Activist Investor Pressures Cybersecurity Firm to Pursue Operational Changes, Sale
By Michael Novinson (MichaelNovinson)
Activist investor Jana Partners has taken a 13 per cent economic interest in Boston-based Rapid7 and is evaluating potential buyer interest in the vulnerability management vendor.
Jana teamed up with three cybersecurity executives as well as investment firm Cannae Holdings – which has expressed interest in participating in a potential acquisition of Rapid7 – to unlock shareholder value. Jana, Cannae and the special advisors said they’re working with Rapid7’s board and management to deal with corporate governance and operational issues that led to the company’s stock being undervalued.
Rapid7’s stock is up US$1.94 – or 5.2 per cent – to US$39.30 per share since Jana announced an increased ownership stake after the market closed Friday. But the company’s stock is down 28.5 per cent since the start of 2024 and 71.6 per cent from its all-time high of US$138.41 per share in November 2021. Rapid7 currently has a valuation of just US$2.46 billion, well below competitors Qualys and Tenable, which are worth US$4.68 and US$4.84 billion.
What Jana Wants to See Changed at Rapid7
In a regulatory filing Friday, Jana called out operational execution, forecasting, investor communication, corporate governance, board composition and employee retention as areas of concern at Rapid7. The firm lost President and COO Andrew Burton in June, Chief Customer Officer Larry D’Angelo in July and Vice President of Global Marketing Planning and Operations Clifford Stevens in August. All took new jobs.
Jana spent US$137 million to acquire 5.8 per cent of Rapid7’s outstanding shares, Cannae spent US$12.8 million to buy 0.6 per cent of the company’s outstanding shares, and the three special advisors spent US$250,000 on their Rapid7 share purchases. Jana also teamed up with third-party financial institutions to gain economic exposure to an additional 6.6 per cent of Rapid7’s stock, but lacks direct voting power over those shares.
The special advisors brought in to assist Jana and Cannae include: Michael Joseph Burns, who served as Imperva’s CFO from 2018 to 2019 and Gigamon’s CFO from 2014 to 2016; Chad Kinzelberg, who was Palo Alto Networks’ senior vice president of business and corporate development from 2012 to 2018; and Robert Bradshaw Henske, who was Intuit’s CFO from 2003 to 2004 and Synopsys’ CFO from 2000 to 2002.
Most of Jana’s holdings are outside tech in areas such as food processing and rehab, while Cannae has an extensive footprint in club soccer and casual dining. The special advisors could therefore be candidates if Jana chooses to nominate its own people to Rapid7’s board, offering expertise in finance and corporate development and direct input into the company’s governance, compensation and operational decisions.
In the regulatory filing, Cannae expressed willingness to participate in an acquisition of Rapid7, signaling that a sale to private equity with Cannae’s involvement could be possible. Cannae’s ownership footprint includes English club AFC Bournemouth, Scottish club Hibernian F.C., French club FC Lorient, Tennessee-based O’Charley’s Restaurant & Bar and Massachusetts-based Ninety Nine Restaurant & Pub.
Rapid7’s Perilous Situation Years in the Making
Jana first announced a “significant” stake in Rapid7 at the Sohn Monaco Investment Conference in June along with plans to push the company to sell itself. Jana got two members onto NewRelic’s board in June 2022 and helped steer the observability vendor toward a US$6.5 billion sale to Francisco Partners and TPG just 13 months later. Neither Jana, Cannae nor Rapid7 immediately responded to requests for comment.
Rapid7 has reportedly been on the selling block for nearly 17 months, and Reuters reported in February 2023 that the company hired Goldman Sachs to help with a potential sale to a private equity firm or another buyer. Thoma Bravo, TPG Capital and Alphabet all reportedly kicked the tires on Rapid7, but The Information reported in July 2023 that Rapid7 and Thoma Bravo were too far apart on price.
Then in August 2023, Rapid7 laid off 18 per cent of its workforce – more than 470 positions – to streamline management layers, reduce role overlap and optimize its mix of onshore and offshore talent. The layoffs aimed to help Rapid7 boost its managed detection and response capabilities across all of security operations.
Rapid7’s revenue for the six months ended June 30, 2024, climbed to US$413.1 million, up 10.6 per cent from US$373.6 million the year prior. The company recorded net income to US$10.5 million – or US$0.14 per diluted share – up from a net loss of US$92.7 million, or US$1.54 per diluted share – in the first half of 2023.
