Axios Pro Rata: Earnout fallout

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Three private equity firms are being accused of fraud, in a lawsuit that's set to begin late next month in Delaware Chancery Court.

Why it matters: This is the next major case involving a dispute over earnouts, which have become increasingly prevalent in merger agreements.

• But unlike the recent situation involving Johnson & Johnson, in which the drugmaker was forced to pay out over $1 billion, these plaintiffs aren't arguing that the buyer changed strategy post-acquisition.
• Instead, they're arguing that the fraud occurred during deal negotiations, inducing a sale under false pretense.
• The private equity firms, meanwhile, have filed a counterclaim — and are likely to argue that the lawsuit is a smokescreen designed to secure an earnout that wasn't really earned, by a startup whose product didn't perform adequately.

Catch up quick: New Mountain Capital in 2019 bought a majority stake in Ontario Systems (now known as Finvi), a provider of financial services software to health-care and government clients.

• Also involved with Ontario were Blue Star Innovation Partners, whose founding partner in Dallas Cowboys owner Jerry Jones, and Eir Partners.
• Ontario used third-party vendors for payments, and decided it should bring the capability in-house via acquisition. So the following year it began negotiating with a Chicago-based startup called SwervePay, which had raised around $18 million in VC funding.
• Deal terms were $10 million in cash upfront, plus up to $55 million in cash earnouts and upwards of $500 million in equity earnouts.
• The earnouts were tranched, and tied the percentage of Ontario clients that SwervePay converted to its system.

The intrigue: SwervePay claims that it was told that Ontario had at least $34 billion of monetizable payment volume, which meant it could reach the first milestone with 13% conversion.

• That claim was made via email, including with a spreadsheet, rather than via a contractual representation.
• The alleged problem is that the real number was closer to $5 billion -- something Blue Star itself had discovered prior to the SwervePay negotiations — thus meaning SwervePay would have needed 43% conversion (something it believed was unachievable).
• Moreover, three Blue Star execs were recently sanctioned by the court for improperly deleting relevant text messages.

Zoom in: The defendants haven't yet filed their official reply, instead focusing on dismissal motions that were largely unsuccessful due to correspondance uncovered via discovery.

• When the defendants state their case, we'll be sure to share it here.

The bottom line: This was a tiny add-on acquisition for private equity. But it could become a giant headache.

Qualcomm (Nasdaq: QCOM) has approached chipmaker Intel (Nasdaq: INTC) about a takeover, as first reported by the WSJ.

Why it's the BFD: This would be the largest tech merger in history, and also reflects Intel's rapid fall from grace.

By the numbers: Intel's stock price has fallen by 36% over the past year, giving it around a $93 billion market cap. That means a buyout bid would likely need to be valued at more than $110 billion.

• Qualcomm is currently valued at around $188 billion. No word yet on how it would finance a bid.
• The largest tech merger to date was Microsoft buying Activision Blizzard for $69 billion. There also was Broadcom's $117 billion bid for Qualcomm in 2017, but that deal was blocked by former President Trump on national security grounds.

Meanwhile: Apollo Global Management has offered to invest up to $5 billion into Intel, per Bloomberg.

The bottom line: This merger could reshape the U.S. tech industry, including the flow of CHIPS Act dollars, and become the next president's first major antitrust case.

• Motion, a Toronto-based ad-tech startup, raised US$30m in Series B funding. Inovia led, and was joined by insiders Headline, Abstract Ventures, and Sugar Capital. axios.link/3XyT4N1

⚡ MetOx, a Houston maker of ultraefficient grid wires, raised $25m in Series B extension fund from Centaurus Capital and New System Ventures, per Axios Pro. axios.link/3XRaeqI

⚡ David Energy, a Brooklyn-based energy retailer, raised $23m in Series A-1 funding. Cathay Innovation led, and was joined by USV, Keyframe Capital, Equal Ventures, and BoxGroup. axios.link/4exasc6

• Fathom, an SF-based meetings intelligence platform, raised $17m in Series A funding led by Telescope Partners. fathom.video

• Jump, a French freelancer benefits startup, raised €11m in Series A funding. Breega led, and was joined by Index Ventures and Raise Ventures. axios.link/3TE3AkV

🚀 Sateliot, a Spanish developer of low-orbit satellites for IoT, raised €10m from Global Portfolio Investments. axios.link/3TDicRC

🚑 Scribenote, a Canadian medical scribe startup for veterinarians, raised US$8.2 million in seed funding. A16z led, and was joined by Inovia Capital and Velocity Fund. axios.link/3XRQDqd

• Kestra, an open-source orchestration platform, raised $8m. Alven led, and was joined by insiders Isai and Axeleo. /axios.link/3BfaRl4

🌎 FluoRok, a British developer of fluorochemical reagents and battery electrolyte salts, raised £7.7m. BGF led, and was joined by Green Generation Fund, Volta Energy Technologies, Oxford Science Enterprises, University of Oxford, and Excellis. axios.link/3ZAVRbo

• Platformatic, a Node.js app platform, raised $4.3m in new seed funding. Rialto Ventures led, and was joined by insiders Dcibel and Panache Ventures. platformatichq.com

• Karman Industries, a Long Beach, Calif.-based manufacturing electrification startup, raised $4m in pre-seed funding from Riot Ventures and Space VC. karmanindustries.com

• mbue, an Austin-based provider of architectural review SaaS, raised $1.8m in pre-seed funding from Techstars, Geek Ventures, 2045 Ventures, Spatial Capital, Factorial Capital, Everywhere Ventures, and The MBA Fund. mbue.ai

🚑 Affinity Equity Partners agreed to buy Lumus, an Australian medical imaging group, from Healius (ASX: HLS) for A$965m. axios.link/47FWYsm

• Arcapita and Dgpays agreed to buy a majority stake in UAE-based payments firm NEOPAY from Mashreq (which retains a minority stake) at a $385m enterprise value. axios.link/47CxbRG

• CREO Group, a sustainable horticulture packaging company of Mill Point Capital, acquired United Solutions, a Leominster, Mass., maker of indoor and outdoor household products. unitedsolutions.net

• KEV Group, a Toronto-based portfolio company of Serent Capital, acquired Gray Step Software, an El Dorado Hills, Calif., provider of school booster finance software. kevgroup.com

⚡ Masdar of Abu Dhabi is in talks to buy Spanish renewable energy firm Saeta Yield from Brookfield, per Bloomberg. axios.link/47E8CUE]

• StandardAero, a Scottsdale, Ariz.-based aircraft maintenance company owned by Carlyle, set IPO terms to 46.5m shares at $20-$23. It would have a $7.1b fully diluted value, were it to price in the middle. Carlyle previously had sought to sell StandardAero for around $10b. It plans to list on the (NYSE: SARO), and reports $9m of net income on $2.58b in revenue for the first half of 2024. axios.link/3Zwop5B

• Vista Equity Partners invested in Gnosis Freight, a Charleston, S.C., provider of supply chain visibility and execution software. gnosisfreight.com

Eight companies plan to price IPOs this week on U.S. exchanges, including three seeking to raise more than $100m: BKV, BioAge Labs, and Quardian Pharmacy Services.

🚑 CAMP4 Therapeutics, a Cambridge, Mass.-based RNA biotech focused on genetic diseases, filed for a $75m IPO. It plans to list on the Nasdaq (CAMP), and raised nearly $190m from firms like Enevate Sciences (19.1% pre-IPO stake), 5AM Ventures (15.9%), Polaris Partners (13.5%), Northpond Ventures (11.6%), a16z (11%), HarbourVest Partners (7.2%), The Kraft Group, and Gaingels. axios.link/4escmLz

• Bold Eagle, the eighth SPAC led by Jeff Sagansky and Harry Sloan, refiled for a $250m IPO. It previously was known as Spinning Eagle, and in 2022 withdrew registration for a $2b IPO. axios.link/47yaRst

• Cohen Circle Acquisition I, a SPAC led by blank-check vet Betsy Cohen, filed for a $200m IPO. axios.link/3TCKID6

• Zabka, a Polish convenience store chain owned by CVC Capital Partners, is prepping what could be the largest Warsaw IPO in three years. axios.link/3MSJXls

• Blackstone agreed to sell the parent company of Motel 6 and Studio 6 to the parent company of India's Oyo Hotels for $525m in cash. axios.link/3zBdMUv

• Butterfly Equity closed on a $300m dividend recap for portfolio company Milk Specialties. milkspecialties.com

• Enfusion, a Chicago-based provider of investment management SaaS, is exploring a sale, per Reuters. It has around a $1.1b market cap. Shareholders include FTV Capital (35%) and Iconiq (10%). axios.link/4djmu7P

• Pure Watercraft, a maker of electric outboard motors, filed for bankruptcy and is seeking to sell its assets. It had raised over $40m in VC funding from firms like General Motors and L37. axios.link/4gBQVJ6

• Rightmove (LSE: RMV), a British online real estate portal, is considering a sweetened $8.1b takeover offer from REA Group (ASX: REA), owned by Rupert Murdoch, after having rejected a $7.3b approach. axios.link/3BdYo0Z

🚑 Stryker (NYSE: SYK) acquired NICO Corp., an Indianapolis developer of medical devices for neurosurgery that had raised around $70m from firms like River Cities Capital Funds and Rose-Hulman Ventures. axios.link/4gyiwuW

• BNP Paribas (Paris: BNP) agreed to buy HSBC's (NYSE: HSBC) private banking unit in Germany. axios.link/4esQNd2

• Cellnex (Madrid: CLNX) is weighing a sale of its French data centers, per Reuters. axios.link/3BeEXoH

• Miniso (HK: 9896) agreed to buy up to a 29.4% stake in listed Chinese supermarket operator Yonghui Superstores for $893m. axios.link/4ev5Pz6

• Tempur Sealy International (NYSE: TPX) said it will divest more than 100 stores, as it seeks to overcome FTC opposition to its $4b takeover of Mattress Firm.

• UniCredit raised its stake in Commerzbank to 21%, despite German government opposition to a takeover. axios.link/4dibcR6

• Acurio Ventures (fka All Iron Ventures) of Spain raised €150m for its third fund. axios.link/4dbC19K

• KKR raised $4.6b for its debut fund focused on North American midmarket buyouts. axios.link/3MVVyAj

• Miura Partners, a Spanish impact investor, raised €475m for its fourth fund. axios.link/3XDEkwF

• New York State Common Retirement Fund will pay up to $350m for Vista Equity Partners fund stakes held by late billionaire Robert Brockman. axios.link/3TDkQHa

• Anna Chen joined Madrona as a Palo Alto, Calif.-based investor. She previously was with General Atlantic. axios.link/3MWRtfk

• Howard Elias, a former Dell/EMC exec, joined Bridge Growth Partners as a senior adviser. axios.link/47EUpa0

• Lina Khan said she'd accept a renomination to FTC chair, were it to be made by the next president, during a "60 Minutes" interview.

• Sandra Robertson is stepping down as chief investment officer of Oxford University's £6.5b endowment, to be succeeded by deputy CIO Neamul Mohsin. axios.link/3ZtSEu5

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