3D Printing Firm Divergent Caught Up in Viceroy Research’s Short Report on Hexagon

As global equity markets become more and more overvalued by historical standards, more room is constantly opened up for activist short seller groups looking to feast on the fat of bloated corporate entities. The most well-known example of this in the past year was Hindenburg Research’s short sale report on Indian conglomerate Adani Group, whose flagship company, Adani Enterprises Ltd, lost as much as 60 percent of its market cap as a result of the report.

The latest in this genre is a report from Viceroy Research on Swedish software firm, Hexagon AB, which has a ~$25 billion market cap and reportedly does over $5 billion a year in revenue. Hexagon also made a $100 million investment into additive manufacturing (AM) firm Divergent Technologies at the end of 2022. Viceroy alleges that an investment vehicle called Greenbridge, founded by former Hexagon CEO and current Hexagon chairman Ola Rollén, was being used by the software giant to front run investments. Front running is when an individual or firm invests in a company with the knowledge that the company will, at a later date, receive a large, well-publicized investment from another entity.

In the case of Hexagon, the allegation is that Greenbridge invested in Divergent with advance knowledge that Hexagon would ultimately make the $100 million investment. According to Greenbridge, “only three out of thirteen” of Hexagon’s executive management team are direct shareholders in Greenbridge (which to me still seems significant), with Viceroy (fairly convincingly) arguing that “Greenbridge is substantially owned by Hexagon insiders.”Greenbridge, for its part, replied by stating that it didn’t invest in Divergent until four months after the Hexagon investment, in April, 2023, m and claimed that its own (Greenbridge’s) investment was “on an arm’s length basis”.

Viceroy then responded by saying that, essentially, while Greenbridge may not have front-run Hexagon’s investment, Viceroy’s larger concern with Hexagon is what the research firm considers to be an opaque style of financial reporting. Regardless of what happened, then, from Viceroy’s perspective, it should at least raise concerns to the average shareholder that Greenbridge didn’t disclose its stake in Divergent until the issue was raised.

The less charitable way that Viceroy puts it is, “Viceroy genuinely believed Greenbridge front-ran Hexagon’s Divergent Technologies investment. It seemed somewhat less idiotic than the alternative: Hexagon management have “double-dipped” in Divergent by taking greater personal stakes ahead of Hexagon shareholders.” That is, if the scenario took place as is now being claimed by Greenbridge, then Hexagon executives are still acting against the interests of shareholders by putting their personal stakes ahead of the company’s.

Having read the Viceroy report, it is hard not to be sympathetic to its claims. On the other hand, I’m not sure that anyone is going to care, except for whoever is in the money on the short side of Hexagon, and whoever has been waiting for the company’s share price to fall to “an attractive entry point”, as asset managers like to say.

I’m not even sure if it will affect Divergent negatively, because all it conveys to me is that something the company is doing is worth performing potentially questionable investment practices. Moreover, because most non-investors don’t really understand how options trading works, short seller reports rarely seem to do permanent damage. Adani Enterprises Ltd has rebounded something like 80 percent since its post-Hindenburg low.