Raytheon makes $1.9B cyber statement

Raytheon’s $1.9 billion acquisition of Websense is more than just a large government contractor making a move to bolster its cyber capabilities.

Raytheon is making a huge investment because it thinks it can do what so many other government contractors have failed to do – build a commercial business. The deal for the privately held Websense is expected to close by the end of June.

Government contractors, and defense firms in particular, are infamous for their lack of success in building substantial commercial businesses. But cyber is an area where many see a convergence of needs that apply across the commercial and government customers.

We’ve seen several government contractors buy commercial cyber businesses. The idea is usually two-fold: acquire new capabilities for their government customers and find new commercial customers for their current cyber capabilities. The classic cross-selling strategy.

But more recently, we’ve also seen Boeing, SAIC and General Dynamics sell off commercial cyber businesses that they acquired earlier this decade. They aren’t souring on cyber, but they came to realize serving the commercial market strays from their core government market capabilities. GD sold its commercial cyber business, Fidelis, just last week. Boeing and SAIC made their divestitures of Narus and Cloudshield, respectively, earlier this year.

“Fidelis serves a commercial customer base, not in our core, and is better served with a commercially focused owner,” GD spokeswoman Lucy Ryan told me.

Raytheon has probably been one of the more aggressive acquirers in the cyber space in recent years. Last year, it spent $420 million to buy Blackbird Technologies.

But what really stands out to me is the structure of this acquisition, and the structure might be the difference maker.

Websense will not become a division of Raytheon, but instead will be a joint venture that merges Websense and Raytheon Cyber Products into a new entity. Websense CEO John McCormack will lead the business. It’ll have its own board of directors and it’ll be separately reported as a Raytheon business segment.

Vista, the private equity firm that owns Websense, also is making a $335 million investment to be the minority partner in the joint venture with Raytheon. They’ll have a 19.7 percent ownership interest.

“Raytheon has found a unique structure through a JV that allows both entities to leverage their strong positions in their respective markets to grow Raytheon’s cyber practice,” said John Song, with the investment bank Houlihan Lokey.

Others agreed.

“The structure of the transaction, as a joint venture between Raytheon and Vista Equity Partners, should help preserve the commercial culture of Websense’s sales and development teams,” said Philip McMann, of the investment bank Aronson Capital Partners.

Raytheon also gains access to threat intelligence through Websense’s commercial and international sales channels, he said.

The unique structure will gives Raytheon some cover on Wall Street, where investors may not have rewarded a transaction that has such a high ratio of price to revenue. For example, the ratio is four to five times Websenses' revenue; in other words, Raytheon is paying $4 to $5 for every $1 of Websense revenue.

But Vista staying on board as a partner in the joint venture gives the deal a sort of seal of approval, a source told me.

This source thinks that Raytheon isn’t finished making cyber acquisitions, and that the joint venture structure and Vista’s partnership might make it easier for the company to move more quickly and aggressively on acquisitions.

I’ll be curious if this transaction pressures Raytheon’s competitors make bolder moves, but as several sources told me, even the companies that have made divestitures are only shedding their commercial businesses so that they can keep their focus on the government market.

Cyber will continue to be an important area of investment and competition among these companies, but what we are seeing are companies trying to figure out what works best for them.

“The large firms are clearly re-evaluating the right ownership, branding and operating structure for their cyber investments, said Bob Kipps, of the investment bank Kipps DeSanto.

Here are some interesting facts about the deal:

Websense, Austin, Texas

Core cyber capabilities: Threat intelligence, mobile security, data loss prevention, web security and email security. Threat intelligence and mobile security overlap with current Raytheon capabilities in those areas. Raytheon also adds insider threat analysis and advanced threat protection capabilities.

Key cyber products: Triton unified content security solution from Websense and Raytheon’s Sureview software suite.

Websense: 1,500 employees; 21,000 customers; 2,200 partners in 155 countries

58 percent of Websense revenue is in the Americas, and 11 percent from government customers. Other core markets include finance, services, manufacturing and business services.

Raytheon’s investment:

• Cash: $1.3 billion
• Loan: $600 million
• Raytheon Cyber Products: $400 million value

Combined enterprise value: $2.3 billion ($1.7 billion of equity and $600 million loan.)

Vista’s investment: $335 million in cash for a 19.7 percent stake of $1.7 billion in equity value.