redhawk security - blair competition 2013
TRANSCRIPT
Miami University, Oxford Ohio ▪
Connor McDonnell | Jake Simon | Jed Sekaran | Kathryn Amato
RedHawk SecurityA Leader in IT Security Services
Discussion Materials: November 2013
Executive Summary
Company Overview2
Industry Landscape7
Valuation Analysis9
Strategic & Financial Buyers18
Summary & Recommendation20
1
AgendaTable of Contents
Executive Summary
A Leading IT Security Company
Executive Summary
Key Highlights
A full-service IT Security company that focuses on customer needs, customization, and overall protection
Attractive Story
Strong Financials &
Valuation
Summary
RedHawk Security and Sea Capital should engage in the process of a sell-side M&A transaction in order to seek an optimal exit opportunity with a strategic or financial buyer
The most ATTRACTIVE opportunity that would derive the highest implied
valuation would be a strategic exit
Implied Valuation Range: ~$528 - $633M
The most APPROPRIATE and ideal consideration however would be a
leveraged buyout with a financial sponsor
Implied Valuation Range: ~$296 – $340M
The Company continues to perform remarkably well:
Revenue CAGR 2010 – 2013E = 23%
EBITDA CAGR 2010 – 2013E = 13%
Strong and consistent free cash flow generation
After conducting several methods of valuation and case scenarios, RedHawk’s total AVERAGE implied EV valuation is within a range of
~$383 - $477M (low: ~$184M | high ~$849M)
RedHawk Security provides customized security services and infrastructure solutions that enable businesses to better protect data and digital information, which in turn allows businesses to focus their energy on accomplishing their long term goals and aspirations
Unique business model that provides a variety of information and data security solutions
Structure the “right for me offering” to meet customer needs, drive innovation, and enable greater manageability
Profound executive leadership with extensive industry expertise and track record execution
18.0% 16.0% 17.8% 16.4%
0%
20%
40%
60%
$0
$200
$400
$600
$800
$1,000
2010 2011 2012 2013E
Extensive Experience
Revenue, CAGR, Gross Margin
Possible Strategic and Financial Buyers
Company Industry
Paul Brown | President and CEO 13 23
John Harbaugh | Chief Financial Officer 1 8
Woody Hayes | Executive VP of Sales and Marketing 1 6
Jim Tressel | Executive VP of Service 10 18
Sean Payton | Chief Technology Officer 3 3
1
Company Overview
Leading independent, pure-play IT security value-added reseller (VAR) with a powerful business model
70.1%
14.1%
7.0%
4.0% 3.0% 1.8%
Products Managed ServicesConsulting MaintenanceTraining Project Management Office
Customizes and resells IT security software products to fit customer’s
unique structure and desires (act as a VAR)
Advises customers/suppliers about which products to purchase/sell
Offers full spectrum of consulting, maintenance and training to ensure
proper implementation and operation
Specific offerings include: data and security management, application
security, and security assessment
RedHawk Security’s Story at a Glance
Business Profile National Footprint Across All Regions
Revenue Sources (% of 2012 Rev.)
•$600+ million in revenue
•300+ employees
•2,500+ customers (including 50 of Fortune 100)
•125+ product suppliers
•1,250 annual consulting projects
•27 offices nationwide; HQ in Oxford, Ohio
•75+ security services offerings
Solid Positioning
•Industry leader in a high growth field within a diverse
set of vertical and horizontal industries
•Inclusive portfolio of products and services
•#1 channel partner for suppliers
•Blue chip and Fortune 100 & 500 customer base
•Incomparable financial performance
•Extensive industry experience with Management
Strong Business
Highlights
Office LocationOffice Location with Training FacilityHeadquarters
2
Security Services
Compelling Business Structure Able to capitalize on accelerating IT security demand due to inclusive services and solution offerings
Supplier
•Utilize RedHawk Security to market and customize IT products for companies across various sectors
RedHawk Security
•Personalize supplied software products for unique demands of customers
Customer
•Use customized software from RedHawk to protect data and proprietary information, while utilizing consulting and advisory services in order to maximize security effectiveness
Nationwide teamfocused ondeliveringsolutions acrossall service lines
Project Management OfficeAdvise companies
strategically across several service lines such as information
assurance andsecurity integration
ConsultingUnique programs that provide customized education services via multiple outlets
TrainingInclusive set of risk management, compliance, and cost reducing services
Managed Services
Regular maintenance checks to ensure optimal performance of supplier products
Maintenance
IT security products enhanced to fit customer unique needs in order to protect and prevent all organizations from security and information threats
Products
Comprehensive Portfolio of IT Security Offerings
Security Solutions
70.1%
14.1%
3.0%
4.0%
7.0%
1.8%
3
$0
$200
$400
$600
$800
$1,000
$1,200
2010 2011 2012 2013E 2014P 2015P
Service
Product
18.0% 16.0% 17.8% 16.4% 16.6% 16.2%
0%
10%
20%
30%
40%
50%
60%
$0
$200
$400
$600
$800
$1,000
$1,200
2010 2011 2012 2013E 2014P 2015P
Historical Performance and Management Projections
Revenue, CAGR, and Gross Margin EBITDA Growth and Margin
Revenue Streams Adjusted Free Cash Flow
RedHawk consistently produces strong recurring results while providing assertive projections
4.4%3.5%
5.4%3.4%
4.9% 5.3%
0%
5%
10%
15%
20%
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
2010 2011 2012 2013E 2014P 2015P
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
2010 2011 2012 2013E
Source: Company Material4
2010-2015P
CAGR
21.4%
20.5%
Significantly help drive the sales of suppliers
Connects established software suppliers with Blue-Chips
customers
Considered an “essential” partner with suppliers
Considered the #1 or #2 partner for their top 20
suppliers
Top 10 suppliers demonstrate longstanding tenure
Product Suppliers & Customer Base
Partnerships with Top Suppliers Diverse Customer Base Strong Customer Relationships
Strong business model is derived from partnership with suppliers and diverse customer base
Suppliers Customers
2,500 + total customers across multiple industry verticals
Customers includes 50 Fortune 100 accounts across a
wide variety of different industries
Over 90% customer retention
298 new customers were added in 1H 2013
Top 10 customers demonstrate strong revenue growth
with greater manageability after initial contact with
RedHawk
Other, 27%
Federal Gov't, 19%
Tech. 9%
Financial 6%
Healthcare6%
Education5%
MFG. 5%
Banking 4%
Consulting4%
State & Local Gov't 4%
Retail 3%
Insurance 2% Food & Beverage 2%
Legal 2% Utilities 2%
Source: Company Material5
REDHAWKSECURITY
Key Opportunities & Potential Risks
IT security spending for large Fortune 100 type companies have projected to grow at a rate of 3% going forward, while medium sized businesses plan to spend nearly 7 to 10% more
Red Hawk is only in contact with ~50 of the Fortune 100 companies and only 33% of Fortune 1000
This ultimately leaves a significant amount of market share for RedHawk to capture
Fortune Company Analysis
Noteworthy growth opportunities outweigh potential headwinds
Growth Opportunities Risks & Threats• Growing need for security awareness• Rising demand for cloud computing• Constant changes in customer needs for
anti-virus software and new infrastructure • “Big Data” requires innovative security
systems that are more risk-aware• Growth in demand for intellectual
property, financial integrity, and identities• R&D investments to support core solutions
• Significant momentum in M&A; opportunity to acquire smaller/niche companies
• Opportunity to gain market share within the Fortune 100 companies
• Increased need to protect proprietary information especially within healthcare and financial industry
• Geographic and international expansion due to growth from emerging markets
• Litigation if a third party asserts security firms infringing on intellectual property
• Products may fail to protect customers, in turn destroying reputation
• Economies and financial markets remain volatile which limits technological expansions
• Rapid technological changes within the anti-virus software industry
• Government regulations; compliance with new and changing laws
• Dependent on supplier products• Difficulties in addressing new viruses with
other complex computer security problems
• Poor operating leverage • New entrants within the industry • Competition from larger IT firms
Near-Term
Long-Term
Source: Company Material, Industry Research6
Industry Landscape
Billions of dollars are lost to cyber crime, data loss, and security breaches each year
The private sector is a main customer for IT security, with exception of the Government
In order to fully understand business risks and create a defensive system with awareness, automation and visibility, there is an increasing need for security consulting
IT systems are increasingly complex and continually evolving, which underscores the need for managing security products
Since consumers needs continue to evolve (software preference, performance needs, mobility, cloud, privacy) demand for innovation and IT security understanding will continue to last
Industry Landscape
It Security & Consulting Background Security Software Publishing in U.S. (Billons)
40%
40%
20%
Corporate Data Security
Security Threat Protection
Cost Reduction and Risk Management
IT Security & Consulting Revenue (Billions) Products & Services Market Segmentation
IT Security & consulting continues to develop further, enabling growth opportunities
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
2012 2013E 2014P 2015P 2016P 2017P
Source:: Industry Research, Investor Presentations7
$3.0
$5.0
$7.0
$9.0
$11.0
$13.0
2012 2013E 2014P 2015P 2016P 2017P
Overall industry trends establish a need for RedHawk’s services and solution offerings
Demand and Profitability Online storage creates vulnerability for proprietary data
Growing demand for security in finance and insurance sectors
Computer investment growth facilitates demand for more secure and defensive software
Mobile security software will provide high revenue growth in the next five years
Industry wide revenue growth attracts strategic newcomers/investors
Technological Changes Cloud computing adds complexity to IT environment
Management teams feel more comfortable hiring IT consultants to prevent security issues rather then risking breach
Increased IT and Security Breaches Hackers cause brand, reputation, and financial damage
High-profile security breaches have drawn public attention
Acquisitive Environment Companies will continue to focus on industry vertical specialization
Strategic buyers are likely to stay acquisitive for next 3-5 years
Sticky revenue, higher margins and a shift to the cloud push software deals ahead
Large companies continue to integrate hardware and software business segments
Recurrent deal activity from traditional buyers with increasing growth from non-traditional buyers
Deal value has recovered to nearly 15.0x in 2011
PE industry continue fundraising while deal flow activity remains constant
IT Security Growth
Drivers of IT Security Growth Industry M&A Activity
Incredibly Large Universe Drives Demand
Accounts • 5 billion decoy accounts
Email • 294 billion email messages daily
Web • 1 billion requests daily
Devices • Over 4 billion used daily
Online• Over 260 billion hours spent online per
month
Social
Media• Over 1.8 billion social networking users
Source:: Industry Research, Investor Presentations8
3.0x
5.0x
7.0x
9.0x
11.0x
13.0x
15.0x
17.0x
19.0x
2009 2008 2010 2011
Median Mean
Valuation Analysis
Comparable Companies SnapshotCompetitive landscape strongly relates well with RedHawk Security
Source:: Bloomberg9
LTM
EBITDA Revenue/LTM
EPS
/Est. EPS
2014E
/ LTM
EBITDA
/ LTM
Revenue
/2014E
EBITDA
/2014E
Revenue
Primary
IT Security Services & Solutions
SYMANTEC CORP SYMC US 25.13$ 15,749$ 17,553$ 1,883$ 6,947$ 1.08$ 21.1x 11.8x 8.4x 2.3x 6.0x 2.2x 10.8% 27.1% 1.1x 1.80
TREND MICRO INC TMICF US 38.14 3,973 5,273 382 1,157 1.42 30.2x 26.6x 11.8x 3.9x 11.6x 3.6x 16.3% 33.1% 0.0x 2.22
AVG TECHNOLOGIES AVG US 24.28 1,314 1,320 125 396 1.29 17.0x 10.4x 10.5x 3.3x 8.3x 2.7x 17.7% 31.6% 0.5x 0.40
CHECK POINT SOFTWARE TECH CHKP US 57.57 7,931 11,458 765 1,364 3.14 18.8x 15.5x 10.4x 5.8x 9.0x 5.3x 45.9% 56.1% 0.0x 1.58
FORTINET INC FTNT US 19.69 2,699 3,201 104 571 0.38 60.0x 35.1x 26.0x 4.7x 17.5x 4.0x 10.5% 18.2% 0.0x 2.49
Secondary
BI Software | Data Management | Consulting
COMPUWARE CORP CPWR US 10.85$ 2,263$ 2,329$ 158$ 946$ (0.08)$ 50.5x 18.5x 14.3x 2.4x NA 2.2x -1.9% 16.7% 0.1x 2.28
MICROSTRATEGY INC MSTR US 97.39 769 1,101 35 576 5.59 173.9x 51.0x 21.8x 1.3x 15.8x 1.3x 10.9% 6.1% 0.0x 7.61
CA INC CA US 29.75 12,261 13,557 1,837 4,626 2.30 11.9x 11.7x 6.7x 2.7x 7.4x 2.7x 22.7% 39.7% 0.7x 1.52
CITRIX SYSTEMS INC CTXS US 57.21 10,007 10,720 610 2,785 1.68 34.3x 16.6x 16.4x 3.6x 9.8x 3.0x 11.4% 21.9% 0.0x 1.28
JUNIPER NETWORKS INC JNPR US 20.82 8,688 10,481 658 4,469 0.59 30.6x 15.5x 13.2x 1.9x 7.1x 1.8x 6.7% 14.7% 1.5x 1.52
Minimum 10.85$ 769$ 1,101$ 35.3$ 395.6$ (0.1x) 11.9 10.4x 6.7x 1.3x 6.0x 1.3x -1.9% 6.1% 0.0x 0.40
Maximum 97.39 15,749 17,553 1,883 6,947 5.6x 173.9 51.0x 26.0x 5.8x 17.5x 5.3x 45.9% 56.1% 1.5x 7.61
Median 27.44 5,952 7,877 496 1,260 1.4x 30.4 16.0x 12.5x 3.0x 9.0x 2.7x 11.2% 24.5% 0.0x 1.69
Average 38.08 6,565 7,699 656 2,384 1.7x 44.8 21.3x 13.9x 3.2x 10.3x 2.9x 15.1% 26.5% 0.4x 2.27
Weighted Average Analysis
LTM
EBITDA Revenue /LTM
EPS
/Est. EPS
2014E
/ LTM
EBITDA
/ LTM
Revenue
/2014E
EBITDA
/2014E
Revenue
Primary 70% 32.96$ 6,333$ 7,761$ 651.8$ 2,086.7$ 1.5x 29.4 19.9x 13.4x 4.0x 10.5x 3.6x 20.2% 33.2% 0.3x 1.70
Secondary 30% 43.20$ 6,797$ 7,638$ 659.7$ 2,680.3$ 2.0x 60.2 22.7x 14.5x 2.4x 10.0x 2.2x 10.0% 19.8% 0.5x 2.84
LTM
Profit
Margin
LTM
EBITDA
Margin
Total
Debt
/EBITDA
PEG
Ratio
PEG
Ratio
Company Name Weight PriceEnterprise
Value
Market
Cap
Trailing
EPS
Price Enterprise Value
Price Enterprise Value LTM
Profit
Margin
LTM
EBITDA
Margin
Total
Debt
/EBITDA
Company Name Ticker PriceEnterprise
Value
Market
Cap
Trailing
EPS
Key Statistics
LTM Profit Margin
LTM EBITDA Margin
LTM EV/EBITDA
LTM
EV/REV.
Exceptional Performance Compared to Peers
Competitive Landscape
RedHawk surpasses most peers in strategy, vision, and operational performance
12.0x13.0x14.0x15.0x
PrimaryGroup
SecondaryGroup
RedHawk
1.0x
3.0x
5.0x
PrimaryGroup
SecondaryGroup
RedHawk
0.0%
20.0%
40.0%
PrimaryGroup
SecondaryGroup
RedHawk
0.0%10.0%20.0%30.0%
PrimaryGroup
SecondaryGroup
RedHawk
Strategy & Vision
Ex
ecu
tio
n &
Pro
du
ct O
ffe
rin
gs
RedHawk Security
Source: Bloomberg, Industry Research, Investor Presentations10
The analysis included 10 comparable companies split between
two groups (Primary and Secondary) within the IT Security
Services and BI Software/Consulting industries
A Weighted Average Analysis was conducted within the two
groups in order to derive suitable average (mean) multiples (EV
/ EBITDA and EV / Revenue)
After careful consideration regarding RedHawk’s market size,
service offerings, and competitive landscape, weightings for the
comparable analysis consisted of the following:
Primary: 70% (Security Solutions)
Secondary: 30% (Security Services: Consulting,
Management, Training)
Based upon the weighting, the analysis implies the
following implied valuation for RedHawk:
Comparable Analysis Summary
Public COMPS Valuation Overview Implied EV and EV/EBITDA: RedHawk
Peer Group EV/EBITDA
Peer Group EV/Revenue
RedHawk’s implied valuation derives a superior result
$100
$300
$500
11.7x 12.7x 13.7x 14.7x 15.7x
Mil
lio
ns
5.0x
15.0x
25.0x
1.0x
3.0x
5.0x
7.0x
Source:: Bloomberg11
2013E
Revenue
2013E
EBITDA
2014P
EBITDA 768.9$ 26.4$ 44.3$
Weighted
EV / 2013E Revenue 3.5x
EV / 2013E EBITDA 13.7x
EV / 2014P EBITDA 10.3x
Implied 2013E EV: 362.43$
Implied 2014P EV: 458.01$
Valuation Summary
The analysis includes deal activity within the IT Security Services &
Consulting Industry within the past 6 years
The universe selection includes a total of 10 transactions: 6 strategic
and 4 financial
Two notable transactions are included within the precedent list;
however the key statistics are not included within our valuation
summary due to abnormalities
Precedent Transaction Environment
Universe Analysis
Historical transaction comparable set benchmarks a strong exit multiple
2013E EV & Exit Multiple: RedHawk
$200
$300
$400
$500
15.0x 16.0x 17.0x 18.0x 19.0x
Mil
lio
ns
Source:: Bloomberg12
Target Target Target Target Transaction Value
EV LTM Rev. LTM EBITDALTM EBIT / LTM EBITDA / LTM EBIT / LTM Rev.
7/2/2012 BreakingPoint Systems Inc IXIA Cash 160$ 160$ 40$ 8$ 7$ 20.7x 23.0x 4.0x
9/1/2011 Paradigm Holdings Inc CACI international Inc Cash 62 71 44 3 3 19.1x 22.3x 1.4x
7/15/2011 SAVVIS Inc CenturyLink Inc Cash 3,065 3,049 973 232 41 13.2x 74.1x 3.1x
9/13/2010 ArcSight LLC Hewlett-Packard Co Cash 1,485 715 195 26 32 27.6x 31.5x 3.7x
8/19/2010 McAfee Inc Intel Corp Cash 6,594 6,111 2,065 453 22 13.5x 21.7x 3.0x
6/29/2006 RSA Security EMC Corp Cash 2,035 1,828 340 45 NA 40.8x 61.9x 5.4x
Financial
6/2/2010 SonicWALL Inc Thoma Bravo LLC Cash 485 263 209 32 12 8.3x 11.7x 1.3x
5/4/2010 Sophos Apax Partners Cash 581 NA 365 64 NA 9.1x NA 1.6x
4/13/2009 Entrust Inc Thoma Bravo LLC Cash 99 66 96 9 14 7.8x 14.2x 0.7x
4/26/2007 Websense/Surfcontrol Vista Equity Partners Cash 401 530 359 54 15 9.7x 15.5x 1.5x
7/23/2013 Sourcefire Inc Cisco Systems Inc Cash 2,185 1,548 247 17 9 90.9x 172.0x 6.3x
9/22/2008 Secure Computing Corp McAfee Inc Cash 412 407 252 5 NA 89.8x NA 1.6x
High: 6,594$ 6,111$ 2,065$ 453$ 41$ 40.8x 74.1x 5.4x
Mean: 1,497 1,421 469 93 18 17.0x 30.7x 2.6x
Median: 533 530 274 38 15 13.3x 22.3x 2.3x
Low: 62 66 40 3 3 7.8x 11.7x 0.7x
Notable Transactions
Announced
DateTarget Company Acquirer
Payment
Type
Transaction
Value
Strategic
EV / EBITDA 17.0x
RedHawk 2013E EBITDA 26.4
Implied EV: 448.45$
Valuation Summary
Total Analysis 17.0x
Strategic 22.5x
Financial 9.0x
Strategic & Financial 15.7x
Average Exit Multiples
Summary of Mean 15.0x 16.0x 17.0x 18.0x 19.0x
Implied Enterprise Value: 395.6$ 422.0$ 448.4$ 474.8$ 501.2$
Mean 20.0x 21.0x 22.0x 23.0x 24.0x
Implied Enterprise Value: 528.0$ 554.4$ 580.8$ 607.2$ 633.6$
Mean 7.0x 8.0x 9.0x 10.0x 11.0x
Implied Enterprise Value: 184.8$ 211.2$ 237.6$ 264.0$ 290.4$
Total Analysis
Strategic
Financial
Base Case – Financials & AssumptionsSolid performance among historical and projected years
Assumption Justification:
Model represents base case financials with conservative estimates overall
2010 – 2015P Assumptions and projections based off managements financial guidance
2016P – 2018P Assumptions and projections based on conservative estimates that step past growth and margins a bit downward, if not held relatively constant
13
Historical Estimated
2010 2011 2012 2013 2014 2015 2016 2017 2018
Net Revenue 411.5$ 544.5$ 636.2$ 768.9$ 906.9$ 1,052.2$ 1,189.0$ 1,307.9$ 1,399.4$
COGS 337.5 457.3 522.8 642.7 756.7 881.4 998.7 1,105.2 1,189.5
Gross Profit 74.0 87.2 113.4 126.2 150.2 170.8 190.2 202.7 209.9
EBIT 11.9 11.9 27.2 19.3 37.4 49.4 54.8 59.5 62.6
D&A 6.3 6.9 7.4 7.1 6.9 6.8 7.0 7.2 7.4
Adj. EBITDA 18.2$ 18.8$ 34.6$ 26.4$ 44.3$ 56.2$ 61.8$ 66.7$ 70.0$
CapEx (1.6)$ (5.3)$ (12.5)$ (6.9) (1.8) (2.6) (2.9) (3.2) (3.5)
Change in NWC N/A (0.3)$ (0.2)$ (0.7)$ (1.3)$ 0.3$ 0.5$ 0.6$ 0.7$
Growth
Revenue NA 32.3% 16.8% 20.9% 17.9% 16.0% 13.0% 10.0% 7.0%
Gross Profit NA 17.8% 30.0% 70.5% 19.0% 13.7% 11.4% 6.6% 3.5%
Adj. EBITDA NA 3.3% 84.0% 45.1% 67.8% 26.9% 10.0% 7.9% 4.9%
Margins
Gross Margin 18.0% 16.0% 17.8% 16.4% 16.6% 16.2% 16.0% 15.5% 15.0%
Adj. EBITDA 4.4% 3.5% 5.4% 3.4% 4.9% 5.3% 5.2% 5.1% 5.0%
Management Expectations Bank Expectations
Projected
Cost of Debt
Pre-Tax Cost of Debt 4.0%
Assumed Tax Rate 38.0%
After-Tax Cost of Debt 1.5%
Cost of Equity
Beta 1.07
Risk-Free Rate 2.7%
Market Risk Premium 7%
Small Stock Premium 2.5%
Cost of Equity 10.0%
WACC Calculation
Equity Weight 94.1%
Debt Weight 5.9%
WACC 9.5%
WACC Analysis
Financial Statement
Beta & WACC Calculation
Company Beta D/E Bu
SYMANTEC 0.98 11.9% 0.91
TREND MICRO 0.38 0.0% 0.38
AVG TECHNOLOGIES 1.06 5.0% 1.03
CHECK POINT SOFTWARE 0.88 0.0% 0.88 D/E Ratio 6.4%
FORTINET 0.94 0.0% 0.94 Tax Rate 38.0%
COMPUWARE 0.87 0.6% 0.87 Average Bu 1.07
CITRIX SYSTEMS 2.24 0.0% 2.24
MICROSTRATEGY 1.05 0.0% 1.05
CA INC 1.00 0.6% 1.00
JUNIPER NETWORKS 0.98 0.0% 0.98
Average Beta (Public Comprable Set) 1.03
RedHawk Security
Discounted Cash Flow Analysis (Base Case)Conservative case assumptions derive a high implied valuation for RedHawk
14
2014 2015 2016 2017 2018
Revenue 906.9$ 1,052.2$ 1,189.0$ 1,307.9$ 1,399.4$
EBIT 37.4 49.4 54.8 59.5 62.6
Taxes at 14.2 18.8 20.8 22.6 23.8
EBIT After Tax 23.2 30.6 34.0 36.9 38.8
Plus: D&A 6.9 6.8 7.0 7.2 7.4
Tax Adjusted Unlevered Operating CF 30.1 37.4 41.0 44.1 46.2
Less: Capital Expenditures (CAPEX) (1.8) (2.6) (2.9) (3.2) (3.5)
Less: Increase (Decr.) in NWC (1.3) 0.3 0.5 0.6 0.7
Free Cash Flow (FCF) 33.2$ 39.7$ 43.5$ 46.7$ 48.9$
Date of Cash 2014 2015 2016 2017 2018 2018
Exit Multiple Method
Terminal Value 944.6$
Cash Flow (FCF) 33.2$ 39.7$ 43.5$ 46.7$ 48.9$ 944.6$
Present Value of Cash Flow 30.3 33.1 33.1 32.5 31.1 600.0
Perpetual Growth Method
Terminal Value 716.7$
Cash Flow (FCF) 33.2$ 39.7$ 43.5$ 46.7$ 48.9$ 716.7$
Present Value of Cash Flow 33.2 36.3 36.3 35.6 34.0 498.5
Exit Multiple Perpetual Growth
Implied Enterprise Value 760.2$ 673.9$
Projected
Projected
#### 11.5x 12.5x 13.5x 14.5x 15.5x
7.5% 729.8$ 778.6$ 827.3$ 876.1$ 924.8$
8.5% 699.8 746.3 792.9 839.4 885.9
9.5% 671.3 715.8 760.2 804.7 849.1
10.5% 644.3 686.8 729.2 771.7 814.2
11.5% 618.7 659.3 699.9 740.5 781.1
Enterprise Value
Discoun
t Rate
WACC
Exit Multiple# #### 11.0% 13.0% 15.0%
3.0% 509.2$ 509.2$ 509.2$
4.0% 634.7 634.7 634.7
5.0% 760.2 760.2 760.2
6.0% 885.7 885.7 885.7
7.0% 1,011.2 1,011.2 1,011.2
Enterprise Value
Revenue Growth (Exit)
EBITDA
Margin
#### 1.5% 2.5% 3.5%
7.5% 802.1$ 933.4$ 1,130.4$
8.5% 690.8 782.0 909.8
9.5% 607.4 673.9 762.7
10.5% 542.5 592.9 657.7
11.5% 490.6 529.9 578.9
Enterprise Value
Perpetuity Growth
Discoun
t Rate
WACC
Sensitivity Analysis
Assumptions & InputsRedHawk
Taxes 38%
Exit Multiple 13.5x
Perpetuity Growth 2.5%
Discount Rate (WACC) 9.5%
Valuation Date as of 12/31/2013
Net Debt $3.6
Analysis proves that RedHawk Security is exceedingly valuable
Valuation is based on 5-year projection estimates of income statement and cash flow items in order to derive a terminal value and implied valuation
Exit Multiple: EV/EBITDA multiple benchmarked off Precedent Analysis and Public COMPS
Precedent Analysis = 17.0x
Public Comparable Analysis = 13.7x
Conservatively accepted a lower multiple for Base Case scenario:
DCF = 13.5x
Conservative Exit Multiple Range:
11.5 – 15.5x
Perpetual Growth: Benchmarked off GDP and inflation (2.5% growth)
Discounted Cash Flow Summary
Summary of Analysis Growth Scenario: Accelerated Case
$100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000
11.5x 12.5x 13.5x 14.5x 15.5x
5%
8%
11%
14%
17%
En
terp
rise
Val
ue
(M)
Exit Multiple
WA
CC
##### 11.5x 12.5x 13.5x 14.5x 15.5x
7.5% 1,167.3$ 1,250.5$ 1,333.7$ 1,416.9$ 1,500.2$
8.5% 1,117.7 1,197.1 1,276.6 1,356.0 1,435.5
9.5% 1,070.6 1,146.5 1,222.4 1,298.3 1,374.2
10.5% 1,026.1 1,098.6 1,171.1 1,243.7 1,316.2
11.5% 983.8 1,053.2 1,122.5 1,191.8 1,261.2
Discount
Rate
WACC
Enterprise Value
Exit Multiple
$100
$600
$1,100
$1,600
11.5x 12.5x 13.5x 14.5x 15.5x
5%
8%
11%
14%
17%
20%
En
terp
rise
Val
ue
(M)
Exit Multiple
WA
CC
Reflects same exit multiple at 13.5x
2010 – 2015P projections based off managements financial guidance
2016P – 2018P Margins and growth slightly improve
Largest impact and value factor is the assumption of EBITDA margin improving
2016 2017 2018
Growth
Revenue 17.0% 17.5% 18.0%
Gross Profit 22.5% 24.4% 24.6%
Adj. EBITDA 31.4% 27.3% 27.1%
Margins
Gross Margin 17.0% 18.0% 19.0%
Adj. EBITDA 6.0% 6.5% 7.0%
15
LBO Analysis Assumptions, calculations and return analysis
16
Total funded debt of 4.80x with estimated 2013 EBTIDA of $27.4 M
Assuming a 15.0x purchase and exit multiple due to company specific
initiatives, growth factors, and a higher implied value
Support: average exit multiple of strategic (22.5x) and financial (9.0x) precedents
Assuming a 9.0x purchase due to a more conservative approach and
valuation for a financial sponsor
Support: average exit multiple for financial precedents (9.0x)
Below is a sensitivity analysis reflecting the 15.0x LBO valuation
Analysis SummaryNormalized Assumptions
AssumptionsTransaction Close 12/31/2013
Senior Leverage at Closing 3.20x
Total Leverage at Closing 4.80x
Management Option Pool 0.0%
Purchase Price Assumptions2013E EBITDA $26.4 $26.4
Purchase Multiple 15.0x 9.0x
Enterprise Value $396.0 $237.6
Less: Net Debt ($3.6) ($3.6)
Implied Equity Value $392.4 $234.0
Assuming 9.0x Multiple
Sources $ % Leverage
Excess Cash $3.0 1.2%
Revolver # 0.0 0.0% 0.00x
Term Loan A (Senior Debt / EBITDA) 84.5 34.1% 3.20x
Term Loan B (Subordinated Debt / EBITDA) 42.2 17.1% 1.60x
Sponsor Equity 98.1 39.6%
Management 19.8 8.0%
Total (Total Debt / EBITDA) $247.6 100.0% 4.80x
2013 2018E
$ % $ % IRR
$98.4 # $557.8 ### 41.5%
Implied Sponsor Equity Contribution/Return
396.5$ 28.6% 31.6% 34.6% 396.5$ 28.6% 31.6% 34.6%
13.0x 391.0$ 361.8$ 336.2$ 4.3x 420.7$ 386.6$ 357.0$
15.0x 430.0 396.5 367.2 4.8x 430.0 396.5 367.2
17.0x 468.9 431.2 398.2 5.4x 439.3 406.2 377.5
Exit
Multiple
Total
Debt
IRR IRR
Assuming 15.0x Multiple
Sources $ % Leverage
Excess Cash $3.0 0.7%
Revolver # 0.0 0.0% 0.00x
Term Loan A (Senior Debt / EBITDA) 84.5 20.8% 3.20x
Term Loan B (Subordinated Debt / EBITDA) 42.2 10.4% 1.60x
Sponsor Equity 243.8 60.1%
Management 32.5 8.0%
Total (Total Debt / EBITDA) $406.0 100.0% 4.80x
2013 2018E
$ % $ % IRR
$244.1 # $961.6 ### 31.6%
Implied Sponsor Equity Contribution/Return
237.7$ 38.5% 41.5% 44.5% 237.7$ 38.5% 41.5% 44.5%
7.0x 223.9$ 213.3$ 203.9$ 4.3x 239.7$ 226.0$ 213.9$
9.0x 251.0 237.7 225.9 4.8x 251.0 237.7 225.9
11.0x 278.1 262.0 247.8 5.4x 262.4 249.3 237.9
Exit
Multiple
Total
Debt
IRR IRR
32.098% 3.3x 3.8x 4.3x 4.8x 5.3x 5.8x 6.3x
9.0x 47.9% 50.9% 54.3% 58.2% 62.8% 68.3% 75.2%
11.0x 39.1% 41.1% 43.3% 45.8% 48.5% 51.6% 55.1%
13.0x 32.7% 34.2% 35.8% 37.6% 39.5% 41.6% 43.8%
15.0x 27.7% 28.9% 30.2% 31.6% 33.0% 34.6% 36.2%
17.0x 23.7% 24.7% 25.7% 26.8% 28.0% 29.2% 30.5%
19.0x 20.4% 21.2% 22.1% 23.0% 23.9% 24.9% 26.0%
21.0x 17.5% 18.2% 19.0% 19.7% 20.5% 21.4% 22.3%
Purchase
/Exit
Multiple
Total Leverage Ratio
$150.00 $350.00 $550.00 $750.00 $950.00
Precedent Transactions(Total - 17.0x)
Precedent Transactions(Strategic - 22.0x)
Precedent Transactions(Financial - 9.0x)
Public Comparables(Exit Multiple - 13.7x)
DCF Exit(Base Case - 13.5x)
LBO(Financial Precedents - 9.0x)
LBO(Normalized - 15.0x)
Valuation SummaryAll analyses determine an optimal outcome for growth
Average$383 - $477
Low Base High Low Base High
Precedent Transactions (Total) $395.60 $448.45 $501.20 15.0x 17.0x 19.0x
Precedent Transactions (Strategic) $528.00 $580.80 $633.60 20.0x 22.0x 24.0x
Precedent Transactions (Financial) $184.80 $237.60 $264.00 7.0x 9.0x 11.0x
Public Comparables $309.63 $362.43 $415.23 11.7x 13.7x 15.7x
DCF Exit (Base Case) $671.30 $760.20 $849.10 11.5x 13.5x 15.5x
LBO (Financial Precedents) $225.90 $237.70 $251.00 38.5% 41.5% 44.5%
LBO (Normalized) $367.20 $395.60 $430.00 28.6% 31.6% 33.6%
Average Statistics $383.20 $431.83 $477.73 13.0x 15.0x 17.0x
33.6% 36.6% 39.1%
Valuation Method
Exit / IRRImplied Value
17
Strategic & Financial Options
Potential Strategic Buyers List
Source:: Bloomberg, Google Finance, Yahoo Finance, Company Websites18
Company Name Description
Enterprise
Value
Market
Cap
LTM
Sales Cash
EV/
EBIT Notable Acquisitions Rationale
Intel / McAfee
Designs and manufactures integrated digital
technology platforms and network security
products
$118,945.25 $106,792.26 $52,351.00 $4,881.00 5.3x
McAfee is one of the largest security software
companies; additional acquisitions will
further Intel's competitive advantage
SymantecGlobal provider of security, storage, and systems
management solutions $16,049.01 $17,738.01 $6,947.00 $3,749.00 8.5x
Backupify provides data backup that protects
companies from data corruption and hacking
Cisco / Sourcefire
Provides large to midsize organzations and
government agencies with intelligent cyber
security solutions
$123,106.55 $88,715.55 $48,607.00 $7,925.00 6.5x
Ironport added message security to Cisco's
Self-Defending Network. Ironport
complemented Cisco's threat mitigation
Hewlett-Packard Co.Provider of products, technologies, software, and
solutions $45,124.42 $56,996.42 $113,126.00 $13,251.00 4.3x
Aquiring ArcSight allows HP to provide
compliance management solutions and to
mitigate cyber threat
Juniper
Develops, and sells products and services that
together provide its customers with network
infrastructure
$10,552.38 $8,758.88 $4,469.01 $2,249.90 13.3x
FireEye provides Juniper with network threat
prevention solutions and malware protection
systems
Blue Coat Systems
Provides Web security and WAN optimization
solutions, while offering solutions that provide
visibility, acceleration and security
NA NA $467.18 $361.39 NA
Permeo Technologies gives Blue coat systems
patented dynamic port management and
circuit switching security
Citrix Systems, Inc
Designs, develops and markets technology
solutions that enable information technology (IT)
services
$10,729.50 $10,029.35 $2,784.70 $263.15 16.4x
Gizmox enabled Citrix Systems to improve
their Mobile and Cloud delivery platforms.
Also it enables new HTML-enabled devices to
provide anytime access
RadwareManufactures and markets integrated networking
solutions$642.85 $482.77 $189.30 $16.54 NA
Strangeloop simply improves Radware's
hosting capabilities and mobile sit
optimazation.
IXIADevelops networking testing and compliance
products with security solutions$1,192.82 $1,158.72 $472.35 $55.69 12.3x
BreakingPoint Systems utilizes real-world
applications to mitigate live-security attacks
CACI international Inc
Provides information technology products and
services while delivering client solutions for
system integration, information and security
$1,616.69 $2,163.31 $3,681.99 $64.34 6.7x
Pangia Technologies improves CACI's data
storage aility as well as network security. Six3
gives CACI a larger connection directly to US
Government agencies
CenturyLink
Integrated communications company that provides
comunication services, data management, network
acess, and wireless services
$19,828.31 $40,199.31 $18,192.00 $214.00 4.1x
AppFog and Savvis gave CenturyLink
increased cloud-based hosting serviecs for
web applications
EMC Corp
Provides enterprise storage systems, software,
networks, and services to retrive, manage and
protect information
$52,187.82 $49,571.82 $22,309.51 $7,526.00 8.6x
RSA added indrustry-leading ideantity and
access management encryption to EMC's
expanding security portfolio
Websense
Global provider of unified Web, e-mail and data
security solutions designed to protect data and
users from external and internal threats
NA NA $359.44 $83.69 NA
SurfControl enabled Websense to imrpove
product offerings that better protect cyber
attacks, data theft, and other security issues
Potential Financial Buyers List
Source:: Bloomberg, Google Finance, Yahoo Finance, Company Websites19
PE Capital Overhang / Dry PowderStrategic vs. Financial Industry: Strategic vs. Financial
26% 26%19%
30%
74% 74%81%
70%
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011$0
$400
$800
$1,200
22.5x 9.0x
Mil
lio
ns
2013E 2017E
Based on the Precedent Analysis and the DCF projections conducted, below are the strategic and financial average exit multiples and implied value based on RedHawk’s 2013E and 2017E EBITDA:
Strategic
Financial
$0
$100
$200
$300
$400
$500
2007 2008 2009 2010 2011 2012
Bil
lio
ns
Sponsor Name Description
Criteria /
Investment Size AUM($MM)
Notable/Historical
Acquisitions Rationale
Thoma BravoThoma Bravo is a private equity firm specializing in investing in middle-
market companies in fragmented and consolidating industries$25-$200M $2.73B
Thoma Bravo is interested in investing in businesses who can grow
organically and by acquiring and integrating similar businesses
InvestCorp
Investcorp firm that manages alternative investment products while its
principal client base is in the six countries of the Gulf Co-operation
Council with institutional clients in North America and Europe
$50-$800M $10.5B
Focuses on small to middle market growth companies with a key interest
for technolgoy related companeis, specifically IT security, consulting and
management
Apax Partners LLPApax Partners LLP is a UK-based private equity and venture capital firm
which invests exclusively in a variety of business sectors$10-$650M >$58B
Apax Funds have a proven strategy of sector focused investing, looking for
opportunities where capital, experience and insight can release the potential
of businesses and lead to significant growth
TA Associates Inc
TA Associates is one of early modern-era private equity firms in the US,
that uses a hybrid strategy making growth capital investments in
developing companies through leveraged buyout and recapitalization
transactions
$50-$500M $11.1B
TA Partners with managers of growth companies to help build outstanding
business. They focus on profitable businesses with strong management
teams. Two industry focuses are technology and business services
Vista Equity Partners Vista Equity Partners is a private equity firm focused on investing in
software and technology-enabled businesses$20-$500M $6.45B
The firm has a strong portfolio of software and technology-enabled
business with a focus on long-term value creation. However, they lack a
security software business
GTCR LLC
GTCR LLC is a private equity firm focused on leveraged
buyout, leveraged recapitalization, growth
capitaland rollup transactions
N/A $7B
GTCR is known for its deep expertise in three growth sectors of the
economy: Financial Services & Technology, Healthcare, and Information
Services & Technology
Bloomberg and Pitch Book state there is a substantial amount of capital that firms need to invest
Summary & Recommendation
We recommend that RedHawk and Sea Capital engage in a sell-side M&A process/transaction in order to seek an exit opportunity with a strategic or financial sponsor
The Precedent and Leveraged Buyout analyses best reflect the implied valuation based on this recommendation
The most attractive opportunity that would derive the highest implied valuation will be a strategic exit
The most appropriate and likely consideration however would be a Leveraged Buyout with a financial sponsor
Based on the Precedent and LBO Analysis, RedHawk and Sea Capital should seek an implied valuation range of:
Strategic Buyer
Implied Value: ~$528 - $633
Exit Multiple: ~20.0x – 24.0x
Support: Precedent Analysis – Strategic
Financial Sponsor
Implied Value: ~$296 – $340
IRR: ~34% - 39%
Exit Multiple: ~10.0x – 14.0x
Support:
50% weighted LBO Financial Precedents (9.0x): ~$225 - $251
50% weighted LBO Normalized (15.0x): ~$367 - $430
LBO Total Range = ~$225 - $430
Closing Comments
Overall Recommendation Most Likely Financial Sponsors
A strategic acquisition would most likely derive the highest value for management and the Company
Most Likely and Favorable Strategic Buyers
20
Specific benefits to a strategic exit include: potential synergies, gain in competitive advantage, geographic expansion, product line expansion,
cost reduction, and demand for additional subsidiary companies
- Continues to make acquisitions and promote/raise new investment funds
- Specific IT Security portfolio company continues to make heavy acquisitions (Blue Coat/Crossbeam)
- Reported 56% increase in net income for Fiscal Year 2013
- Successful historical acquisitions for tech firms- Portfolio is full of related IT security companies
- Recently sold security and defense firm (Six3) after rapid expansion; potentially looking for a new security portfolio company
CompanyAnnounced
Deals LTM
25
24
5
1
6
Cash and Near-Cash Equivelents
$2.9
$3.8
$10.6
$19.1
$50.6B
est
Fit
Appendix
Full Financial Statement (Base Case)
Historical Estimated Projected
2010 2011 2012 2013 2014 2015 2016 2017 2018
Revenue 411.5$ 544.5$ 636.2$ 768.9$ 906.9$ 1,052.2$ 1,189.0$ 1,307.9$ 1,399.4$
COGS 337.5 457.3 522.8 642.7 756.7 881.4 998.7 1,105.2 1,189.5
Gross Profit 74.0 87.2 113.4 126.2 150.2 170.8 190.2 202.7 209.9
SG&A 56.3 70.8 80.3 100.3 105.9 114.6 128.4 136.7 140.3
D&A 6.3 6.9 7.4 7.1 6.9 6.8 7.0 6.5 7.0
One-Time Adjustments (0.5) (2.4) (1.5) (0.5) 0.0 0.0 0.0 0.0 0.0
Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
EBIT 11.9 11.9 27.2 19.3 37.4 49.4 54.8 59.5 62.6
D&A 6.3 6.9 7.4 7.1 6.9 6.8 7.0 7.2 7.4
Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Adj. EBITDA 18.2$ 18.8$ 34.6$ 26.4$ 44.3$ 56.2$ 61.8$ 66.7$ 70.0$
CapEx (1.6)$ (5.3)$ (12.5)$ (6.9) (1.8) (2.6) (2.9) (3.2) (3.5)
Change in NWC N/A (0.3)$ (0.2)$ (0.7)$ (1.3)$ 0.3$ 0.5$ 0.6$ 0.7$
Growth
Revenue NA 32.3% 16.8% 20.9% 17.9% 16.0% 13.0% 10.0% 7.0%
Gross Profit NA 17.8% 30.0% 70.5% 19.0% 13.7% 11.4% 6.6% 3.5%
Adj. EBITDA NA 3.3% 84.0% 45.1% 67.8% 26.9% 10.0% 7.9% 4.9%
EBIT 0.0% 128.6% 62.2% 93.8% 32.1% 11.0% 8.5% 5.2%
Margins
Gross Margin 18.0% 16.0% 17.8% 16.4% 16.6% 16.2% 16.0% 15.5% 15.0%
Adj. EBITDA 4.4% 3.5% 5.4% 3.4% 4.9% 5.3% 5.2% 5.1% 5.0%
EBIT 2.9% 2.2% 4.3% 2.5% 4.1% 4.7% 4.6% 4.5% 4.5%
D&A (as a % of Revenue) 1.5% 1.3% 1.2% 0.9% 0.8% 0.6% 0.6% 0.5% 0.5%
CapEx (as a % of Revenue) -0.4% -1.0% -2.0% -0.9% -0.2% -0.2% -0.2% -0.2% -0.2%
Change in NWC (as a % pf Revenue) NA NA NA -0.2% -0.1% 0.0% 0.0% 0.0% 0.1%
SG&A (as a % of Revenue) 13.7% 13.0% 12.6% 13.0% 11.7% 10.9% 10.8% 10.5% 10.0%