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Websense’s Potential Recognized in Purchase

The proposed acquisition of Websense Inc. by Vista Equity Partners announced last week could result in a lot of upside for the Web security business firm, said several industry analysts.

“This could be a good move for them,” said Phil Hochmuth, an analyst with IDC, a Massachusetts-based market research firm focused on information technology and telecommunications. “The fact that Websense is being acquired by a private equity firm reflects that the company has a lot of potential value.”

Websense said it signed a definitive agreement to sell the business to Vista Equity, based in Austin, Texas, for $24.75 a share or an aggregate of $907 million.

The news propelled the company’s stock, WBSN on the Nasdaq exchange, trading for most of this year below $16, up to nearly the agreed-upon offer price. It closed May 23 at just below $25, giving it a market capitalization of $914 million.

Stock analysts of Websense noted the offer was a 29 percent premium to the prior closing price and even stronger 53 percent premium to WBSN’s past 60 day average price.

‘Price Level Is in Line’

“While this price level is in line with what we believe the company had been seeking a few years ago, it’s clearly above what many (ourselves included) thought was achievable today, particularly in light of the company’s prior growth and execution challenges,” said Greg Moskowitz, an analyst at Cowen & Co.

Websense, which was founded in 1994 and went public in 2000, was dealing with challenges involving growing its sales volume. Last year it did $361 million in revenue, compared with $364 million in 2011.

Hochmuth said Websense’s focus on selling preventative filtering software to companies was getting squeezed by a slew of competitors, some of which aren’t pure-play security software firms.

“At one time they were the only game in town in Web filtering,” he said.

The top four security software vendors by sales are Symantec Corp., Cisco Systems and Intel Corp. (through subsidiary McAfee Inc.), and IBM, according to a recent IDC ranking.

In recent years, Websense sought to expand its security offerings to provide security to email and company data, and move beyond its core business of limiting the type of websites that employees visit on their computers.

That strategic shift caused some fallout and produced less than stellar results, said several analysts.

Rob Owens of Pacific Crest Securities said in a report earlier this year that Websense was still undergoing “a painful transition.”

‘Similar Vision’

“While billings were strong (in the fourth quarter of 2012), the company continues to see no growth in revenue as its legacy business remains a drag and the company’s majority software model creates a lag in revenue recognition,” Owens said.

Cowen’s Moskowitz was blunter: “Websense’s history has been littered with execution issues.”

In January, Websense named John McCormack, the former president, as new CEO, replacing retiring Gene Hodges. In its announcement of the sale, Chairman John Carrington said the company held detailed discussions with several potential buyers before selecting Vista Equity.

“Vista shares a similar vision for the company including a dedication to developing and delivering best-in-class cyber security to our customers,” McCormack said.

Vista Equity has a portfolio of mainly technology companies recently valued at more than $7 billion.

That type of capital heft should prove advantageous to a company such as Websense, said Hochmuth.

Staying in San Diego

By going private, the company doesn’t have to worry about their performance and meeting forecasted goals on a quarterly basis, he said.

Instead, the firm can spend more time focusing on its core technologies, and benefiting from Vista’s experience in helping technology companies to grow, he said.

However, not all were thrilled by the news of Websense’s sale.

The pending transaction, which the company said should be completed before the end of the third quarter, spawned a slew of class-action shareholder lawsuits alleging “breaches of fiduciary duties” and other violations of laws by the board of directors for not acting in the best interests of shareholders.

Most observers say such litigation is standard no matter how high the offering price for a public company.

Once the deal closes, Websense said it will maintain its current headquarters at Sorrento Valley with its current management team intact.

Of the company’s total workforce of 1,600, some 500 are based here.

“I’m happy to hear they will remain headquartered here in San Diego,” said Tom Clancy, chairman of Software San Diego, the local industry trade group.

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