm specializing in secure enterprise browser solutions, for $625 million. Talon’s venture backers included Evolution Equity Partners, Ballistic Ventures, CrowdStrike, Merlin Ventures, SYN Ventures, Lightspeed Venture Partners, Sorenson Ventures, and Team8.
• Houlihan Lokey has made an approach to acquire Triago, a Paris-based private equity fund placement agent and advisory firm.
• Ascendant Capital Partners made an approach to acquire Hollysys Automation Technologies, a Chinese provider of automation and control technologies, for $1.6 billion.
• CapVest Partners agreed to acquire Recochem, a Canadian manufacturer of automotive fluids and household chemicals, from H.I.G. Capital.
• EQT Infrastructure agreed to acquire Statera, a provider of balanced energy solutions, from InfraRed Capital Partners.
• Main Capital Partners acquired Lux Scientiae, a provider of healthcare communications solutions.
• MidOcean Partners acquired Smith System, a provider of driving safety training and education, from Levine Leichtman Capital Partners.
• Partners Group is nearing a deal to acquire Rosen Group, an oil and gas engineering firm.
• Platinum Equity agreed to buy a majority stake in Kohler's generators unit in a deal rumored to be worth around $3 billion.
• Fenway Partners is preparing an exit for Riddell, a designer and developer of football helmets and sports equipment, hiring UBS and Baird to lead a process that could fetch around $800 million.
• Cigna Group (NYSE: CI) is considering a sale of its Medicare Advantage business, per Reuters.
• Crescent Point Energy (TSX: CPG) agreed to buy Hammerhead Energy (TSX: HHRS) for C$2.55 billion.
• Kinder Morgan (NYSE: KMI) agreed to acquire NextEra Energy Partners’ (NYSE: NEP) South Texas gas pipelines for $1.82 billion.
• Tata Group is considering strategic options, including a sale, for its Voltas home appliances unit, per Bloomberg.
• Core Industrial Partners acquired General Converting, an Illinois-based manufacturer of custom packaging solutions.
• KKR and GED Capital agreed to acquire Eugin Group, Fresenius’ international fertility group, for around €500 million.
• Nordic Capital agreed to buy a majority stake in IntegriChain, a Philadelphia-based life sciences market access and commercialization firm, from Accel-KKR.
• Macquarie Capital agreed to acquire Carmin Cargo, a provider of inspection services to the energy and commodities industries, from Metalmark Capital Partners.
• TransDigm (NYSE: TDG) agreed to buy the electron device business of TJC-backed Communications & Power Industries, for around $1.4 billion.
• Shein, the fast-fashion retailer, is targeting a valuation of up to $90 billion in its U.S. IPO, per Bloomberg.
• Circle, the cryptocurrency firm managing stablecoin USDC, is considering an IPO in early 2024, per Bloomberg. Its investors include Goldman Sachs, General Catalyst, BlackRock, Fidelity, and Marshall Wace.
• Flutter Entertainment, owner of fantasy sports business FanDuel, said it plans to list on the NYSE in Q1 2023, delisting from the Euronext Dublin exchange.
• Fortegra Group, a Jacksonville-based provider of risk management solutions and a subsidiary of Tiptree (Nasdaq: TIPT), filed for an IPO.
• TA Associates completed an investment in KatRisk, a Berkeley-based developer of advanced catastrophe modeling solutions.
• Brentwood Associates and Sixth Street invested in Far West, a franchisee of Wingstop restaurants.
• Aleph Alpha, a German startup developing generalizable artificial intelligence solutions, raised $500 million in Series B funding led by Innovation Park Artificial Intelligence, Schwarz Group, and Bosch Ventures, with participation from Christ&Company Consulting, HP Enterprise, SAP, and Burda Principal Investments.
• Photonic, a developer of quantum computing technology, raised $140 million of new funding from Microsoft, British Columbia Investment Management Corp, U.K. National Security Strategic Investment Fund, Inovia Capital, Yaletown Partners, and Amadeus Capital Partners.
• Enable, a rebate management platform, raised $120 million in Series D funding led by Lightspeed Venture Partners, with participation from Menlo Ventures, Norwest Venture Partners, Insight Partners, and Sierra Ventures.
• May Mobility, an autonomous vehicle startup specializing in self-driving shuttle services, raised $105 million in Series D funding led by NTT Group, with participation from Toyota Ventures, Aioi Nissay Dowa Insurance Co., State Farm Ventures, BMW i Ventures, Cyrus Capital, and Trucks VC.
• Wonder, a cloud kitchen and takeout foods startup, raised $100 million in new funding from Nestlé.
• Elucid, a biotech specializing in cardiac MRI analysis software, raised $80 million in Series C funding led by Elevage Medical Technologies.
• Xpressbees, an Indian logistics company specializing in e-commerce delivery and supply chain solutions, raised $80 million in new funding from Ontario Teachers' Pension Plan.
• Volante Technologies, a global provider of cloud-based financial messaging and payment solutions, raised $66 million in a mixture of equity and debt funding led by Sixth Street Growth, with participation from Wavecrest Growth Partners and Wells Fargo Strategic Capital.
• OrsoBio, a biotech focused on severe metabolic disorders, raised $60 million in Series A funding led by Longitude Capital and Enavate Sciences, with participation from Eli Lilly, Samsara BioCapital, and NuevaBio.
• Black Ore, a developer of AI-enabled automation solutions for tax and accounting professionals, raised $60 million of new funding led by Andreessen Horowitz and Oak HC/FT.
• Refurbed, an online marketplace specializing in refurbished electronics and appliances, raised $57 million in Series C funding led by Evli Growth Partners and C4 Group, with participation from All Iron Venture and Speedinvest.
• Forward Therapeutics, a biotechnology focused on chronic inflammatory conditions, raised $50 million in Series A funding led by BVF Partners, with participation from RA Capital Management and OrbiMed.
• L-Nutra, a nutrition tech company focused on fasting-mimicking diets, raised $47 million in Series D funding led by Moderna CEO Stephane Bancel and Brentwood Associates.
• Eleos Health, a provider of voice-enabled workflow automation tools for behavioral health professionals, raised $40 million in Series B funding led by Menlo Ventures, with participation from F-Prime Capital, Eight Roads, Arkin Digital Health, SamsungNext, and Ion.
• Cast AI, an AI-enabled cloud optimization and cost management platform, raised $35 million in Series B funding led by Vintage Investment Partners, with participation from Creandum and Uncorrelated Ventures.
• Qomodo, a provider of retail physical payment solutions, raised €34.5 in equity and debt funding led by Fasanara Capital, with participation from Exor Ventures, Proximity Capital, Ithaca Investment, Notion Capital, and Octopus Ventures.
• Harvest Partners raised $5.34 billion for its ninth buyout fund.
• Kennedy Lewis raised $4.1 billion for its third private credit fund.
• KKR raised $2.8 billion for its second global impact fund.
• PSG Equity raised more than €2.6 billion for a second European tech-focused fund.
• Ardian agreed to buy a $2.1 billion portfolio of LP interests from CPP Investments.
• Jefferies raised more than $2.1 billion for its second private credit fund.
• Dyal Capital Partners is targeting $2 billion for a new fund to buy stakes in alternatives managers.
• Craft Ventures raised $712 million for its fourth flagship fund, plus an additional $608 million for its second growth fund.
• IBM (NYSE: IBM) launched a $500 million AI-focused corporate venture fund.
• 01 Advisors raised $395 million for its third venture fund.
• Bison Ventures raised $135 million for a debut climate and biotech fund.
1. A straight shot from $47 billion to Chapter 11.
• Debtwire provides a detailed analysis of WeWork’s bankruptcy filing, announced last week. — WeWork files long-awaited Chapter 11 case with RSA equitizing notes, cutting USD 3bn in debt, Debtwire
2. Ken Moelis is here to stay.
• The eponymous founder of Moelis & Co. has ditched his exit plan, preferring to stay on as he positions the firm to capitalize on a market recovery. — Ken Moelis Scraps CEO Handoff to Seize Once-a-Decade Moment, Bloomberg
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