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.

Activist shareholder Elliott Management just revealed that LifeLock is its latest tech target, increasing the security company's chances of becoming a takeover target as well.

The firm disclosed late Thursday that it's taken a stake in LifeLock, which charges between $9.99 and $29.99 a month to protect its 4.3 million members from identity theft.

The arrival of an activist at LifeLock, which has no debt and a small cash pile, was only a matter of time. Its shares plunged last July, when the company was accused by the FTC of making deceptive claims about its services and failing to take steps required to protect the data of its users. The charges were settled, albeit for $100 million, and the company says it has made changes to avoid future issues with the agency. Yet its shares never quite recovered.

Activist investor Elliott Management believes LifeLock's shares are undervalued
Source: Bloomberg

Elliott says it stepped in because it believes LifeLock is undervalued, and the firm has initiated discussions with the company's management. If recent history is anything to go by, the activist fund may encourage the exploration of strategic alternatives which culminates in a sale. It's already successfully pushed for this outcome at companies including Qlik Technologies, Riverbed Technology, Compuware and American Capital.

Private equity firms, especially those with technology-focused funds, are possible buyers. It helps that they're replenishing their coffers, with Vista Equity Partners and Thoma Bravo -- a longtime beneficiary of Elliott's agitation -- putting the final touches on respective funds totaling $10 billion and $7.2 billion, respectively. Consumer-focused security companies such as Intel's security arm, Intel Security, or AVG Technologies also could be interested, according to Wunderlich analyst Ryan MacDonald. 

LifeLock's shares have been buoyed by Elliott's stake -- and the fund itself is already enjoying a 20 percent gain on its average buy-in price of $12.96, according to filings. Even so, the company isn't overly expensive.

Still Growing
LifeLock's revenue is still climbing, albeit at a slower clip
Source: Bloomberg

LifeLock is valued at roughly 2.1 times sales, having delivered 22 percent revenue growth in the past 12 months. That compares with the about 6 times sales Symantec paid to buy cybersecurity firm Blue Coat, which reported revenue growth of 17 percent in the year ended April 30. It's arguable that LifeLock can't command the same premium as Blue Coat because its services are tailored for consumer, rather than corporate, customers. But there's still a big valuation gap there. 

While Elliott could seek board representation and other changes rather than a sale, it might be deterred by LifeLock's staggered board election structure from going this route and launching an extended campaign, according to Bloomberg Intelligence analyst Gregory Elders. That increases the chance that it pushes for a sale. Besides, the return from a faster resolution can then be spent betting on the firm's next big idea.

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

  1. That violated a prior settlement with the agency.

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