Spac pitfalls illuminated by family feud at Velodyne

David Hall and Brad Culkin are inventors, longtime colleagues and brothers-in-law.

But after a Spac deal and a boardroom bust-up at their firm, Velodyne Lidar, they’re now, within the phrases of Hall, locked in a “fight to the death”.

Hall, who based the 3D sensor enterprise, was ousted as chair earlier this 12 months however stays the biggest shareholder and is now decided to strike again towards Culkin, who took over as chair, and anybody else on the board who helped take away him.

Last week, Hall wielded his majority voting energy to put in Eric Singer, an activist investor, on to the board. “He’s going to drive those cockroaches out of there,” mentioned Hall, in an interview with the Financial Times. “I want them gone and to never hear from them again for the rest of my life, and my children’s lives as well.”

The developments at Velodyne are one other instance of the pitfalls of special-purpose acquisition firms, which have offered a faster path to public markets in comparison with conventional listings, however which have additionally been used by high-risk, founder-controlled companies. The firm’s share worth has fallen greater than 50 per cent this 12 months throughout the public dispute.

A spokesperson mentioned the corporate continues to execute “a strategy designed to drive long-term growth for the company [ . . . ] with the highest standards of corporate governance”.

Falling revenues

Velodyne is the main US producer of lidar techniques, the rotating laser units used by self-driving automobiles to “see” roads and obstacles. Ahead of its arrival on the general public markets, by way of a $1.6bn take care of a Spac known as Graf, regulatory filings described it as a “fast growing business with strong momentum”.

A automobile outfitted with Velodyne’s lidar system, which makes use of lasers to ‘see’ roads and obstacles © Velodyne Lidar

But the corporate’s troubles stretch again for years, in keeping with regulatory filings and other people conversant in the corporate.

Hall arrange Velodyne in 2016, elevating an preliminary $150m from Ford and China’s Baidu. The traders additionally turned necessary clients, shopping for thousands and thousands of {dollars} value of merchandise. 

Velodyne made greater than $180m in revenues in 2017, in keeping with filings, largely from one-off gross sales to analysis groups at firms similar to Uber that had been growing self-driving vehicles. That 12 months, Velodyne’s lidar sensors offered for a weighted common worth of practically $18,000 every.

But as rivals flooded the market, the value of lidar sensors fell sharply. Velodyne mentioned it had proactively minimize its costs to extend the adoption of the expertise, however by 2019 its revenues had fallen by greater than 40 per cent.

In 2018, the corporate accused Hesai, a Chinese rival that additionally acquired funding from Baidu, of reverse engineering its spinning lidar sensors. Last 12 months, it settled the dispute with Hesai and with one other Chinese firm, in change for licensing and royalty charges.

But Hall mentioned the alleged theft of Velodyne’s designs had “ruined” the marketplace for lidar.

Lidar revenues soar as its products' prices fall

‘A family business’

Meanwhile, a number of individuals conversant in the corporate accused Hall of operating it as a family enterprise, at occasions using his kin and associates in senior roles.

Regulatory filings confirmed that Hall and his spouse Marta, who stays on Velodyne’s board, borrowed from the corporate to fund the $23.4m buy of a constructing in San Jose, California, that served as its headquarters. An organization owned by the couple then charged Velodyne thousands and thousands of {dollars} in annual lease for the usage of the constructing.

Last month, the Halls sold the property for $51.4m, returning greater than 200 per cent on their preliminary funding. Hall mentioned the deal had been “dumb luck” and that he charged the corporate below-market lease.

Responding to questions concerning the jobs held by his family members, Hall mentioned: “It is marginal nepotism, and it is getting a little out of control. I am going to rein that in some day.”

The street to the general public markets

In January 2020, Hall stepped again from day-to-day administration, selling Anand Gopalan to chief govt as the corporate started to think about an IPO. Hall mentioned at the time that Gopalan was “the right executive to lead Velodyne in its next growth phase”.

Velodyne held preliminary discussions about an IPO, however traders had issue valuing the corporate after a number of years of income declines, mentioned two individuals conversant in the method.

As the pandemic hit, another choice offered itself: Spacs, or blank-cheque automobiles raised for the aim of merging with an organization and bringing it to public markets. 

Graf Industrial Corp, which had already deserted talks with a polypropylene recycling firm, started discussions with Velodyne in May. By June, the businesses had begun soliciting traders for added backing so as to add to the Spac’s money contribution, aided by advisers at Bank of America and Oppenheimer.

An investor presentation predicted Velodyne’s revenues would start rising once more and attain greater than $680m in 2024, with greater than half of enterprise coming from new multiyear agreements, software program gross sales and subscriptions. In 2020, the corporate had revenues of $94m.

The deal was introduced in July, and within the weeks main as much as Velodyne’s itemizing in September, the automobile’s share worth briefly reached $32. Culkin, who co-founded with Hall an audio firm from which Velodyne was spun out, emerged with thousands and thousands of shares and a seat on the board.

Ford, in the meantime, negotiated an exemption to lock-up agreements that usually prohibit insiders from early buying and selling, and offered its complete stake in Velodyne within the fourth quarter. Ford, which remains to be utilizing Velodyne’s expertise, has said the gross sales had been “consistent with our efforts to make the best, highest use of capital”.

Line chart of Share price ($) showing Velodyne's stock has fallen during the public feud

The battle for management

In the months after going public, Hall pushed for modifications to the board that may have allowed him to nominate six out of eight administrators and fireplace the chief govt, in keeping with Velodyne.

The board’s audit committee started investigating Hall and his spouse, claiming in February that they “behaved inappropriately with regard to board and company processes”. Velodyne eliminated Hall as chair with out publicly offering specifics of the investigation’s findings.

Anand Gopalan, Velodyne’s chief executive
Anand Gopalan was made chief govt after Hall stepped again from day-to-day administration in January 2020 © Velodyne Lidar

In a press release to the FT, Velodyne mentioned the alleged misconduct by David and Marta Hall “dramatically increased” after Hall’s board proposals had been rejected. Velodyne mentioned each member of the board aside from Marta Hall rejected Hall’s claims, which it mentioned contained “unsupported accusations”.

Following his removing, Hall accused Culkin of taking “several liberties with the truth” and appearing as a “rubber stamp”. Culkin didn’t reply to requests for remark.

One day after the annual shareholder assembly final week, Velodyne introduced it had begun arbitration proceedings towards Hall, alleging breach of contract and the theft of commerce secrets and techniques. 

In a separate assertion, the corporate mentioned Hall had copied “hundreds of thousands” of Velodyne paperwork on to at least one exterior arduous drive earlier than returning his firm laptop computer. Through a spokesperson, Hall declined to touch upon the arbitration.

Hall mentioned he had been misled by attorneys and Spac executives throughout the merger course of, which he believed would enable him to retain management over the corporate. Graf and Gunderson Dettmer, the legislation agency that represented Velodyne throughout the Spac discussions, declined to remark.

Investors nurse losses

Meanwhile, traders have posted complaints on the message board Reddit, and have called in recent weeks for the Halls to desert their battle with the corporate. Shares had been buying and selling at about $11 on Wednesday.

Outside observers predicted that a number of firms which have struggled since merging with Spacs might grow to be prime targets for activist shareholders. Many have but to seek out industrial success for futuristic applied sciences and are nonetheless led by comparatively inexperienced groups.

“That’s all the ingredients you need for volatility and activist interventions,” mentioned Ethan Klingsberg, a accomplice at the legislation agency Freshfields who advises boards on company governance issues.

Additional reporting by Sujeet Indap in New York

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