Darktrace: A UK Success Story

Another day, another breathless media flurry foretelling the death of the UK stock market. A merry-go-round of articles, variously bemoaning delistings, a lack of IPOs, fund outflows and lowly comparative valuations (invariably with the US market where valuations are highest) have landed in my inbox with unerring regularity over the past few months.

The latest cause of handwringing is the announcement that Darktrace will be taken private by an American private equity business. The UK market is supposedly at fault for this transaction taking place, presumably because it afforded Darktrace such a typically woeful valuation that it was impossible for the company to reject its offer.

This is also an apparent existential crisis as, according to some, we will have no great AI companies left on the UK market and, apparently, no chance of attracting any others, given the UK so clearly fails to support them. A wider point is also being made in the press that if UK tech darlings like Darktrace and ARM don’t stick around then why would any tech companies.

But is any of this really the case? Darktrace has had a volatile time since listing. Its financial performance has been inconsistent and it has been tarnished by associations with billionaire Mike Lynch, currently on trial on charges of fraud relating to the $11bn sale of his company Autonomy to Hewlett Packard.

Despite this, Darktrace has enjoyed a premium valuation since listing in the UK. Its ultimate acquisition price is 45 times its forecast earnings. That’s two and a half times the average multiple for the S&P 500 (the US’s biggest companies) at 20 times earnings, so can it unequivocally be argued that UK investors undervalued Darktrace, or that it would have fared any better on a US exchange? Its investors are likely very happy with the offer they’re getting. Mike Lynch is set to bag a further $300 million from the sale.

Also, will Darktrace’s absence from the exchange deter similar companies from listing in the UK? The UK still has investors seeking listed tech companies and they will now have a Darktrace hole to fill. At the same time, there remain plenty of tech companies that could accelerate their growth via the many benefits a UK listing can bring, such as the ability to raise funds, issue paper for acquisitions, incentivise staff through share ownership, and enjoy a higher public profile, to name but a few.   

Would seeing the likes of Darktrace enjoying a 148% increase in valuation in three years (it listed on this very day, 30 April 2021) before being bought for 45 years’ worth of earnings, put companies off the idea? A lot of CEOs might be very happy with that scenario.

Instead of catastrophising over these events and fuelling negative sentiment toward the UK, we should perhaps be advertising the success story of companies like Darktrace, which has done very well out of its UK listing.

For all the talk of an exodus of UK listed businesses to US markets, the London Stock Exchange remains a cheaper venue than New York with less onerous and complex rules and regulations. There is also no guarantee of a higher stock price in the US, as Dark Trace’s premium to the average S&P 500 valuation clearly illustrates. US tech giants hugely skew the average valuations of US companies and those under $10 billion market cap (like Darktrace) typically trade on relatively lowly valuations. Of the 23 British firms that listed in the US in the past decade, six have delisted and 13 are below their listing price; hardly a panacea. 

Markets are cyclical, and while the number of UK listed businesses is currently diminishing, driven by issues such as increased interest rates (which are now coming under control), this trend will reverse in time. Ahead of this, we should champion, rather than denigrate, the UK stock market to ensure that when companies regain the confidence to IPO, London is one of the first markets they consider.