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Peter A. Sokoloff & Co. regularly analyzes transactions which occur within the industries covered. An archive of these case studies is kept online as a courtesy to our colleagues. To receive by e-mail new case studies as they are prepared, please e-mail [email protected] with your contact information.

Archives > Transaction Case Study #8

Secure Computing Acquiring CyberGuard Corporation

Dear Colleague,

Today's case study looks at Secure Computing Corporation's (NASDAQ: SCUR) announced merger with CyberGuard (NASDAQ: CGFW. Announced in August and approved by the stockholders of CyberGuard on January 11, 2006, the transaction awaits approval by SCUR shareholders. SCUR has agreed to acquire all of the common stock of CyberGuard in exchange for an aggregate of 70% stock and 30% cash, equal to approximately $314 million at today's stock closing price. The value will fluctuate against SCUR's market price until closing.

Stockholders of CyberGuard will receive half a share of SCUR's common stock and $2.73 in cash for each outstanding share of CyberGuard. SCUR’s stock price at the time of the announcement was $12.18 and was at $13.83, as of close of business on January 10th.

The larger company, SCUR had $104.5 million of revenues for the trailing twelve months ending Sept 30, 2005. CGFW had $67.8 million revenue and $7.5 million EBITDA over the same period.

With an enterprise value of approximately $300 million, CGFW's shareholders are receiving a valuation equal to about 4.4x revenue and 40x EBITDA.

The transaction is expected to be slightly dilutive overall in 2006. "We believe the acquisition will be accretive to Secure Computing's earnings within the second full quarter of operations following the close of the transaction," said John McNulty, chairman, president and CEO of Secure Computing.

Secure Computing Corporation develops network security solutions that enable organizations to exchange critical information with their customers, partners, and employees.

CyberGuard Corporation provides network security solutions designed to protect enterprises that use the Internet for electronic commerce and secure communication companies worldwide. It offers firewall/VPN appliances, which include anti-virus, anti-span, SSL acceleration, Web-content filtering, and intrusion detection appliances for network security solutions.

Pat Clawson, chairman and CEO of CyberGuard Corporation said, "the combination of Secure Computing and CyberGuard brings together two successful leaders in IT security technology that are among the most established players in this dynamic and evolving industry. Together, we will be able to offer customers the most advanced and robust security solutions for the Unified Threat Management, Secure Content Management and Strong Authentication markets."

In connection with this transaction, Warburg Pincus, a private equity firm, will invest $70 million in Secure Computing in the form of convertible preferred stock with warrants. The preferred stock will be convertible at $13.51 per share, representing an 11% premium to the closing price of Secure Computing's common shares on August 17, 2005, and will include a 5% dividend which shall be paid-in-kind for the first 4.5 years and thereafter may be paid in cash, at the option of Secure Computing.
Warburg Pincus will also receive 1.0 million warrants to purchase Secure Computing common stock at a price of $14.74, representing a premium of 21% to the closing price of Secure Computing's common shares on August 17, 2005. The convertible preferred stock is not redeemable but may be converted to common at any time by Warburg Pincus and after one year by Secure Computing, subject to the achievement of certain share price performance milestones. This investment will close concurrent with, and is contingent upon, the closing of the CyberGuard transaction.

We hope that you find this feature from Sokoloff & Co. interesting, informative and useful. We welcome your comments and suggestions.

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