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Quick Turnaround for Bain Nets 3x Return on Security Play Blue Coat

Jun 14, 2016

Quick Turnaround for Bain Nets 3x Return on Security Play Blue Coat

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On Sunday, Symantec (NASDAQ:SYMC) announced the acquisition of Blue Coat Systems, a leading provider of cloud security technologies, for $4.65bn. It is Symantec’s largest deal in a decade. For Bain Capital, the private equity firm that controls Blue Coat, it is a very impressive tech exit with the firm earning 3x its investment in less than 18 months.

This is pretty much a blueprint for successful PE investments in tech.

In March 2015, Bain Capital acquired Blue Coat from another PE firm, Thoma Bravo, for $2.4bn (Thoma Bravo had taken it private three years or so earlier for $1.3bn). According to public sources, Bain leveraged its acquisition with $1.25bn of debt, and invested approximately $1bn as equity (the Company had about $200m in cash on its balance sheet at the time).

Blue Coat made two significant acquisitions under Bain’s ownership: it acquired Perspecsys and Elastica, two CASBs (Cloud Access Security Brokers) solutions providers, for about $50mm and $280mm respectively. It financed these acquisitions with debt rather than additional equity capital.

Earlier this month, Blue Coat filed an S1 to take the company public with a $100mm IPO. These “sell or list” strategies have gained traction among private equity in recent years to signal to potential strategic acquirers that their last chance to acquire the company while private may be close. Growth challenged Symantec, (its revenue fell 9% in their last fiscal year ending April 1, 2016), had missed out on Blue Coat the last time around in part because they were busy divesting their Veritas business for $7bn+ (they had paid more than $10bn in 2005).

Blue Coat, while growing nicely, is under intense competitive pressures not dissimilar to those affecting Symantec. Symantec and Blue Coat address similar needs for different markets. Symantec has long been a leader in antivirus software for personal computers and other physical devices, while Blue Coat has focused on selling to firms that offer services via the Internet. There is virtually no product overlap.

In another recurring theme, Symantec also solved a leadership issue. Symantec’s CEO, Michael Brown left in April. Greg Clark, Blue Coat’s CEO, will lead the combined entity.

Symantec is paying a strong price – with Blue Coat’s trailing revenues close to $600mm, the $4.65bn acquisition is about a 7.8x trailing twelve-month revenue multiple and about 21x its $223mm adjusted EBITDA for the year ended April 2016 (According to its S1 filing, Blue Coat did not make money on a non-adjusted EBITDA basis). Once adjusted for the debt and cash on Blue Coat’s balance sheet ($1.8bn debt and $140mm cash as per their latest filing), this would mean that Bain and other equity holders involved in the same transactions would earn approximately $3.0bn or a 3x return on their investment. As a little caveat to that, Bain has agreed to reinvest $750mm as debt convertible into equity, back into Symantec, which means that they have realized about $2.25bn in cash and have an opportunity for a bigger play in Symantec. Not too shabby!

Symantec expects $150mm in annual cost savings once the two companies are fully integrated. This is in addition to $400mm in annual expense reductions that Symantec was already pursuing. We wish Blue Coat, Symantec and Bain well. It’s a tough market.

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