Contact: Brenon Daly
Announcing the second-largest information security transaction in history, Symantec says it will pay $4.7bn in cash for Blue Coat Systems. The single purchase eclipses the amount Big Yellow has spent, collectively, on all of its two dozen information security acquisitions over the past decade and a half, according to 451 Research’s M&A KnowledgeBase. Strategically, the proposed pairing is essentially a large-scale combination of Symantec’s endpoint security with Blue Coat’s Web defense, an M&A trend that has mostly featured deals valued in the tens of millions of dollars, rather than billions of dollars.
The transaction will further boost Symantec’s standing as the largest independent security vendor. On a GAAP basis, the combined company would have sales of about $4.2bn. (For perspective, that’s twice the size of McAfee at the time of its sale to Intel in 2010.) Blue Coat recorded GAAP revenue of $599m in its latest fiscal year. However, because of accounting regulations, that figure excludes a fair amount of deferred revenue. In its IPO paperwork, Blue Coat offered a non-GAAP ‘adjusted revenue’ figure that included the written-off deferred revenue totaling $775m in its latest fiscal year. By either measure, Blue Coat would bump up the combined company’s top line by about 20%.
For Symantec, however, bigger has not necessarily proven to be better. Big Yellow only recently cleaved off its Veritas division, unwinding a decade-long effort to pair security with storage that ultimately failed to produce returns. Yet even on the other side of the tumultuous separation, revenue at Symantec shrank in its previous fiscal year by 9%, with the company forecasting that the contraction would continue in the current fiscal year. The instability has also played out in the corner office, with Symantec having run through three CEOs in the past four years. (Note: Symantec currently doesn’t have a permanent chief executive, although as part of the agreement, current Blue Coat CEO Greg Clark will take the top job at the combined company after the deal closes, which is expected by September. In that way, there’s also a bit of an ‘acq-hire’ aspect to the multibillion-dollar pairing.)
The move marks a rare case of a dual-tracking, with Symantec buying Blue Coat less than two weeks after the company revealed its IPO paperwork. And, as we look at Blue Coat’s valuation, we can’t help but think that Big Yellow had to outbid Wall Street to get this transaction done. Think about it this way: a little more than a year ago, current owner Bain Capital was able to purchase Blue Coat for $2.4bn – just half the price Symantec is paying. (Of course, last spring Symantec probably wasn’t in a position to do a major deal, as it was focused on the Veritas divestiture.)
At $4.7bn, Blue Coat is valued at 7.8x its trailing GAAP revenue of $600m. (Even if we view the transaction on the adjusted revenue of $775m, Symantec is paying 6x non-GAAP revenue. Continuing on those unorthodox financial measures, we would add that the acquisition values Blue Coat at slightly more than 20x trailing adjusted EBITDA.) Overall, those valuations are only slightly above the average of just under 7x trailing sales for information security deals valued at more than $1bn over the past 14 years, according to 451 Research’s M&A KnowledgeBase.
Largest information security transactions, 2002-16
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Source: 451 Research’s M&A KnowledgeBase *Price-to-trailing-sales multiple
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