Showing posts with label Sonicwall. Show all posts
Showing posts with label Sonicwall. Show all posts

Wednesday, June 30, 2010

Merger Arbitrage: SonicWALL Inc (SNWL)

On June 2, SonicWALL Inc (SNWL) announced a definitive agreement to be acquired by an investor group led by Thoma Bravo, LLC and including Ontario Teachers' Pension Plan for $11.50/share, or about $720 million. SNWL is a leading provider of IT security and data backup and recovery solutions. The offer price represented a 28% premium to SNWL's previous closing price. SNWL expects the transaction to close in the fiscal quarter ending September 30 or early in the fiscal quarter ending December 31. The press release did not contain any more information, nor was there a conference call. Let's dig into this merger arbitrage situation.

Some people might be thinking, "great, a 28% premium from legitimate buyers", however there are warning signs that should be evident after reading the 8:30pm announcement. We have mentioned the first two issues several times on this blog. The first is that there is no go-shop period, which would allow SNWL to solicit bids from third parties for a specified time period, typically 30 days. These provisions are typical with private equity buyers. The second issue is that there is no voting agreement with shareholders. Or, shall we say, there was no announcement of any go-shop period or voting agreement. Since these are viewed favorably to shareholders of target companies, and management will go out of its way to display any shareholder friendly actions performed, we assume that lack of disclosure means that these items do not exist. We learn at 6am the following morning in a filing that there is a voting agreement, albeit for the 1% of shares that management and the board own. This is unconvincing, given that page one holders represent 64% of the shares outstanding.

These are nice ancillary points, one could say, but how about something more substantive? Okay, let's look at valuation. At $11.50/share, SNWL is valued at about 2.0x LTM revenues. SNWL's comps trade at a multiple of about 2.2x. All things being equal, which they admittedly never are, the takeout multiple should be higher than where the peers trade. The main reason is that shareholders must be enticed with a control premium.

For some background on Thoma Bravo, the private equity firm agreed to acquire Entrust Inc on April 13, 2009 for $1.85/share, or $114 million. The transaction contained a 30-day go-shop provision. Thoma Bravo was able to secure a voting agreement with 19% of Entrust shares. When the go-shop period expired on May 13, Entrust provided an update on what transpired in the process. After speaking with 35 separate parties, Entrust received written, non-binding indications of interest from three parties, each of which contemplated a price higher than the $1.85/share deal with Thoma Bravo. As a result, Entrust intended to provide additional due diligence and continue discussions and negotiations with these parties. Notwithstanding the foregoing, Entrust reiterated that its board determined that the merger with Thoma Bravo is fair and that they still recommend shareholder approval of the deal. On June 11, Entrust director Douglas Schloss (who runs the risk arb fund Rexford Management) publicly stated how the timing is poor to be selling the firm and that the offer price should be increased. Schloss was one of the two directors out of the nine-person board who voted against the $1.85/share deal. On July 10, Thoma Bravo amended its merger agreement with Entrust for an acquisition price of $2/share, or $124 million. The deal closed on July 28.

Now let’s return to the SNWL deal. On June 11, we learn from the preliminary proxy that three parties outside of the buying consortium entered confidentiality agreements with SNWL, though no offers were made. This does not support management's decision not to negotiate a go-shop provision, since clearly there were other interested parties. Surprisingly, this did not tighten the spread, as it remained at 2.4% after this news. The release of the definitive proxy on June 22 set the shareholder vote for July 23. It also disclosed that regulatory clearance from the FTC had been granted. The most important piece of information in the filing was added to the end of the background section, acting as the latest update. This is the section where one can learn about other conversations the company had about a transaction. Often there is nothing material (no big change in the background section from the preliminary to the definitive), though in this case, there is an important addendum:
On June 16, 2010, the board of directors of SonicWALL, Inc. received an unsolicited non-binding proposal from Strategic Party D, a privately held competitor, in which such party proposed, subject to completion of due diligence and finalization of definitive documentation, to acquire the outstanding shares of common stock of SonicWALL for $12.00 per share in cash. Strategic Party D’s offer identifies Financial Sponsor C and Financial Sponsor D as expected equity financing sources for its proposal and states that it is in discussions with debt financing sources.

On June 18, 2010, the board of directors of SonicWALL, after consultation with its financial and legal advisors, determined that the unsolicited non-binding proposal from Strategic Party D meets the criteria required by Section 5.6(b) of the Merger Agreement to permit the Company to provide information to, and negotiate with, Strategic Party D in accordance with its terms. Based on this determination and as permitted by the Merger Agreement, SonicWALL delivered a confidentiality agreement with a standstill provision to Strategic Party D and its proposed equity financing sources as provided for in the Merger Agreement and, upon its execution, will furnish information to Strategic Party D and enter into discussions with it regarding its proposal.

The board of directors of SonicWALL has not approved, adopted or recommended the acquisition proposal from Strategic Party D or declared it superior to the Merger Agreement and the merger. Moreover, SonicWALL’s board of directors has not withdrawn, qualified, or modified its recommendation that SonicWALL shareholders approve the principal terms of the Merger Agreement, the merger and the Agreement of Merger. Our board of directors continues to recommend that you vote “FOR” the proposal to approve the principal terms of the Merger Agreement, the merger and the Agreement of Merger. There is no assurance that negotiations with Strategic Party D will ultimately lead to a superior proposal, that SonicWALL and Strategic Party D will reach final agreement on terms regarding the acquisition of SonicWALL by Strategic Party D or that, if the parties do enter into such an agreement, regulatory approvals and other conditions to completing such a transaction will be obtained.
Knowing about Entrust, we are aware that Thoma Bravo has been in a similar situation. We also know that the result was an increase in the purchase price. The spread closed on June 22 at -3.0% after disclosure of this bidder. As of June 29, it is -1.5%, as investors are still very interested in the potential spoiler bid.


About the Authors

Hunter is the founder of the Distressed Debt Investing Blog and the Distressed Debt Investors Club. He has worked on the buy side for the past 7 years in high yield and distressed debt investing.

Edward has been a professional investor for four years, focusing mainly on the event-driven space. His investment philosophy is value-based, and he spends the majority of his time identifying near-term catalyst based opportunities.


hunter [at] distressed-debt-investing [dot] com