PE firm acquires Websense in $1bn deal

July 2013 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

Private equity firm Vista Equity Partners announced on 20 May that it had entered into a definitive agreement to acquire website filtering company Websense Inc. for around $1bn.

Under the terms of the agreement Websense’s shareholders will receive $24.75 in cash for each share of common stock they hold. The agreed price represents a 29 percent premium over Websense’s closing price on 20 May, and a 53 percent premium on the firm’s average closing price for the proceeding 60 days. Upon announcement of the deal, shares in Websense soared 29 percent to close at $24.76 on the NASDAQ.

Websense expects the deal to close before the end of the third quarter, and the agreed terms will see the company’s existing management, who unanimously supported the deal, remain intact. Websense will also continue to be headquartered in San Diego, California.

Recently, Websense has been attempting to transition away from its core business – the filtering and blocking of inappropriate websites such as Facebook and pornography in the workplace. This service has been described by the company’s chief executive John McCormack as the “porn-filtering business”, and is a market reportedly worth over $1bn. While Websense’s filtering software is generally considered to be an industry leader, recently the company has come under increased pressure from rival firms providing unified security software capable of managing multiple threats to computer networks, rather than just catering to one element. Accordingly, the company has experienced declining sales and profits in recent years. Indeed, revenue fell around 1 percent in 2012 to $361.5m. Net income also dropped 41 percent to $18.3m.

Consequently, Websense hopes to position itself as a provider of broader online security services. Websense’s new focus on content security, including services that protect email, will see the company enter a market worth in the region of $5bn to $6bn. Following the acquisition by Vista Equity, Websense will now focus on its promising Triton business, a unit which produces web security gateway and email security products. Mr McCormack, in a joint statement announcing the deal, noted that Vista Equity will bring “an operational discipline that will enable us to continue to invest in the business and technology innovation”.

This new breed of security companies, which offer more comprehensive services, are becoming increasingly popular investment targets for firms as businesses seek protection from cyber thieves attempting to steal corporate information.By acquiring Websense, Vista Equity has become the latest company to enter an increasingly consolidated market, following in the footsteps of private equity firm Thoma Bravo, which acquired web security firm Blue Coat Systems in December 2011 in a deal valued at about $1.3bn. In late 2012, Blue Coat acquired Crossbeam Systems Inc., a network-security company, for an undisclosed fee.In March 2012 DellInc. purchased network security company SonicWall for a similar figure.

In the joint statement, Robert F. Smith, chief executive and founder of Vista Equity, said “We are long term investors in enterprise software and data companies that are committed to being leaders in their markets. We are impressed with Websense’s market leading product suite and the compelling value proposition it offers to its customers. We look forward to working with the company to enable it to reach its full potential.” Vista Equity, which has offices in Austin, San Francisco and Chicago, is a firm which focuses predominantly on software and technology businesses, and currently has around $7bn in equity capital.

On 28 May Vista Equity’s affiliate firm Tomahawk Merger Sub Inc. began the tender process of acquiring all outstanding Websense shares. Bank of America Merrill Lynch served as financial adviser to Websense, with Cooley LLP acting as the company’s legal adviser. Kirkland & Ellis LLP acted as Vista’s legal adviser. JP Morgan Securities LLC, RBC Capital Markets and Guggenheim Partners agreed to provide debt financing to fund the transaction.

However, on 31 May the agreed deal was thrown into some doubt when a Websense shareholder asked a judge to block the takeover. Shareholder Shelley Wilner told a judge in Delaware Chancery Court that the Websense board did not get enough for the firm and unduly favoured Vista Equity’s bid. Lawyers acting on Ms Willner’s behalf stated that “the board unduly focused on reaching a quick deal with a financial buyer rather than taking the time to engage in substantive negotiations with all interested parties”.

According to Ms Willner’s laywers, Websense’s directors also loaded the agreement with ‘deal protection devices’ in order to ensure the Vista Equity deal was completed. Miss Willner is asking the judge to either block the proposed takeover, or to award damages once the deal is completed.

Richard Summerfield