Audax intends to countersue HIG Capital over Mobileum deal

The private equity industry is known for its collegiality. If anything, it’s been criticized as too chummy. So it’s noteworthy to witness the acrimony being expressed by mid-market PE firms Audax Private Equity and HIG Capital over their co-investment in telecom software developer Mobileum. After HIG filed its complaint this week, Audax says it now plans to countersue, with both claiming the other destroyed Mobileum’s value.

“We were completely surprised,” a spokesperson for Audax told affiliate publication PE Hub when asked if the Boston private equity firm had expected the lawsuit that Miami-based HIG filed on October 24.

In the suit, HIG accused Audax of misleading it about the financial condition of Mobileum and asked a judge to award damages for fraud over the deal. The case, Matrix Parent v. Audax Management Co., N23C-10-212 MAA CCLD, Delaware Superior Court (Wilmington), begins:

1. This action concerns a brazen, massive, systemic fraud perpetrated by Audax, a private-equity firm, in the sale of a majority stake in telecommunications-software company Mobileum to Plaintiffs for a grossly inflated price of $915 million. The purchase price was based on a multiple of earnings (i.e., “EBITDA,” or earnings before interest, taxes, depreciation, and amortization), which was estimated by sellers and management to be $84 million for 2021. The multiple Plaintiffs used in determining the purchase price was based on a variety of factors — including the substantial growth in new bookings and revenue in 2021 of 18% and 15%, respectively, represented in the diligence.

2. It is now known that the Mobileum financial information underlying both EBITDA and growth was grossly, knowingly and fraudulently misstated by Audax and its affiliates, representatives and agents, in a concerted and coordinated fashion. These misstatements caused Mobileum’s EBITDA for 2021 to be overstated by well in excess of $20 million (i.e., a more than 30% overstatement) due to the fraudulent and intentional over-recognition of revenue and, in fact, the company’s EBITDA was declining (not growing), meaning Plaintiffs overpaid—given the EBITDA multiple employed—by hundreds of millions of dollars.

Now Audax plans to countersue, the firm’s rep told PE Hub, sharing this statement:

This is a spurious lawsuit and completely without merit. We are planning to countersue HIG Capital. Mobileum, during our ownership, was a phenomenal business with a first-rate management team. We rolled $100 million of capital into the deal because we believed strongly in the company’s future. Under HIG’s control, meaningful value has been destroyed. We intend to prove in court that that value destruction had nothing to do with Audax.

Back in March 2022, Audax announced it had completed the sale of Mobileum, a Cupertino, California-based provider of telecom analytics solutions, to HIG Capital through an affiliate of HIG Technology Partners. Following the transaction, HIG became the majority owner of Mobileum alongside management, and Audax retained a minority equity stake.

The Audax rep said the firm retained the minority stake because it believed in the future of the business.

HIG wasn’t the only party interested in buying the majority stake, according to Audax.

“We had a second buyer interested in the company,” the rep said. “They did not require a rollover, and their offer would have provided higher cash proceeds in the immediate term.”

The rollover is one of the areas HIG and Audax do not see eye to eye on.

HIG executives declined to comment beyond the filing.

While the suit-countersuit contest is rare in private equity today, perhaps in the future we’ll see more cut-throat competition and less camaraderie, given the current dealmaking environment, in which buyers and sellers are often struggling to come to terms on valuations amid higher interest rates.