
Abandoning IPO, Blue Coat Sells to Symantec for $4.7 Billion
Symantec (SYMC) - Get Report announced late Sunday that it would acquire fellow cybersecurity company Blue Coat Systems for $4.65 billion in cash.
Following the close of the merger, Blue Coat CEO Greg Clark will be appointed CEO of Symantec and will join Symantec's board. Symantec has been searching for a CEO since former CEO Michael Brown stepped down April 28 after a disappointing quarter.
"Once combined, we will offer customers around the world -- from large enterprises and governments to individual consumers -- unrivaled threat protection and unmatched cloud security," Clark said in a statement.
Blue Coat's majority shareholder, Bain Capital, and fellow private equity firm Silver Lake Partners will each invest in connection with the transaction. Silver Lake, which previously invested $500 million in Symantec, invested an additional $500 million in 2% convertible notes due 2021. Bain made an investment of $750 million in the convertible notes. The notes are noncallable and unsecured, with an initial conversion price of about $20.41 per share. Bain managing director David Humphrey will join Symantec's board following the close.
For the fiscal year ending April 30, Blue Coat earned $755 million in non-GAAP revenue, representing 17% growth year-over-year. Non-GAAP operating margins were 22%, and cash flow from operations was $135 million during the same period.
Symantec CFO Thomas Seifert said in a statement that the transaction will create about $150 million in annual net cost synergies. In addition, members of Blue Coat's management team will roll over "a substantial portion of their cash and options into the combined entity."
The transaction will be funded with cash on hand and $2.8 billion in new debt. Mountain View, Calif.-based Symantec said in a statement that it "is focused on paying down a significant portion of this debt within the next several years with cash on the balance sheet and through cash generation."
The deal is Symantec's largest acquisition since 2005, when it splashed out about $13.5 billion in stock for Veritas Software Corp. Veritas originally planned to spin off Veritas until an investor group led by Carlyle Group LP (CG) - Get Report acquired the unit for $8 billion on Aug. 11, 2015. The price was later shaved to $7 billion.
Despite the revised deal terms, analysts were optimistic about Symantec's future M&A prospects after unloading Veritas.
"While the revised deal terms may disappoint some investors, given market conditions, we still view this deal as a major victory for Symantec as the company finally unloads this 'decade of agita' since the Veritas acquisition was done and can laser-focus efforts on beefing up its legacy security platform through aggressive M&A with cash from this transaction," Dan Ives of FBR & Co. wrote in January.
Wells Fargo Securities analyst Gray Powell said in a note that the price reduction "could be considered a disappointment," but "given recent uncertainty around the deal, we view the revised terms and improved visibility on a close date as positive."
Bain announced on March 10, 2015, that it would acquire Blue Coat, of Sunnyvale, Calif., from Thomas Bravo and Ontario Teachers' Pension Plan for $2.4 billion. The two selling shareholders had taken Blue Coat private three years earlier for $1.3 billion.
On June 2, Blue Coat filed a Form S-1 with the Securities and Exchange Commission, reifying predictions from both Bain's Humphrey and Blue Coat's Clark that Bain would return Blue Coat to public markets.
Bain holds a 75.6% stake in Blue Coat, according to the S-1, which also revealed that Blue Coat had a net loss of $289 million for the year ending April 30. Bain holds four of Blue Coat's six board seats.
The transaction is expected to close in the third quarter.
JPMorgan Chase & Co.'s Drago Rajkovic and Madhu Nambur led the financial adviser team for Symantec, which also took financial advice from Barclays, Bank of America Merrill Lynch, Citigroup Inc. and Wells Fargo. The five banks are also providing debt financing to Symantec.
Davis Polk & Wardwell LLP's Alan F. Denenberg and Max Brunner provided legal advice to JPMorgan.
A Fenwick & West LLP team led by Doug Cogen provided legal counsel to Symantec on the acquisition, convertible note investment and debt financing. The Fenwick & West team also included David Michaels, Scott Joachim, Bomi Lee, Michael Duignan, Kate Dodson, Victoria Wong, Willow Yang, Alexandra Wood, Scott Spector, Patrick Grilli, Alex Galev, Stuart Meyer, Stephen Gillespie, David Hayes, Charlene Morrow, Darren Donnelly, Chris Joslyn, Ana Razmazma, Ben Ryan, Michael Riskin, Will Skinner, David de Ruig and Mark Ostrau. Simpson Thacher & Bartlett LLP also advised on the debt financing. The Simpson team includes Jennifer Hobbs, Christian Fischer and Shana Ramirez.
Blue Coat tapped Goldman, Sachs & Co.'sSam Britton, Adam Meister and Ward Waltemath as its lead financial adviser for the deal, with Morgan Stanley & Co. LLC and Credit Suisse Securities (USA) LLC also providing financial advice.
The target's outside legal advisers were Ropes & Gray LLP and Wilson Sonsini Goodrich & Rosati PC. Ropes' Thomas Holden served as legal counsel on the initial public offering, while Jeffrey D. Saper and Allison B. Spinner of Wilson Sonsini had advised the IPO underwriters. Wilson Sonsini's Martin Korman and Todd Cleary advised on the deal.
Updated Monday, June 13. -- Adds advisers.









