Valuation Analysis
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Valuation Analysis Valuation Analysis Presentation Transcript

  • REDHAWK SECURITY INC. Overview and Valuation Analysis M AT T B E N D E R , M I C H A E L LOFFREDO, ALEX V I E L M E T T I , & J O E WAV E R I N G
  • Agenda Introduction and Industry Overview 3 Company Overview 5 Preliminary Valuation Analysis 8 Potential Buyers 12 Recommendation 16
  • EXECUTIVE SUMMARY IT Services Market and Trends M&A Outlook Bullish factors driving IT services industry include the rise of mobile data, increasing internet availability, growing private demand for computers and software, big data needs, and record US corporate profits We expect the year of historically low deal flow to see an uptick driven mainly by increased mobile usage, combinations of enterprise and personal data, and growing use of cloud and social networks Within independent VARs, there is a growing gap between niche providers and companies with broad offerings Bearish factors include CEO confidence index which is 23% below the high set in 2004 and government sequestration has public sector revenue down 11% Transaction volume in the software industry for Q3 increased 4% from Q2 and total transaction value increased 17% from $26.2 billion to $30.6 billion Sources: Bloomberg research, PwC M&A outlook, Berkery Noyes Investment Banking RedHawk Security Valuation RedHawk Security’s EBITDA margin is the firm’s key value driver The discounted cash flow analysis and comparable companies analysis were given the heaviest weights in our final valuation of the firm The precedent transactions analysis were weighted less heavily because the acquisitions included a premium that would overvalue RedHawk Security
  • IT SECURITY OUTLOOK • 71% of IT respondents expect YoY growth in security industry, which is the highest percentage of respondents expecting YoY growth within the specific IT sector • Software application and security are top two spending priorities in the industry, respectively • Within security management, Data Security is top priority according to respondents Source: JP Morgan CIO survey Percentage of Spending in IT 15% 10% 75% packaged app software security other (25 out of 27) The respondents expected spending growth for 2014 to be 3.9%, while JPM expected 3.6%, which suggests optimism in the industry
  • OVERVIEW REDHAWK SECURITY INC. History - Established 2000 - 300+ employees - 2500+ customers including 50 Fortune 100 companies - 125+ product suppliers - 75+ security services offerings -1250+ consulting projects annually Source: William Blair case handout Business Model - RedHawk Security adds features and services to existing IT security products and then resells those products - They also offer services including managed services, training, and consulting
  • SWOT ANALYSIS AND DIFFERENTIATING FACTORS Strengths - - Largest independent, full service IT security VAR in the world. #1 channel partner for IT security products and services Extensive and growing blue chip customer base Customer diversity across multiple industry verticals Managed by the best talent in the industry Deep domain expertise Weaknesses - - Threats Opportunities - More expansion into Security Services where there are higher gross margins Globalization: expand into mainland Europe, S. America, and Asia Greater emphasis on recurring revenue streams Source: William Blair case handout RedHawk Security has lower margins on their greatest source of revenue than on their less prominent sources They have only one office outside of the USA, leaving most overseas markets underpenetrated. - - Larger, more prominent competitors have diversified revenue streams or offer proprietary products RedHawk Security is less liquid than its publicly funded counterparts
  • REDHAWK SECURITY STRATEGY RECOMMENDATION • Develop the global brand • Focus on European development out of London hub • Expand into the Asian market which is a hot location for growth in IT security demand • Maintain commitment to current customer base • Continue to build a revenue base by establishing larger contracts with existing customers • Preserve the 90% customer retention rate
  • COMPARABLE PUBLIC COMPANIES LIST OF COMPARABLES & VALUATION ANALYSIS Redhawk Security Comparables Company Analysis Name Informatica Corp. Microstrategy Inc. Check Point Software Technoligies Ltd Commvault Systems Inc. Compuware Corp. Ticker Price Mkt Cap (M) Enterpise Value (M) Enterprise Value Revenue / SALES / EBITDA YoY % Growth FCF Yld INFA MSTR CHKP CVLT CPWR $36.40 $96.19 $57.57 $81.69 $10.85 3,940 1,087 11,458 3,818 2,329 3,573 840 7,887 3,641 2,284 4.1x 1.5x 5.8x 7.0x 2.4x 21.3x 23.8x 10.3x 40.0x 14.5x 16.8% 1.9% 4.4% 20.8% 0.6% 5.1% (2.8%) 8.2% 2.5% 5.2% High Median Mean Low $96.19 $57.57 $56.54 $10.85 11,458 3,818 4,526 1,087 7,887 3,573 3,645 840 7.0x 4.1x 4.2x 1.5x 40.0x 21.3x 22.0x 10.3x 20.8% 4.4% 8.9% 0.6% 8.2% 5.1% 3.6% (2.8%) Implied Valuation (M) Redhawk Security 2012 EV (Sales) $2,637.44 $2,648.47 Median Mean EBITDA (M) 34.6 Sales (M) 636.2 EV (EBITDA) $736.73 $759.87 EV Final (EBITDA Value Average) $748.30
  • PRECEDENT M&A TRANSACTIONS VALUATION ANALYSIS Redhawk Securities Precedent Transactions Target Name Sourcefire Inc. Quest Software Inc. Civica Group Ltd. Novell Inc. Epicore Software Corp. ArcSight LLC McAfee Inc. Acquirer Name Cisco Systems Inc. Dell Inc. Multiple Acquirers Attachmate Corp. Apax Partners LLP Hewlett-Packard Co. Intel Corp. Announce Date Strategic Takeover Strategic Takeover Strategic Takeover Strategic Takeover Sponsor Takeover Strategic Takeover Strategic Takeover Implied Valuation Redhawk Security 2012 Announced Premium Transaction Value Cash Cash Cash Cash Cash Cash Cash 33.4% 14.2% 34.0% 5.4% 18.6% 33.1% 52.3% 2,185 2,250 402 1,090 936 1,485 6,594 High Median Mean Low 7/23/13 6/14/12 3/28/08 4/28/11 4/4/11 9/13/10 8/19/10 Transaction Type Payment Type 52.3% 33.1% 27.3% 5.4% 6,594 1,485 2,135 402 8.8x 2.6x 3.9x 1.3x Sales (M) 636.2 EBIT (M) 27.2 LTM EBITDA Margin 242.8x 24.9x 16.5x 12.5x 45.6x 65.5x 22.6x 6.9% 16.9% 16.5% 14.5% 12.4% 12.5% 21.8% 242.8x 24.9x 61.5x 12.5x 128.3x 15.2x 35.9x 9.3x TV (Revenue) TV (EBITDA) TV (EBIT) $1,622.31 $525.92 $2,478.45 $1,240.71 Median Mean EBITDA (M) 34.6 Transaction Value / LTM Revenue / LTM EBITDA / LTM EBIT 8.8x 128.3x 2.6x 15.2x 1.6x 9.6x 1.3x 9.3x 2.1x 17.2x 7.6x 57.3x 3.3x 14.1x 21.8% 14.5% 14.5% 6.9% $676.74 $1,672.41 TV Final (EBITDA Value Average) $883.31
  • DISCOUNTED CASH FLOW FREE CASH FLOW PROJECTIONS AND VALUATION ANALYSIS
  • VALUATION SUMMARY Valuation Summary Precedents Comparisons DCF $0.00 $200.00 $400.00 $600.00 Valuation Range $800.00 $1,000.00 $1,200.00 $1,400.00
  • POTENTIAL STRATEGIC BUYERS Company Industry Strategic Growth Opportunity Financial Profile (in millions, except per share data) Microsoft (MSFT) Large cap multinational software company that develops and supports a wide range of products and services related to computing The acquisition could bring a lucrative new customer base to Microsoft who already has the broad software experience to make insights into the development of RedHawk Securities Cash: $3,804 Market Cap: $291,215 D/E: 0.2 EBIT/Int. Exp.: 62.4 Shares: 8,330 Share Price: $34.96 Oracle (ORCL) Large cap multinational computer technology corporation that specializes in developing and marketing computer hardware and enterprise software products Stands to acquire new customers and accounts as well as expand into new revenue streams (IT security) Cash: $14,613 Market Cap: $149,940 D/E: 0.6 EBIT/Int. Exp.: 17.7 Shares: 4,557.5 Share Price: $32.90 Source: Bloomberg
  • Company Industry Strategic Growth Opportunity Financial Profile (in millions, except per share data) Accenture (ACN) A multinational management consulting, technology services and outsourcing company headquartered in Dublin, Republic of Ireland International company could be searching for better foothold in the American market and has possible synergies with Accenture’s existing business model Cash: $5,631 Market Cap: $49,405 D/E: 0.0 EBIT/Int. Exp.: 289.6 Shares: 636 Share Price: $72.88 Infoysys LTD (INFY) An Indian multinational provider of business consulting, information technology, software engineering and outsourcing services Would be entry into the American market and IT security operations would complement their existing IT operations. Foreign operation means they’d be likely to keep existing management in place Cash: $4,007 Market Cap: $31,083 D/E: NA EBIT/Int. Exp.: NA Shares: 574.2 Share Price: $54.13 American global corporation that provides IT and professional services Would grow their American operations by acquiring new customers, expanding into the security arm of IT services and would add new consulting clients Cash: $2,054 Market Cap: $7,761 D/E: 0.9 EBIT/Int. Exp.: 5.8 Shares: 147.7 Share Price $52.55 Computer Sciences Corp. (CSC) Source: Bloomberg
  • Company Symantec (SYMC) Cisco (CSCO) Cognizant Tech Solutions (CTSH) Source: Bloomberg Industry Strategic Growth Opportunity Financial Profile (in millions, except per share data) American global computer security software corporation Synergies exist with their existing security platform and they stand to acquire new customers, access new creative talent, and limit future competition Cash: $4,685 Market Cap: $17,738 D/E: 0.4 EBIT/Int. Exp.: 9.3 Shares: 698.6 Share Price: $25.39 American multinational corporation that designs, manufactures, and sells networking equipment The acquisition would diversify their revenue streams by joining the high growth IT security industry and bringing in new customers Cash: $7,925 Market Cap: $123,106 D/E: 0.3 EBIT/Int. Exp.: 19.4 Shares: 5,361.6 Share Price: $22.96 American multinational IT, consulting and business process outsourcing company Redhawk Security would offer possible synergies with existing IT division and the VARs model complements the existing components of outsourcing in the current business model Cash: $1,570 Market Cap: $25,848 D/E: NA EBIT/Int. Exp.: NA Shares: 301.4 Share Price: $85.77
  • FINANCIAL BUYERS • Financial buyers are not included in our analysis for these reasons: • Potential discrepancies in company vision between the buyer and current management. • RedHawk security has strong growth which lessens their desire to sell in a sponsored takeover. • Cash is a very low percentage of RedHawk’s total assets which makes the company less desirable for financial buyers.
  • RECOMMENDATION AND RATIONALE • We recommend the sale of RedHawk Security to Cisco Systems • Cisco has the required liquid assets to acquire RedHawk Security • Cisco is placing an emphasis on strategically acquiring security focused companies in the coming fiscal year • Potential acquisitions must be concentrated over a wide variety of markets Source: Cisco Earnings Call (9/26/13)
  • ACCRETION/DILUTION MODEL The accretive effect of this acquisition is very small in magnitude because the transaction is such a small percentage of Cisco’s net income.
  • CONCLUSION • RedHawk Securities is a well run company with strong growth in revenue and margins • The experienced management team has the skills to succeed in the post-transaction transition period and establish a long term vision under the new system We recommend the sale of RedHawk Security to Cisco, or a similar strategic buyer. - RedHawk represents a new product area, which increases the likelihood that the acquirer will retain management for their expertise - Similarities in IT platforms offer the greatest potential for synergies for growth in the combined business entity