Two years ago, I critiqued Raytheon's (RTN) decision to more than triple the size of its cybersecurity business -- at a very high price -- by buying Websense. Two years later, it looks as if Raytheon itself may be starting to rethink its move.
As Reuters reports, barely two years after completing its purchase of Websense and merging it with Raytheon's in-house cybersecurity division to create Forcepoint, Raytheon is already beginning to mull spinning off the division -- and getting out of the cybersecurity business entirely.
How Raytheon got into cybersecurity
This story begins back in 2015, when Raytheon agreed to acquire 80% of privately held cybersecurity company Websense for $1.6 billion. It was a complicated transaction, involving an intra-company loan and leaving part of the acquired company in the control of a private-equity firm. But the gist of the deal, as I wrote at the time, was this:
Just before Websense went private in mid-2013 [the company reported] $360 million in annual revenue, but just $23 million in profit. ... Raytheon's $1.6 billion cash purchase price works out to a valuation of more than four times Websense's last-reported sales ... and 70 times 2013 earnings.
At the time, Raytheon's own stock cost only 1.5 times sales and 15 times earnings. Paying nearly three times its own price-to-sales ratio, therefore, and nearly five times its price-to-earnings ratio, just to get bigger and faster in cybersecurity, seemed like a risky play for Raytheon. This was especially true, I thought, with the memory still fresh of General Dynamics' recent 2013 writedown of $2 billion in negated goodwill -- a writedown that was brought about by similarly ill-considered IT acquisitions. That fiasco cost one General Dynamics executive his job and caused the company to shake up its executive ranks to prevent a recurrence.
That Raytheon would risk a similar venture into IT, so soon after General Dynamics had gotten itself burned, seemed to be tempting fate. But how has it played out in fact?
Why Raytheon may want to get out of cybersecurity
Data from S&P Global Market Intelligence shows that, before acquiring Websense, Raytheon's cyber division was doing a bit more than $100 million a year in annual revenue. Immediately after closing the acquisition in May 2015, and integrating Websense into its new Forcepoint cyber division, Raytheon's cyber revenue jumped past $100 million every quarter. So if all Raytheon hoped to accomplish by acquiring Forcepoint was to get big in cybersecurity, well -- mission accomplished.
Profits, however, were another matter. In its first full year of owning Forcepoint, 2016, Raytheon collected $566 million worth of Forcepoint revenue and reported operating profits of $51 million from the division. So the business remained profitable -- but profit margin contracted even as Raytheon grew its Forcepoint revenue significantly.
It's also noteworthy that the 9% operating profit margin at Forcepoint, although not a bad margin in and of itself, falls far short of the 14.3% profit margin for Raytheon as a whole. Given that Forcepoint is about one-third less profitable than the rest of Raytheon, it's even less clear why the company agreed to pay a price-to-sales ratio nearly three times richer than Raytheon's own, and a P/E ratio nearly five times Raytheon's own, to acquire this inferior business.
Buy the rumor, sell the Raytheon news
Raytheon management may now be coming to the same conclusion. Citing an interview with German business newspaper Boersen-Zeitung, Reuters reports that Forcepoint CEO Matthew Moynahan has been talking up the subsidiary he runs, saying Forcepoint "could thrive were it to be listed separately," in Reuters' words.
Moynahan was quick to disclaim that Raytheon is contemplating such a spinoff at this time. But his comment still has the feel of a trial balloon, being floated in hopes of attracting interest from potential acquirers. The timing of the remark also seems propitious, coming as it does just weeks after a global WannaCry ransomware cyberattack grabbed headlines around the world, and in the midst of the similar Petya ransomware that struck Russia, Ukraine, and Western Europe last week.
If Raytheon really is looking to get rid of its underperforming Forcepoint unit, I can't think of a better time to do that than now.