"He had relaxed for one day. And he had lost"
Lyndon B. Johnson's 1941 Senate race and an Australian private equity takeover in 2023
The below is a timely reminder that election shenanigans are as American as apple pie. Enjoy your vote on 5 November, American friends. May it be your last! (I kid, I kid…)
All information contained herein is based on public information only. The author is a former employee of Potentia Capital.
The founder of a private equity firm once told me he’s never bought a company and not thought: f***. Buying companies is an act of hubris. In the moment you buy a company, you are willing to pay more than anyone else in the universe.1 Maybe you have good reason to back yourself. But in the moment after you have won there lies both victory and trepidation. It is not enough to win. You must win and be right. And as an investor you will only know that later once you have sold.
That said, reality has considerably more detail than just saying the biggest number.
Tactics matter. Navigating a regulatory environment or a capital structure or some other complexity can yield an advantage. Mistakes can spell defeat.
This a story about an Australian private equity takeover in 2023, and its peculiar spiritual precedent in a US Senate race in Texas in 1941.
Lyndon Johnson’s 1941 Senate race
In 1941, future President Lyndon B. Johnson ran for the Senate — and lost. He lost by the skin of his teeth. He fought that election hard, and he smelt victory. As early results came in on Election Day they pointed to victory, and he was so confident, he was celebrating in the lobby of a hotel with his campaign staff. But his overconfidence led to a slip. And in a tragi-comic twist, his opponent Pappy O’Daniel’s foes arranged for Johnson to lose and for O’Daniel to win. The liquor lobby didn’t want O’Daniel to stay Governor in Texas but rather to win the Senate election and leave to Capitol Hill. And they could only arrange the fix because Johnson slipped.
You see, in Texas, not all the votes were counted on Election Day. There were rural precincts that came in late. In The Path to Power, Robert Caro writes that there were:
…precincts that were for sale, the “boxes” in which the county judge wouldn’t “bring in the box” (report the precinct totals to the Election Bureau) until the man who had paid him told him what he wanted the total to be… Since in a close election, precinct results could thus be altered, it was a fundamental rule of Texas politics not to report your important precincts—the ones in which you controlled the result—early. By reporting your total, you let your opponent know the figure he had to beat, and in Texas, it was all too easy then to beat it… Johnson had violated this rule, perhaps out of overconfidence… But the vote was to be changed nonetheless.
Almost all the returns in these ballots went to Johnson’s opponent Pappy O’Daniel.
Lyndon Johnson’s loss had been due to a political fluke. He had been beaten not by his opponent’s friends but by his opponent’s foes; O’Daniel had won the Senate seat not because these men wanted him to be Senator, but because they didn’t want him to be Governor—because they wanted to get him out of Texas. But it was Johnson’s mistake that had enabled these men to take his victory away. He had planned and schemed and maneuvered for ten years—had worked for ten years, worked day and night, weekday and weekend—had done “everything.” And, for ten years, he had won.
He had relaxed for one day. And he had lost.”
Potentia’s takeover of Nitro Software
On 31 August 2022, Nitro Software, an Australian Stock Exchange listed PDF-editor business, entered into a trading halt to announce an unsolicited offer from Potentia Capital, an Australian private equity firm, at a price of $1.58 per share. Potentia had acquired a 17% stake in the company in a raid. The Board rejected the offer.
On 28 October, Potentia increased the takeover offer to $1.80 per share, and had creeped up to 19.8% of the shareholder register. Potentia wanted access to diligence, which the Board refused to provide. Tech markets were not in a good place. US peers were issuing lower revenue growth guidance and beginning to announce layoffs. Nitro looked like it had market headwinds, and with a 19.8% stake, Potentia figured it would be difficult for an interloper to come in. Time was on Potentia’s side.
But time did not turn out to be on Potentia’s side. On 15 November, the Nitro Board announced it was recommending an acquisition from Alludo, a KKR portfolio company. The Nitro Board had scoured the earth for a higher bidder and they had found one. Alludo would be able to pay a higher price — it was a strategic acquirer after all, and presumably there’d be synergies. And the Board had granted Alludo diligence access. Potentia challenged the Board at the Australian Takeovers Panel and lost. It increased its price from $1.80 to $2.00. Alludo increased its price to $2.15. At least Potentia would make a profit on its 19.8% stake. But it could not beat Alludo in a shoot-out. All was lost. Or so it seemed.
By 6 February 2023, Alludo had only received 12.53% acceptances into its offer. Perhaps shareholders were holding out for another round of bidding. Alludo was getting impatient. Its offer was expiring on 3 March. And so to hurry shareholders along, Alludo announced that its $2.15 price was:
“‘best and final’ and will not be increased (even if a Superior Proposal emerges)”
Australian takeovers are regulated under a ‘truth in takeovers’ regime. Basically, bidders and targets in takeovers must do what they say. And so in their confidence Alludo, with diligence, a Board recommendation, and less than a month to go before its offer expired, went ‘best and final’.
The next day Potentia said it would beat Alludo’s price. Theoretically, it could bid one cent higher and win. Potentia said it was prepared to bid $2.20 — 2.30 if it were granted diligence access and 3 weeks to firm up the offer. The Board, loathe to grant Potentia access after it had snuck up on them with a 19.9% stake build and an unsolicited bid, had no choice. There would be no second rabbit out of the hat. They had to act in shareholders’ interests, and Potentia’s was the highest bid. Alludo had ruled themselves out of an increase.
It was a fundamental rule of Texas politics not to report your important precincts… early. By reporting your total, you let your opponent know the figure he had to beat, and in Texas, it was all too easy then to beat it.
Maybe it was from overconfidence or impatience or bad advice, but in any case, Alludo had reported their final price early enough for Potentia to beat it.
Potentia completed its three week diligence process and increased its bid price, which was then recommended by the Nitro Board. On 31 March, Potentia had over 95% acceptances and on 14 April Nitro Software was de-listed from the ASX.
Potentia won the takeover. But the only score that matters comes when they sell.
There are exceptions. Maybe you are in a position to force the company to sell to you (you are already a major shareholder, a customer or a supplier).
Brilliant.
Looking forward to part two.