Raytheon [RTN] on Monday said it will be forming a new business segment focused on the commercial cyber security market through its $1.9 billion pending acquisition of a majority share in information security provider Websense, a portfolio company of the private equity firm Vista Equity Partners.
The new business segment that will be built around Websense will be a joint venture between Raytheon and Vista, which will retain a nearly 20 percent ownership stake in the arrangement through a $335 million cash investment. Texas-based Websense is expected to have $375 million in sales this year while Raytheon’s contribution to the venture, Raytheon Cyber Products, expects to add another $125 million to the top line of the new business in 2015.
The transaction is expected to close late in the second quarter of 2015 subject to regulatory approvals.
Raytheon’s bet on the commercial cyber security market comes as two other major defense companies, Boeing [BA] and General Dynamics [GD], this year decided to exit that space and focus their respective cyber security capabilities in core government markets.
But Raytheon sees its new joint venture as a “game changer,” that integrates its “defense-grade” cyber solutions that are currently used to help customers in the intelligence and defense markets with Vista’s “deep background and significant experience in the tech sector, particularly with commercial software companies,” Thomas Kennedy, Raytheon’s chairman and CEO, said during an analyst call to discuss the transaction. This will enable Raytheon to bring its current capabilities to a broader set of customers in the commercial space, he said.
Kennedy outlined five reasons why Raytheon expects its arrangement with Vista and the focus commercial market to be successful. First is the partnership with Vista, which will have a 20 percent stake in the joint venture as a signal of their “confidence,” and is a “leading technology market player” in the “commercial software arena,” he said.
Second, Kennedy said, is that Raytheon has commercial cyber security experience and will be scaling up with the new venture. The current Cyber Products group has a commercial business model that is growing at double-digit rates, he said. The new joint venture will also be competitive with “one of the broadest product offerings in the industry…and with a very strong brand,” he added.
The new business will also launch with well established customers and distribution channels, which gives it “considerable scale,” and the go-to-market channels are for government and commercial markets, which enables “cross selling,” Kennedy said. Websense has 2,200 channel partners in 155 countries.
Websense has more than 21,000 customers distributed among a broad base and the breakout of its top line includes 16 percent of revenue from the finance, insurance and real estate markets, 14 percent from services, 11 percent from government, 10 percent from the manufacturing sector, 7 percent from business services, 6 percent healthcare, 4 percent education, and 32 percent from other, according to slides Raytheon presented as part of the analyst call. By geography, the Americas account for 58 percent of revenue, 32 percent from Europe, the Middle East and Africa, and 10 percent from the Asia Pacific.
Finally, the joint venture will operate as a separate business segment, which will be led by current Websense CEO John McCormack, “so it’s not going to get smothered in under the mother Raytheon defense ship,” Kennedy said. He offered his personal commitment “that we do not lose any shine on I would call the capability of this very unique new commercial company in the cyber security marketplace.”
McCormack said in a note to Websense’s customers that was posted on the company’s website that the new business “sets a new standard in the market—defense-grade cybersecurity for organizations worldwide.”
McCormack and Dave Wajsgras, who is president of Raytheon’s Intelligence, Information and Services business, also said on the call that both companies have experience in attracting and retaining talent in the competitive market for cyber security professionals.
Raytheon is forecasting high single-digit growth rates in 2016 and double-digit growth in 2017 for the joint venture.
The current global cyber security market stands at about $70 billion and is expected to grow 8 percent annually through 2018, Wajsgras said. The growth outlook combined with the synergies between both companies’ cyber security capabilities “are key drivers behind our decision to enter into this joint venture,” he said.
Wajsgras also said the pending deal is a continuation of its growth in cyber security, which has been propelled by organic sales and more than a dozen acquisitions.
Growth in the cyber security space is being driven by a constant barrage of attacks against government and commercial entities.
“Today’s enterprises are more vulnerable than ever due to the proliferation of cloud computing, mobility and the Internet of Things,” Wajsgras said. “These attacks are increasingly becoming more sophisticated and are being perpetrated by state sponsored groups, criminal organizations, hacktivists and insiders.”
Websense’s product family is built around its TRITON suite that provides advance threat protection and data theft prevention for the web, email, cloud and endpoint infrastructure. Raytheon on Tuesday at the annual RSA Conference will launch its SureView family of products, which it will contribute to the joint venture with Vista. SureView is “defense-grade technology” that will be provided to the “enterprise market,” Wajsgras said.
TRITON and SureView are complementary and will be combined “in a common architecture and centralized around security and analytics to provide end-to-end visibility across the enterprise,” Wajsgras said. He said this capability will reduce the time between a cyber breach and containment and allow “customers to defend, detect, decide and defeat cyber incursions.”
For its 80 percent stake in the new business, Raytheon is paying $1.6 billion in cash, including a $600 million intercompany loan to the joint venture. In addition, Raytheon will contribute $400 million of assets and related intellectual property of Raytheon Cyber Products.
Raytheon said the acquisition will knock about 48 cents per share off its earnings this year due to amortization of intangibles, deferred revenue, and on-time transaction costs. Absent these expenses, the company said the join venture would contribute about 6 cents to earnings per share in 2015 and accelerate as the new business grows and synergies are achieved.
Websense has 1,500 employees. The new company will remain headquartered in Austin, Texas, and will report to Wajsgras’ IIS business.
Websense’s financial adviser on the deal is Citigroup [C]. Raytheon’s lead financial adviser is RBC Capital Markets LLC and Deutsche Bank Securities Inc. served as co-adviser.