Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

There's a cast of private equity characters behind Symantec's $4.65 billion acquisition of Blue Coat Systems. And as in life, there are winners and losers.

Symantec is buying Blue Coat from its private equity owner, Bain Capital. It's financing the deal partly with cash, which the Mountain View, California-based company has on hand thanks to the $7.4 billion sale of its data-storage unit, Veritas, to another private equity firm -- Carlyle Group -- in January. That transaction left Symantec as a pure-play cybersecurity company with an appetite for transformative M&A. 

Securing Its Future
Symantec's shares jumped after the company said it would spend $4.65 billion on Blue Coat Systems and inherit its chief executive officer
Source: Bloomberg

Without a doubt, the biggest winners are Bain and its co-investors, which paid just $2.4 billion for Blue Coat in a transaction that closed barely 13 months ago. Sure, under Bain's ownership, Blue Coat acquired Elastica for $280 million, bought PerspecSys for an undisclosed amount and snapped up a minority stake in Appthority. But the private equity firm is a genuine beneficiary of good timing: Symantec's CFO Thomas Seifert told the Wall Street Journal the company couldn't possibly have acquired Blue Coat when it came up for sale last year, as it was busy preparing to split off Veritas. By becoming its owner, Bain put itself in a position to reap future rewards, which, as recently as last week, appeared to be from an IPO.

Bain is showing it wasn't just Blue Coat's temporary babysitter by declining to making off like a bandit with sale proceeds. It's instead reinvesting $750 million in convertible debt at a strike price of $20.41 and a representative is joining Symantec's board. So the private equity firm is in line to see profits swell further if the company thrives. 

This will be tough to swallow for Thoma Bravo, which took Blue Coat private  in February 2012, and, with the benefit of hindsight, shouldn't have sold the company when it did. Under its watch, Blue Coat's earnings before interest, taxes, depreciation and amortization, or Ebitda, grew from $91.3 million  to roughly $200 million, meaning it put in the hard work to boost the company's performance. In its own words, it worked with management:

...to add additional operational resources; design and execute a plan that substantially reduced the company’s cost structure without negatively impacting top line performance; navigate the largest appliance refresh program in the company’s history; realign the focus of the company’s sales force; improve channel terms and practices; strengthen pricing discipline; and complete four strategic acquisitions in high growth sub-sectors of its markets.

Thoma Bravo's 2009 fund was part of a consortium that paid $1.3 billion for Blue Coat, meaning there was no rush for it to sell the company in 2015 apart from guaranteeing a decent return. The fact that at least four strategic buyers initially competed against the firm in its pursuit for the company should've buoyed its hopes that one would come knocking at some stage in the future, allowing for a stellar, not just decent, return.

Big Customers Matter
Blue Coat's top 250 customers now account for more than 75% of overall revenue, and the reported retention rate of 95% of its top 1000 customers bodes well for Symantec
Source: Blue Coat filing

Then there's Silver Lake, which in February agreed to spend $500 million on Symantec convertible notes. At the time, (now outgoing) CEO Michael Brown said that the company would benefit from Silver Lake's "extensive capability in assessing companies," adding that the firm was "interested in helping us with this issue as well both from the standpoint of looking at the opportunities, but also in making sure that we understand the targets that we're looking at in-depth."

Endorsing the Blue Coat purchase gives Silver Lake the ability to put even more money to work by doubling its investment in Symantec to $1 billion.  It stands to make additional profit from its new $500 million convertible, which is at a conversion price of $20.41, compared to the $16.77 associated with its first $500 million (originally announced as $21, it was tweaked in part to reflect the $4 special dividend). 

By pre-empting a Blue Coat IPO, Symantec has broadened its suite of offerings, locked in an avenue of growth, bolstered its profitability and inherited a CEO. The stock bounced as much as 7.4 percent on Monday as shareholders cheered this news. If it keeps climbing, at least two firms -- Bain and Silver Lake -- can celebrate in lockstep. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates conversion price in the penultimate paragraph to reflect adjustment made earlier this year.)

  1. Thanks in part to Elliott Management putting the company into play.

  2. Full year 2011 reported Ebitda

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net