Preferred gets preference

Even with McAfee’s offer of $5.75 in cash for each share of Secure Computing representing a premium of about 27% over the previous close, many Secure shareholders are underwater. In June, Secure sank to its lowest level in six years, part of a slide that has seen some 40% of its market value erased this year. The decline left the company trading at just 1x revenue. (When it shed its authentication business at the end of July, we noted that the divested unit sold for twice the valuation of the remaining Secure business, a highly unusual situation in corporate castoffs. We also asked if the move wasn’t a prelude to an outright sale of the company.)

It turns out, however, that the stock’s decline didn’t really affect Secure’s largest shareholder, Warburg Pincus. The private equity firm took a $70m stake in Secure in January 2006. (Secure took the money to help it pay for its mid-2005 purchase of CyberGuard.) Yet, because of the way Warburg structured its purchase, the shop ended up making money on its holding. That’s true even though Secure stock, even with McAfee’s offer, is some 60% below where it was when Warburg took its stake. (Shares changed hands at $14.40 each when Warburg picked up its holding, although the conversion price was adjusted slightly six months later to offset the potential dilution caused by Secure’s cash-and-stock purchase of CipherTrust.)

In the end, Warburg pocketed $84m from McAfee for its Secure holdings, which were largely made up of series A preferred shares. Having put $70m into Secure, and then seen the shares sink, we guess Warburg is probably content to book even a slight gain on its investment.

Spending the ‘divestiture dividend’

On the same day it closed the divestiture of its authentication business, Secure Computing said it will pay $15m for Securify. The deal, which is expected to close in the fourth quarter, also has a potential $5m earnout. Secure said it plans to add Securify‚Äôs identity-based monitoring and control technology to its firewall. The majority of Securify’s customers are government, and Secure Computing plans to cross-sell into that market. Founded in 1998, Securify had raised more than $70m in VC. However, it only generated about $13m in revenue last year. Secure Computing indicated the acquisition would boost earnings next fiscal year.