Deciphering encryption deals

Exactly a year ago, McAfee announced its $350m acquisition of SafeBoot, which in turn came about a year after Check Point Software made its own purchase of an encryption vendor, Protect Data AB. We mention this bit of history because, in what has seemingly become an annual autumn event, Sophos just closed its own big encryption purchase, the $341m deal for Utimaco.

Although the three encryption vendors shared a home market of Europe and were in the same neighborhood in terms of revenue, the three transactions are very different. For starters, the relative growth rates of the targets were all over the board. Protect Data, or Pointsec as it was more commonly known, was clipping along at 90% year-on-year growth when we spoke to them ahead of the takeout. (Although we have heard that some of that torrid growth came at the expense of margins.) Meanwhile, SafeBoot, which was preparing for a possible public offering, told us sales were likely to grow about 70% in the year leading up to its acquisition. In contrast, 20-year-old Utimaco had increased sales just 20% in its most recent fiscal year.

Also, Check Point inked its acquisition of Protect Data when it was running at about $600m in sales. McAfee was even larger, having topped $1bn in annual revenue when it reached for SafeBoot. That’s not the case for Sophos and its just-closed purchase of Utimaco. With Sophos having finished its fiscal year (ending March) with revenue of $213m, it will be looking to integrate a company that is nearly half its size.

Finally, the returns on the two acquisitions already on the books have varied quite a bit. Check Point, which has traditionally been strong on network security, has struggled to notch sales of Pointsec, which secures the endpoint. On the other hand, McAfee has kept SafeBoot rolling along, with one source indicating that the unit will do about $100m in sales this year. The reason: McAfee already had a strong presence on endpoint security, as well as a management console that has integrated SafeBoot. Of those two contrasting acquirers, Sophos lines up more closely with McAfee, which bodes well for its combination with Utimaco. That’s crucial for Sophos, since we consider its purchase of Utimaco a make-or-break deal for the company.

Significant data encryption deals

Date Acquirer Target Price Target revenue
July 2008 Sophos Utimaco $341m $86m
October 2007 McAfee SafeBoot $350m $60m*
November 2006 Check Point Protect Data (Pointsec) $586m $64m

Source: The 451 M&A KnowledgeBase *451 Group estimate

Sophos bags an elephant

In a twist on a private-public transaction, Sophos laid out on Monday a bold $340m plan to pick up Utimaco, an encryption vendor that trades on the Frankfurt Stock Exchange. Rather than rolling into the public company, Sophos plans to take Utimaco off the market. It plans to fund the acquisition by drawing on three sources. (My colleague, Nick Selby, has the details on the financing as well as the strategy.)

The financing is crucial because this deal is a whopper. If it goes through, it’ll be the largest IT security deal in seven months. More significantly, however, Sophos’ planned acquisition of Utimaco stands as the biggest purchase by a privately held security company. In fact, it’s nearly twice the size as the number two deal, Barracuda’s unsolicited run at Sourcefire. (And it’s not certain that deal will close at all. Sourcefire, which is slated to report second-quarter earnings on Thursday, has shot down the deal so far.)

Although Utimaco will be erased from the market, we view the disappearance as temporary. Once the two companies get through the integration, we expect Sophos to try to go public once again. (Recall that last fall, it announced plans to list on the London Stock Exchange but shelved them as the markets deteriorated.) Among the underwriters for the planned IPO was Deutsche Bank, which advised Sophos on the purchase of Utimaco. Indeed, it was the same DB banker on this deal that also co-advised on a very similar transaction last fall, McAfee’s $350m purchase of Dutch encryption vendor SafeBoot. (DB and UBS Investment Bank advised SafeBoot, while Morgan Stanley advised McAfee.)