Elliott's Guide to Selling Your Meh Business

The activist investor dresses up software stocks and finds them pretty offers.
At Closing, April 20st
27.71 USD

Feeling down about your software stock? Do margins need a boost? Does a takeover premium seem hopeless? Then the Elliott Management plan might be for you. Call 1-800-ACTIVIST to see if you qualify.

OK, it's not quite that easy. But Paul Singer's activist hedge fund Elliott Management Corp. sure does seem to have a knack for fixing up underwhelming software companies so that they can score fat takeover premiums. 

Elliott Effect

Most of activist Elliott Management's software targets have ended up being acquired -- and for attractive prices:

Source: Bloomberg

Its latest success story is LifeLock Inc., a Tempe, Arizona-based business that provides identity-theft protection services. On Monday morning, Symantec Corp., a leader in cybersecurity, announced it was buying LifeLock for $2.3 billion including net debt. At $24 a share, the offer works out to a 41 percent premium to Lifelock's average closing price in the 20 trading sessions through Nov. 10, which was before the stock popped on takeover reports. 

That's not too shabby for a business with lumpy Ebitda, whose stock was projected to not even reach $20 apiece on its own over the next 12 months, and which paid $100 million in a settlement with the Federal Trade Commission last December. The accusations were that it made deceptive claims about its services and failed to take steps to protect user data.

The Hard Part

As with most mid-size software companies, LifeLock's revenue is growing fast but profits are cyclical

Source: Bloomberg

What Symantec sees in LifeLock is a growth opportunity and a way to expand its own services. Symantec makes Norton antivirus software and recently paid $4.65 billion for cybersecurity firm Blue Coat Systems Inc. Blue Coat CEO Greg Clark was also put at the helm of Symantec. (And funnily enough, Blue Coat was an old activist play for Elliott a few years back.)

For the next four years, LifeLock's sales are forecast to climb 10 percent to 15 percent, while Symantec's -- along with most other large U.S. companies in just about every industry -- have slowed. Symantec's offer is about 3.5 times LifeLock's trailing 12-month revenue, higher than some analysts even expected. While you can't call that kind of a multiple "cheap," you could say it's more reasonable compared to other software transactions of the past couple years.

Elliott, whose U.S. activist investments are run by Jesse Cohn, disclosed its stake in LifeLock in June. The 13D filing shows that they bought in the $11 to under $15 a share range, so in some instances half of what Symantec is paying. Another win for Elliott: 

Always Be Selling

These are Elliott Management's activist stakes taken in the technology industry since the beginning of 2015. The highlighted rows are companies that have already been or are being acquired:

Source: Bloomberg Intelligence

*These are non-U.S. holdings and aren't cases where Elliott is calling for a sale (the investor opposed Dialog's bid for Atmel, which was terminated). **Mitel Networks bid for Elliott's other holding, Polycom, but the target ended up selling to Siris Capital instead. ***Citrix Systems agreed in July to merge its GoTo business with LogMeIn.

The hedge fund also had a large activist stake in Mentor Graphics Corp., which German engineering company Siemens AG announced last week that it's buying for $4.5 billion. Gadfly's Chris Bryant wrote that Siemens is paying top dollar, given that Mentor's growth looks pretty anemic for a software company. But Elliott dressed up Mentor well enough to get it a good deal. 

So what's next on the hedge fund's list? Whatever it is, the target's days as an independent company will probably be numbered.

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

    To contact the author of this story:
    Tara Lachapelle in New York at tlachapelle@bloomberg.net

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

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