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The Public/Private Pendulum Keeps Swinging

By Mike Rothman

They say the grass is always greener on the other side, and I guess for some folks it is. Most private companies (those which believe they have sustainable businesses, anyway) long for the day when they will be able to trade on the public markets. They know where the Ferrari deal is, and seem to dismiss the angst of Sarbanes-Oxley. On the other hand, most public companies would love the freedom of not having to deal with the quarterly spin cycle and those pesky shareholders who want growth now.

Two examples in the security space show the pendulum in action this week. First is Tripwire’s IPO filing. I love S-1 filings because companies must bare their innards to sell shares to public investors. You get to see all sorts of good stuff, like the fact that Tripwire has grown their business 20-30% annually over the past few years. They’ve been cash flow positive for 6 years, and profitable for the last two (2008 & 2009), although they did show a small loss for Q1 2010.

Given the very small number of security IPOs over the past few years, it’s nice to see a company with the right financial momentum to get an IPO done. But as everyone who’s worked for a public company knows, it’s really about growth – profitable growth. Does 20-30% growth on a fairly small revenue base ($74 million in 2009) make for a compelling growth story?

And more importantly for company analysis, what is the catalyst to increase that growth rate? In the S-1, Tripwire talks about expanding product offerings, growing their customer base, selling more stuff to existing customers, international growth, government growth, and selective M&A as drivers to increase the top line. Ho-hum. From my standpoint, I don’t see anything that gets the company from 20% growth to 50% growth. But that’s just me, and I’m not a stock analyst.

Being publicly listed will enable Tripwire to do deals. They did a small deal last year to acquire SIEM/Log Management technology, but in order to grow faster they need to make some bolder acquisitions. That’s been an issue with the other public security companies that are not Symantec and McAfee – they don’t do enough deals to goose growth enough to make the stock interesting. With Tripwire’s 5,400 customers, you’d figure they’ll make M&A and pumping more stuff into their existing base a key priority once they get the IPO done.

On the other side of the fence, you have SonicWall, which is being taken private by Thoma Bravo Group and a Canadian pension fund. The price is $717 million, about a 28% premium. SonicWall has been public for a long time and has struggled of late. Momentum seems to be returning, but it’s not going to be a high flyer any time soon. So the idea of becoming private, where they only have to answer to their equity holders, is probably attractive.

This is more important in light of SonicWall’s new push into the enterprise. They are putting a good deal of wood behind this Project SuperMassive technology architecture, but breaking into the enterprise isn’t a one-quarter project. It requires continual investment, and public company shareholders are notoriously impatient. SonicWall was subject to all sorts of acquisition rumors before this deal, so it wouldn’t be surprising to see Thoma Bravo start folding other security assets in with SonicWall to make a subsequent public offering, a few years down the line, more exciting.

So the pendulum swings back and forth again. You don’t have to be Carnac the Magnificent to figure there will be more deals, with the big getting bigger via consolidation and technology acquisitions. You’ll also likely see some of the smaller public companies take the path of SafeNet, WatchGuard, Entrust, Aladdin, and now SonicWall, in being taken private. The only thing you won’t see is nothing. The investment bankers have to keep busy, don’t they?

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