A second exits gets ArcSight a 2x valuation

Contact: Brenon Daly

Hewlett-Packard’s pending purchase of ArcSight is the third IT security deal so far this year valued at more than $1bn, after not having a single security transaction valued in 10 digits in 2009. While the other two deals have gone off at basically market multiples, ArcSight is being valued at twice that level. The largest ESIM vendor agreed to sell itself to HP for $43.50 per share, valuing the security firm at more than four times the level it went public just two and a half years ago.

HP put the enterprise value of the transaction, which is slated to close by the end of the year, at $1.5bn. That means the tech giant is paying 7.5 times ArcSight’s trailing sales of $200m. (For the current fiscal year, ArcSight is expected to put up about $225m in sales, meaning HP is paying about 6.7x projected sales.) On a trailing basis, both McAfee and VeriSign’s identity and authentication business garnered 3.5x sales in their respective sales to Intel and Symantec. (Morgan Stanley advised both McAfee and ArcSight, while JP Morgan Securities advised VeriSign.)

The high-multiple deal represents a stunningly successful outcome for ArcSight. As we have mentioned in the past, both HP and McAfee approached ArcSight in the summer of 2007, ahead of the company’s IPO. We gather that both were bidders in the range of $600-750m. Unlike other dual-track candidates, ArcSight didn’t opt for the trade sale, but went ahead with its offering even as the equity market turned bearish. ArcSight spent virtually its entire first year as a public company trading in the single digits, including a fair amount of time below its offer price. (At one point when its shares were underwater, CA Technologies lobbed a low-ball bid at the firm, we understand.) If we had to guess at another suitor in the current process around ArcSight, we might tap EMC as an interested party.

Even as its stock took off over the past two years, ArcSight never did a secondary offering. (For a company with about $200m in sales, it has a very narrow base of shares, totaling only about 38 million.) In this case, the unwillingness to sell shares – either a small chunk or all of them – except at an eye-popping valuation has generated a return that seems reminiscent of the late 1990s. ArcSight raised only about $30m to build a business that got valued at 55 times that level on the exit.