Raytheon’s Retail Play

Cybersecurity firm Raytheon has made a $1.7 billion dollar bet that it can translate the security skills it currently brings to bear for its military and intelligence clients into protection for retailers and banks.

The firm announced yesterday (April 20) that it has acquired Websense Inc. from private-equity firm Vista Partners LLC. Raytheon says it will now take the Austin-based business and its 21,000 data-security clients in order to build a new joint cybersecurity venture. That new effort is forecasted to bring in about $500 million this year and margins of around 20 percent.

“CEOs are shaking in their boots,” said Raytheon Chief Executive Tom Kennedy, noting that the time is right for this pair-up, given how pervasive cyberattacks have become in the marketplace.

And that demand is clearly what Raytheon is betting on, given that the price they are paying for Websense is more than four to five times the company’s annual sales. The deal is the largest acquisition in a decade by one of the nation’s five prime contractors – though past (smaller) deals have had a mixed record of success.

Raytheon, however, has assertively invested in a push into cybersecurity, with 14 acquisitions since 2007. While that may sound terribly aggressive, Raytheon faces a landscape increasingly crowded with cyber startups that are attracting increasingly rich valuations.

Websense “would clearly take Raytheon well into the commercial cybersecurity space, which we believe would involve significant risk,” said Sanford C. Bernstein & Co. analysts in a recent report on the sector.

“The days are gone when you can prevent intrusion,” Websense CEO John McCormack noted. “It screams out automation and integration.”

He further told The Wall Street Journal that Websense has outperformed a global commercial cyber market, growing at around 8 percent a year, with a Top 10 market position in monitoring. Going forward, Massachusetts-based Raytheon anticipates that the new joint venture will deliver high-single-digit revenue growth next year and mid-double-digit growth in 2017. They further predict the new venture will turn a profit from Day 1 – good news for Raytheon, which will have an 80 percent stake in the cyber venture (Vista Partners LLC will hold 20 percent).

Raytheon is investing $965 million in cash, providing a $600 million loan and injecting $400 million of existing cyber assets into the as-yet unnamed venture.