10 Things To Know About The Planned $3.82 Billion Thoma Bravo-Sophos Deal

Here's a look at how Sophos could leverage Thoma Bravo’s expertise to its advantage, the role Sophos’ existing leaders would play going forward, and whether Thoma Bravo is considering deep job cuts at Sophos.


Back In Private Hands

Sophos potentially will walk away from the public market just four and a half years after its initial public offering following the $3.82 billion purchase offer from private equity giant Thoma Bravo. The potential acquisition of the Abington, U.K.-based SMB platform security giant would add yet another cybersecurity firm to the expansive portfolio of Chicago and San Francisco-based Thoma Bravo.

“They know the space, and they know what’s necessary to succeed and drive innovation and growth and operational performance to accelerate both the top line and bottom line,” Sophos CEO Kris Hagerman told CRN.

Sophos protects more than 400,000 organizations across 150 countries from today's most advanced cyberthreats, securing endpoints and networks against evolving cyberattack techniques like ransomware, malware, exploits, data exfiltration, active-adversary breaches, and phishing. Sophos sells its products and services exclusively through a global channel of more than 47,000 partners and MSPs.

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Here's a look at how Sophos could leverage Thoma Bravo’s expertise and track record to its advantage, the role Sophos’ existing management team would play going forward, and whether Thoma Bravo is considering deep job cuts at Sophos.

[Editor’s Note: Register now to see Mike Hoffman, principal at Thoma Bravo, deliver a keynote address at the NexGen Conference, hosted by CRN parent The Channel Company, Oct. 22 – 24 in Anaheim, Calif.]

10. Billings Continue To Climb For Sophos In 2019

Sophos expects to report 9 percent billings growth for the six months ended Sept. 30 after factoring out changes in foreign currency exchange rates, with the company seeing continued growth in end-user and network security.

Subscription billings led the way with 12 percent year-over-year growth on a constant currency basis, according to the acquisition documents, with the company seeing growth in business from brand-new customers as well as a modest improvement in the net renewal rate. Sophos expects to report the full results for the first half of its 2020 fiscal year on Nov. 6.

For Sophos’ 2019 fiscal year, which ended March 31, revenue jumped to $710.6 million, up 11.2 percent from $639 million a year earlier. And from a profitability standpoint, Sophos saw earnings of $26.9 million, improved from a loss of $60.9 million a year earlier.

9. Sophos Recently Has Made Three Acquisitions

Sophos has been aggressive in the merger and acquisition space this year, kicking things off in January by buying emerging cloud infrastructure vendor Avid Secure to provide end-to-end protection around public cloud services such as Amazon Web Services, Microsoft Azure and Google. Later that month, the company bought DarkBytes to provide the foundation for its new managed detection and response services.

Then in June, Sophos acquired managed detection and response provider Rook Security to help businesses of all sizes monitor, hunt for, analyze and respond to security incidents. Four months later, Sophos debuted a managed threat response service that integrates with the company's protection capabilities to ensure security teams end up dealing with the most important alerts.

The acquisition spree kicked off in February 2017 when Sophos purchased endpoint security startup Invincea for $120 million. All told, Sophos has made 13 acquisitions since 2003, according to CrunchBase.

8. Sophos’ Valuation Has Risen Sharply Over The 2010s

Sophos kicked the decade off by being acquired in May 2010 by London-based private equity firm Apax Partners for $830 million. Just over five years later, Sophos raised $125 million as part of an initial public offering on the London Stock Exchange that valued the company at $1.6 billion.

Hagerman told CRN the company went public at 225 pence, or about $2.83 per share, and has now received a bid of 583 pence, or $7.40 per share, nearly four and a half years later to be acquired by Thoma Bravo. Sophos’ shareholder return during its time as a publicly traded company greatly outpaced the performance of the market as a whole, according to Hagerman.

“We’ve had a very good run as a public company,” Hagerman said.

7. Deal Offers A 37 Percent Premium Over The Most Recent Close Price

Thoma Bravo offered to buy Sophos for 583 pence per share, or $7.40 per share, which represents a 37.1 percent premium over Sophos’ Friday closing price of 425.5 pence per share, or $5.30 per share. As a result, the company’s stock is up 154.30 pence ($1.94 per share), or 36.26 percent, to 579.80 pence per share ($7.27 per share) in trading midday Monday on the London Stock Exchange.

Compared with the six-month period leading up to the acquisition offer, the deal represents a 45.6 percent premium over Sophos’ weighted average price of 400.6 pence, or $5.03 per share, according to acquisition documents. The transaction would be a multiple of approximately 32 times over Sophos’ unlevered free cash flow of $124 million for the year ended March 31, 2019.

All told, the transaction values Sophos at approximately $3.82 billion on a fully diluted basis and implies an enterprise value for the company of $3.95 billion.

6: 27.2 Percent Of Sophos Shares Have Been Pledged In Favor Of The Deal

Sophos’ board of directors has unanimously recommended that shareholders vote in favor of the acquisition by Thoma Bravo, and have pledged to vote their shares (which collectively represent 0.8 percent of all outstanding Sophos shares) in favor of the transaction, according to the acquisition documents.

In addition, an entity affiliated with private equity firm Apax Partners as well as Sophos co-founders Peter Lammer and Jan Hruska have pledged to vote their shares, which represents 26.5 percent of all outstanding shares, in favor of the transaction. Apax Partners was the majority owner of Sophos from May 2010 until the company went public in June 2015.

As a result, approximately 27.2 percent of all outstanding Sophos shares have already been committed to vote in favor of the acquisition.

5. Thoma Bravo First Proposed Buying Sophos In June

Thoma Bravo submitted an initial nonbinding proposal to acquire Sophos in June, and since then has engaged in discussions and due diligence around the transaction.

The private equity firm praised Sophos for its innovative, simple and highly effective offering, extensive network of more than 47,000 channel partners, and strong retention and renewal rates. Thoma Bravo said it believes that Sophos' investments are allowing the company to evolve into a next-generation security leader with a significant opportunity to enhance its services offering.

“Sophos has a market-leading product portfolio and we believe that, by applying Thoma Bravo's expertise, operational framework and experience, we can support the business and accelerate its evolution and growth,” Thoma Bravo Managing Partner Seth Boro said in a statement.

4. Thoma Bravo’s All-Out Push Into Cybersecurity Continues

Thoma Bravo has been extremely active in the cybersecurity space recently, purchasing storage and security player Barracuda Networks for $1.6 billion in February 2018; security information and event management vendor LogRhythm in July 2018; application and data protection vendor Imperva for $2.1 billion in October 2018; and application security vendor Veracode for $950 million in November 2018.

In addition, Thoma Bravo bought a majority stake in identity management vendor Centrify in July 2018, and then in October 2018 spun off its Identity-as-a-Service business into a stand-alone company called Idaptive, which is also owned by Thoma Bravo.

Thoma Bravo has also met the needs of the channel by investing heavily in IT service management firms through the purchase of remote monitoring and management (RMM) vendor Continuum in June 2017 and MSP technology provider ConnectWise in February 2019. Thoma Bravo also teamed up with private equity firm Silver Lake in February 2016 to buy SolarWinds for $4.5 billion, which has an RMM offering.

3. Thoma Bravo’s Expertise, Track Record Will Help Sophos Grow

Sophos looks forward to leveraging Thoma Bravo’s expertise and track record to make the most of the opportunity in the $40 billion security market, Hagerman told CRN. Specifically, Hagerman said Thoma Bravo has the benefit of having seen a lot of different business models thanks to extensive work with cybersecurity companies.

Thoma Bravo’s deep security expertise should help with everything from strategic consideration of M&A to expanding and accelerating the company’s MSP, subscription, and Software-as-a-Service offerings, Hagerman said. There are lots of areas that Thoma Bravo has seen or worked with companies to embrace that would be a good fit for Sophos, according to Hagerman.

All told, Hagerman said the acquisition by Thoma Bravo should allow Sophos to continue growing its customer base, billings and revenue while enhancing the quality and innovation of its products.

2. Existing Sophos Management Seen As Key To Thoma Bravo’s Success

Thoma Bravo said it attaches great importance to the skills, knowledge and expertise of Sophos' management and employees, and therefore expects that the existing management and employees of Sophos will be key to the company’s success going forward. Sophos CFO Nicholas Bray on July 12 announced his intention to leave the company in mid-November after nine years in the role.

The private equity firm said it’s neither discussed nor entered into any form of incentivization arrangements with members of Sophos management. Thoma Bravo said it intends to put in place appropriate arrangements for management of Sophos following completion of the acquisition.

Going forward, Thoma Bravo said it plans to work with Sophos’ management team to implement operational best practices to create a best-in-class software franchise.

1. Thoma Bravo Doesn’t Expect To Materially Reduce Sophos’ Headcount

Thoma Bravo said its plans to review Sophos’ business and operations in the six months after the deal closes to implement operational best practices and create a best-in-class software franchise. For starters, Thoma Bravo said it plans to evaluate opportunities to streamline operational functions to help accelerate top-line growth.

In addition, Thoma Bravo said it plans to reduce spending on legacy and noncore products while upping investment in areas like next-generation endpoint and network security that are expected to enhance the customer experience and product portfolio. Finally, Thoma Bravo said it plans to reduce noncritical administrative costs as well as go-to-market program spend that offers a lower return on investment.

Based on its experience around previous transactions, Thoma Bravo said it doesn’t expect the review to result in a material headcount reduction. In addition, Thoma Bravo said it intends to continue operating Sophos as a stand-alone business group, and avoid undertaking any material restructuring or changes in locations of Sophos’ headquarters, operations or places of business.