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.

Avast Software, a Czech cybersecurity company whose name means "cease and desist" in pirate-speak, has hauled in its booty.

The maker of antivirus software agreed on Thursday to buy rival AVG Technologies for $1.3 billion. Private equity-backed Avast will pay around 2.9 times AVG's expected 2016 revenue, which is cheaper than the median valuation of 4 times revenue enjoyed by other software companies with similar "Rule of 40" sums.

AVG's largest shareholder, TA Associates, is supporting the $25 a share deal. At first glance, that looks odd considering the stock peaked at $28.79 last summer and analysts estimate that it'll be back around that figure in another 12 months. 

More to Come?
At least one Wall Street analyst believes AVG could fetch $30 or more if another bidder emerges
Source: Bloomberg

But for a private equity firm like TA Associates, a bird in hand is better than none. It couldn't easily sell its 6.8 million shares last summer when AVG was sitting above $28 apiece without tanking its shares. The security company's average daily trading volume since its 2012 IPO is just 477,000, according to data compiled by Bloomberg. So rather than waiting for a recovery and dribbling out its AVG shares, a sale to Avast gives TA Associates a clean break some seven years after it first invested in the company. 

This may resonate for other firms that have taken companies public, only to be met with lackluster investor interest and shares that don't change hands often.  They face a longer, more drawn-out selldown of their stakes (as the parcels of shares sold each time are smaller) or steeper discounts than those that apply to block trades for larger, more liquid companies.  

Slim Pickings
Private equity firms face challenges selling down shares in thinly-traded companies like AVG Technologies, which makes M&A welcome
Source: Bloomberg

Ironically, Avast itself will likely pursue an IPO in coming years. Considering that the highly cash-generative company will have more scale and relevance -- and a market value that can be expected to exceed $3 billion -- its private equity backers CVC Capital Partners and Summit Partners should face an easier path to exit.

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

  1. That metric, which combines a company's free cash flow margin with its revenue growth, gives AVG a score of 27, placing it in the middle of the pack among peers, based on a recent Gadfly analysis. 

  2. An example of this is GMS, a building products company backed by private equity firm AEA Investors that went public in May. Its average daily volume is just 376,000 shares. 

  3. An example of this is Blackstone and Permira's recent secondary sale of NXP Semiconductor shares at $90.60/share, priced at a fairly tight 1.6 percent discount to its previous closing price. 

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