BCSI’s business involves designing, developing and selling proxy and other appliances and related software to secure the delivery of business applications. Recently, the business operation has been struggling with declining revenue for the past four quarters, and it just changed its management team.
Orlando Bravo, the managing partner at Thoma Bravo, said that Blue Coat would be better positioned to innovate at an accelerated rate and achieve a higher level of growth as a private company. After acquisition, Thoma Bravo still keeps the same company’s strategy, the product portfolio. Following Scott Crawford, the managing research director in the security and risk management group at Enterprise Management Associates, Thoma Bravo was establishing an “increasingly provocative portfolio” of companies offering security as a direct benefit of optimizing the IT infrastructure. BCSI fit well as it has “good footing across networks, applications and security priorities.” In addition, according to PricewaterhouseCoppers, the security sector has experienced with quite a few mergers and acquisitions over the last three years with the total amount of $22 billion on security deals, including McAfee being bought for $7.7 billion by Intel and VeriSign was acquired for $1.3 billion by Symantec.
For the target, Blue Coat System can be considered a nice and neat company as it kept growing its top line for the last 10 years, from $56 million in 2002 to $487 million in fiscal year of 2011. In addition, it was like a cash generating machine with its growing CFO during the same time frame. And at the end of fiscal year 2011, the operating cash flow was standing at $131 million and its free cash flow was at $119 million. Financial strength is there as well, with D/A of 43.3%, whereas 14.6% of total asset was already deferred revenue. Interest-bearing debt was nearly 10%, mainly long-term debt. The two biggest items of the company’s assets were cash (45.3%) and goodwill (30.4%). With the high level of liquidity with little interest bearing debt, the enterprise value would be expected to have much lower value than the market capitalization figure.
Adjusting the level of cash and the debt Blue Coat bears, before acquisition, the enterprise value was hovering around only $500 million, so it was effectively trading only 3.8x operating cash flow and 4.1x free cash flow, a very low figure. At the deal valued at $1.3 billion offered by Thom Bravo, the enterprise reached a little bit more than $1 billion, valuing the company at 7.7x CFO and 8.3x FCF, still somehow a little bit undervalued price. There are several more steps to go before the deal can be completed. As the insider holding of BCSI is only 0.14% of total shares outstanding, it is not so clear whether the shareholders' vote can go through. Personally I think BCSI would be worth a little bit more than 7.7x CFO and 8.3x FCF.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.