SonicWALL’s big-ticket buyout

Contact: Brenon Daly

The recently closed leveraged buyout (LBO) of SonicWALL represents the largest straight take-private of a technology company so far this year. Thoma Bravo announced the deal, which has an equity value of $717m, back in early June and shareholders gave the LBO their blessing on Friday. The bid of $11.50 for each share stood as the highest price for SonicWALL shares since 2002. The close came only after an unidentified bidder – which some observers suspect may have been the ever-aggressive Barracuda Networks – stepped out of the process.

While other private equity (PE) shops have handed over bigger checks so far this year than the one Thoma Bravo is writing for SonicWALL, the buyout of the unified threat management vendor is the most money that a single firm has spent to take a public company off the market in 2010. Other large deals have involved either carve-outs (IDC, for instance, was majority owned by Pearson), secondary transactions (Hellman & Friedman’s flip of Vertafore to TPG Capital) or club deals (the consortium buyout of SkillSoft, as well as IDC).

The big-ticket buyouts of SonicWALL and other companies have helped push PE activity so far this year to essentially where it was in 2008. PE spending in the first two quarters of 2010 hit $14bn, just a shade under the $16bn we tallied in 2008 but a dramatic rebound over the paltry $2bn we saw in the first half of last year. The seven-fold increase in spending by buyout shops so far in 2010 has vastly outpaced the broad M&A market, which is basically running at twice the spending of the same time in recession-wracked 2009. See our full report on first-half tech M&A activity.

SonicWALL should be right at home in PE portfolio

Contact: Brenon Daly

Except for losing its ticker, we don’t expect the soon-to-be private SonicWALL to be radically different from the one that traded on the Nasdaq. At least not the SonicWALL of the past few years. The reason? The unified threat management vendor has already been running a strategy that’s found fairly often in PE portfolios.

Basically, the company has taken the cash it has generated from its rather mature core product (firewalls) and done acquisitions to expand into emerging markets. SonicWALL has inked about a deal each year for the past half-decade, buying startups that had developed technology for anti-spam, continuous data protection and, most recently, WAN traffic optimization.

The collective bill on those deals is about $78m, a relatively small amount for a company that held more than $200m in its treasury and generated roughly $10m of cash each quarter. Once it goes private, we wonder if SonicWALL won’t start eyeing some larger deals. After all, it will have deep-pocketed new owners and will no longer be penalized in its accounting for acquisitions.

SonicWALL’s shopping trips

Date announced Target Deal value Market
April 19, 2010 DBAM Systems (assets) $4m WAN traffic optimization
June 12, 2007 Aventail $25m SSL/VPN
February 8, 2006 MailFrontier $31m Anti-spam
November 21, 2005 Lasso Logic $15.5m Continuous data protection
November 21, 2005 enKoo $2.4m SSL/VPN

Source: The 451 M&A KnowledgeBase

SonicWALL heads behind closed doors

Contact: Brenon Daly

After more than a decade as a public company, SonicWALL is set to go private in a $717m leveraged buyout (LBO) led by Thoma Bravo. Terms call for the private equity (PE) firm to pay $11.50 for each of the roughly 62 million shares outstanding for the unified threat management (UTM) vendor. That marks the highest price for SonicWALL shares since early 2002. (However, that didn’t stop several law firms from investigating a possible breach of fiduciary responsibility by SonicWALL’s board, as the ambulance chasers have done in so many other recent transactions.)

As we look at the proposed LBO, the valuation strikes us as pretty fair. Our math: while the deal carries an equity value of $717m, the net cost is much lower thanks to the profitable company’s fat treasury. SonicWALL holds $213m of cash and short-term investments, lowering the enterprise value (EV) of the planned take-private to $504m. That works out to 2.5 times the company’s sales of $200m in 2009 and 2.2x projected revenue of about $230m this year.

That valuation sits about midway between SonicWALL’s two closest rivals. Four years ago, WatchGuard Technologies went private in an LBO by Francisco Partners that valued the UTM vendor at basically 1x trailing sales, on an EV basis. Meanwhile, fellow UTM provider Fortinet, which went public last November, currently trades at slightly more than 3x trailing sales. (Again, that’s calculated on an EV basis, and without any acquisition premium for Fortinet.) SonicWALL shareholders stand to get a 28% premium on their stock, assuming the LBO closes as expected in the third quarter.