For a company that has been struggling with a multi-year identity crisis, Websense (Nasdaq:WBSN) got a pretty good deal Monday morning. While the company's bid from Vista Equity Partners won't be setting new records in the tech space for deal multiples, it's a good deal for a growth-challenged company with iffy margins and a very uncertain long-term strategic place.
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Websense announced Monday morning that it had accepted a bid from Vista Equity Partners to sell itself for $24.75 per share in an all-cash deal worth over $900 million. The deal will be structured as a tender offer and, somewhat unusually for a tech bid these days, does not appear to contain a provision allowing Websense to actively solicit a better bid.
This deal represents a 29% premium to Friday's close, and a better than 50% premium to the average Websense stock price over the past 60 days. All of that said, it is about 27% below the stock's all-time high (set back in December of 2005).
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Struggling Operations Lead To Less Premium
There are a few different ways to look at this deal. On an EV/EBITDA basis, the nearly 17x multiple seems like quite a robust valuation. On an EV/revenue basis, though, the 2.5x multiple is not very rich at all – not when growing software companies can sell for multiples in the high single digits or low double digits.
The key there, though, is “growing software companies”. Websense was once an innovative and disruptive company in the security space. Websense outmaneuvered companies like Symantec (Nasdaq:SYMC) and Intel's (Nasdaq:INTC) McAfee and established a beachhead in the web filtering market – so much so that I once called Websense the preeminent killjoy of the American cube-bound workforce.
Since then, though, the web filtering market has stagnated and Websense has struggled to develop a second act. While the company has established its TRITON platform to enter the email and data security markets, revenue growth has averaged only about 5% over the last four years – a period in which more comprehensive security companies like Sourcefire (Nasdaq:FIRE) and Fortinet (Nasdaq:FTNT) achieved average growth rates of about 30% and 26%, respectively.
To that end, Websense found itself in a position not dissimilar to other recent tech acquisition targets like BMC (NYSE:BMC), Dell (Nasdaq:DELL), and Quest (acquired by Dell). Absent growth, bidders just don't see a reason to pay a rich premium. More specifically in the case of Websense, the company at least has some attractive cash flow characteristics that lend some appeal as a private equity target.
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The Bottom Line
Websense management has indicated that it believes the email and data security markets are worth about $5 billion to $6 billion in total annual revenue (combined), against roughly $1 billion for web filtering. Should Websense manage to increase its penetration and billings growth (which has been in the mid-to-low single digits recently), I wouldn't be completely surprised to see Websense come public again.
As it is, this looks like a reasonable deal for a company that has been fighting a long battle against uninspiring growth. It also highlights the challenges for those companies still public and fighting to regain revenue momentum – names that include CA (NYSE:CA), Compuware (Nasdaq:CPWR), and Check Point (Nasdaq:CHKP). In tech, growth and value are inextricably entwined, and Websense's weak growth profile argues to me that this about the best deal that management can hope to get at this point in time.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.