[SatNews] Raytheon disclosed early Monday that it is acquiring cybersecurity firm Websense and will form a joint venture with Vista Equity Partners to greatly expand the defense company’s global cyber offerings. The new venture, in which Massachusetts-based Raytheon will hold an 80 percent stake, would subsume its cyber-products business and the much larger Websense network-security enterprise that Vista took private in 2013. Company executives say the move will accelerate Raytheon’s efforts to offer “defense-grade” cyber solutions to civil and commercial customers while generating growth rates and margins superior to those prevailing in its military hardware markets.
I talked to several principals involved in the transaction on Sunday, including Raytheon Chairman & CEO Thomas Kennedy and Websense CEO John McCormack (Raytheon contributes to my think tank). To say they are excited about the pending business combination would be an understatement. From Kennedy’s viewpoint, global demand for cybersecurity products and services is exploding, and the joint venture will enable his company to deliver market-beating solutions across the full range of potential customers. With 50 percent of Websense sales already overseas, the transaction will reinforce Raytheon’s pre-existing strategy of generating a larger share of sales from foreign markets than other first-tier defense contractors.
The combination is complementary in other ways too. Raytheon’s domestic cyber business is especially strong in military and intelligence markets, whereas Websense is mainly concentrated in civil and commercial markets. David Wajsgras, who runs the Raytheon business unit focused on information and intelligence lines, stresses that “Websense is not concentrated in any particular vertical” segment of the cyber market, but is well-positioned in financial services, healthcare, insurance, real estate and manufacturing—areas where Raytheon had not previously been a big player. Now it will be.
Once the transaction closes in the second quarter, the joint venture will be a separately reporting segment within the Raytheon portfolio of tech businesses. Company execs say that having Vista Equity Partners hold a minority stake in the venture (it will occupy one of five board seats) will bolster the new enterprise’s prospects given Vista’s long involvement in the commercial software industry. However, they stress that the Websense acquisition is not a departure from Raytheon’s identity as a defense firm so much as it is an effort to leverage fungible capabilities developed for military and intelligence users into a far larger global market.
Raytheon CFO Anthony (Toby) O’Brien says during its first year of operations, the joint venture will only represent about 5 percent of company revenues—a bit above $500 million, with legacy Websense lines delivering about three-quarters of the total. But O’Brien notes that the growth rates and margins are so much better than in defense that the impact of the new enterprise on company results will likely be disproportionate from day one. Raytheon already generates some of the highest operating margins in the defense sector, but none of its units can match the 20 percent Websense is currently achieving, and executives expect cyber margins to grow from here.
Kennedy has an elegant way of describing the strategy that underpins the Websense move. He says that malware and data theft are proliferating at an exponential rate around the world because government and private enterprise alike can’t resist the business logic of operating on the web. But as web activities increasingly concentrate in mobile and cloud applications, users are becoming highly vulnerable to threats from inside and outside of their organizational boundaries. They need the kind of world-class cyber solutions that Raytheon has developed for its military and intelligence customers, and the new venture will speed delivery of those solutions. Kennedy sees online security as becoming a key competitive discriminator for many businesses.
Websense CEO John McCormack, who will run the joint venture, sees the tie-up with Raytheon as greatly expanding the range of opportunities his enterprise can pursue. With $23 billion in annual revenues, Raytheon can pursue pretty much any cyber venture that looks promising. And with product cycles much more compressed in the cyber world than in Raytheon’s military hardware business, the positive returns from new initiatives are likely to be reflected at the bottom line much faster. McCormack told me Sunday, “I’ve been doing this for 18 years, and I am totally stoked.”
He should be. Raytheon is arguably the most tech-savvy player in the world’s biggest defense market. It spends a higher percentage of sales on R&D than any of its defense peers, and it has the only board on which a majority of directors come from technology backgrounds. The company has recently scored a series of big competitive wins in electronic warfare and military surveillance by pioneering the use of gallium nitride technology, a chip-making breakthrough that some experts compare to the advent of silicon. Since its creation by MIT alums in the 1920s, Raytheon (the name translates from French and Greek as “light from God”) has been concentrated in areas such as signals intelligence and electronic countermeasures that readily align with today’s cybersecurity concerns.
In that sense, the Websense venture should come as no surprise. Business-unit head Wajsgras says the company has made 14 acquisitions over the last two decades to build up its organic cyber expertise, and some of them—like last November’s $420 million acquisition of Blackbird Technologies—have been quite sizable. CEO Kennedy emphasizes that all of Raytheon’s business units will continue to be deeply engaged in cyber activities delivering customized solutions to their military technology customers. But with the company soon in a position to market both the Websense Triton brand and its own SureView brand of cyber solutions globally, it’s clear that Raytheon is making a big bet on cybersecurity to keep investor returns growing.
By Forbes Contributor, Loren Thompson. This article can be found here http://www.forbes.com/sites/lorenthompson/