WatchGuard Acquired By Private Equity

Kevin McLaughlin

Security vendor WatchGuard Tuesday announced it has agreed to be acquired by Francisco Partners, a Menlo Park, Calif.-based private equity fund, ending months of industry speculation about the struggling company’s future plans.

The $151 million cash-only deal will net WatchGuard shareholders $4.25 per share and is expected to close during the fourth quarter, subject to shareholder approval. WatchGuard employees holding about 5.8 percent of the company’s outstanding shares have already indicated their support for the acquisition, according to the Seattle-based vendor.

“We believe that this transaction is the right decision for our shareholders, customers, partners and employees,” said Ed Borey, chairman and chief executive officer of WatchGuard, in a statement.

WatchGuard has been a takeover target for the past several months. In February, San Francisco-based Vector Capital Corporation purchased 9.4 percent of WatchGuard and inquired about purchasing the rest of the company. But in April, WatchGuard announced it had hired Wachovia Securities to examine “strategic alternatives”. In late May, Vector offered $5.10 per share, but then cut the bid to $4.65 per share a month later, citing “due diligence”.

Now that a deal has been reached, WatchGuard can focus on responding to the market faster, says Carl Mazzanti, CEO of eMazzanti Technologies, a Hoboken, N.J.-based solution provider. “[WatchGuard] is no longer in an uncertain state and [the acquisition] should give the market confidence that management and WatchGuard’s backing just got drastically more sophisticated,” said Mazzanti.

However, it will take some time for WatchGuard to repair the damage that has occurred over the past year related to issues with its Fireware Pro appliance, said one partner, speaking on condition of anonymity. Problems with the Fireware Pro operating system and the WAN failover feature in version 8.0 have negatively affected WatchGuard’s image in the channel and have likely cut into the vendor’s sales, the source added.

Watchguard officials recently told CRN that Version 8.3 of Fireware Pro, unveiled June 22, addresses problems with the product.

In WatchGuard’s first quarter earnings call in May, the vendor reported a net loss of $4.1 million, or $0.12 per share, in Q1 2006 compared to a net loss of $1.3 million, or $0.04 per share, in the previous quarter, and a net loss of $3.9 million, or $0.12 per share, in Q1 2005.

After closing Monday trading at $3.73, WatchGuard shares had rebounded .40 to $4.10 at the close of Tuesday trading.