Websense: Shareholders Should Tender Their Shares To Vista Equity Partners

| About: Websense, Inc. (WBSN)

Shares of Websense (WBSN) rose an incredible 28.8% in Monday's trading session after the company, which protects organizations against cyber attacks and theft, agreed to sell itself to Vista Equity Partners.

For investors there appears to be limited upside from current levels given the low possibility of a counter offer. Investors are best advised to tender their shares at these levels.

The Deal

Websense announced that it has agreed to sell itself to private equity firm Vista Equity Partners. The private equity party, which focuses on investments in software, data and general technology, will pay $24.75 per share in cash for Websense. The deal values the company at a 29% premium compared to Friday's closing price, and a 53% premium over the average closing price of the past 60 days.

All in all, the transaction values Websense around $903 million. After closure of the deal, Websense will become a privately held company. Its headquarters will remain in San Diego.

For the full year of 2012, Websense generated annual revenues of $361.5 million, down 0.7% on the year before. The company reported a net profit of $18.3 million, down almost 41% on the year before.

The board of directors of Websense has already unanimously approved the offer, and recommends that shareholders tender their shares to Vista. The deal is subject to financing agreements, normal closing circumstances and antitrust approval. Websense anticipates that the deal will close before the third quarter of 2013.


Websense ended its first quarter of 2013 with $83.7 million in cash and equivalents. The company operates with a total debt position of $68.0 million, for a net cash position of around $15 million.

The $903 million deal values operating assets of the firm at $888 million. This values the operating assets of the firm at 2.5 times 2012's annual revenues and 48-49 times last year's earnings.

Despite the profitability and solid financial position, Websense does not pay a dividend at the moment.

Some Historical Perspective

Long-term holders of shares have seen some very modest results. Over the past decade, shares have traded in a $15-$25 trading range. Shares briefly traded above $30 in 2005 to hit lows of $10 during the financial crisis of 2009. For the remainder of the time, shares have traded in this relatively tight trading range.

More recently, investors have seen some better returns. Shares slumped from levels around $19 at the start of 2012 to hit lows of $13 in November later that year on the back of a poor operating performance. Shares bounced back on a solid first quarter performance and are trading with year to date returns of a whopping 65% following the announcement of the offer.

Between 2009 and 2012, Websense grew its annual revenues by a cumulative 15% to $361.5 million. The company reported a $10.7 million loss for 2009, but improved its profitability to report a $18.3 million profit last year. Websense furthermore retired roughly 15% of its shares outstanding.

Investment Thesis

Investors should have low hopes for a counter offer, a reason why shares of Websense are currently trading a mere penny above the offer from Vista. The deal is being executed on friendly terms, has been unanimously approved by the board, and the company has been "shopped" around to other suitors already. On top of that, management thinks that the offer represents fair value for the company.

Websense failed to create significant value in recent years. At the moment, the company is in a transition phase from being a pure internet filter company towards being a broader based online security service company. Vista will bring operational excellence to the company, which is much needed as operating expenses kept increasing over the past year while revenues were stagnant. Owned by Vista, Websense will focus on its promising Triton business and become a sizable part of the $6 billion portfolio of Vista.

Investors never got to see the end of the transition phase, but the fact that management is happy to sell at these levels indicates that this short-term gain might be the best outcome for shareholders. As the company has already been shopped around, there are few hopes for a counter offer and shareholders should tender their shares.

After a few disappointing years, investors have received a significant premium for their shares at fairly high valuation multiples. While the long term successful transition strategy could deliver more value in the long run, investors should take their short term profits and move on.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.