WatchGuard – Purchase by Francisco Partners. Insult or fair price for old rope?
Now I should confess up font that I'm a WatchGuard
fan. I love the product! Why even now as I type this I feel strangely reassured by the red box, with it's familiar flashing lights sat in a rack in the corner of my office. And it's not just that I've had a long and meaningful relationship with the company ever since it first came over to the UK in 1997 (then of course it was Seattle Software Labs). It's also because WatchGuard DID
something to the Firewall market. They took it to the SME's. Whilst Check Point
were still fleecing the Blue Chips and Cisco PIX
was still so complicated you needed a PhD and a working knowledge of voodoo just to turn the thing on, WatchGuard entered the market with it's cute red box, flashing lights and an interface that was so straight forward, even I could get one to work! Not only that, they were throwing them at the market for a fraction of the price of the competition. Lets face it folks WatchGuard owned the appliance firewall market and by the start of the millennium stock prices had climbed to $70+ .
Oh yes. Firewall appliances were where the market was at and WatchGuard was a furlong ahead of the pack. It's what happened next that was amazing. Absolutely nothing! The WatchGuard foot went firmly off the gas and amazingly seemed content to coasted along. Money was waisted on ill-conceived acquisitions (God help you if you ever bought a WatchGuard-RapidSteam unit!), and slowly but surely the SonicWalls and NetScreens of this world gradually caught up and then waved cheerfully at the snoozing WatchGuard as they trotted past. By the time WatchGuard resolved to make up ground with the development of the X-Class, (after the ill-received V-Class, which was basically a RapidStream with a paint-job) it had given away it's market edge in a way that was almost criminal.
So that brings us to todays news
. And it is a pathetic culmination of poor management and weak product direction. Rumors of WatchGuard's sales have been banded around for quite a few months now and in May Vector Capital offered $5.10 per share. Ed Borey, CEO of WatchGuard who was appointed exactly two years ago (Hmmm....) sat on his hands until Vector reduced it's offer to $4.65 (perhaps having had first hand experience of dealing with 'thought leaders' at WatchGuard!) which sent the share price tumbling a staggering 48% (smooth Ed... Real smooth!). Today Borey accepts (subject to shareholder approval) an offer of $4.25 from Francisco Partners
. Given that Borey was brought on with the specific remit to prepare the WatchGuard business for sale, one has to ask what on earth makes this an appropriate conclusion to his contract, for which he is rumored to be in line for a $3m pay-out.Final thoughts:
I've spent a lot of time working with the WatchGuard product and some really dedicated people in the WatchGuard organization. This deal is an insult to both. Yes WatchGuard lost it's edge a while back, but a huge investment in ASIC technology and completely revised firmware has brought it back into contention over the past couple of years. I don't hold stock in WatchGuard (NASDAQ WGRD)
but if I did, I would oppose this deal. Maybe Francisco is a good home for WatchGuard, after all they have some complementary products such as Barracuda
. They also have a habit of cutting out the rot from senior management, which my contacts at WatchGuard would indicate is long over-due. However, the rumor is WatchGuard have $72m in the bank and revenues approximately totaling $77m for the past 12 months (based on Q2, 3, 4 results 2005 and Q1 results 2006) which makes this looks like a steal. I am definitely no market analyst, but in my heart I feel it's a sad day when the senior management of an organization put less value in their business than their staff and loyal supporters.