Websense Inc. (NASDAQ: WBSN) finds itself in a mixed position as it reportedly is exploring its merger possibilities.  Shares originally popped up almost 10% to $22.37 when we first covered this on March 16 on reports that it was exploring a sale (or other alternatives) with the help of Frank Quattrone’s Qatalyst Partners.

Websense is a phenomenal company.  Its web, data, and email filtering technology undoubtedly saves companies endless dollars and endless technology headaches and endless wasted hours from filtering out websites, content, and data that are deemed inappropriate or which are deemed to be infiltrating that could harm a user’s computer.

What is interesting is that both Novell Inc. (NASDAQ: NOVL) and Lawson Software, Inc. (NASDAQ: LWSN) are larger and both are involved in pending mergers.  Websense is arguably the most impressive of these three companies without considering its sub-$1 billion market cap today. Though Websense seems expensive, it may be very cheap to the right buyer .  Lawson is far from cheap and Novell went almost nowhere in more than a decade, and we admit that the conservative stance may not be reflected by a true technology buyer.

The sale was initially touted as a $1 billion possibility and we would note that Websense ended 2010 with some $77.6 million in cash and with $67 million in direct long-term debt. We also cannot help but notice more than 60% of the company’s assets are classified as “goodwill and intangible assets” and Yahoo! actually classifies the net tangible assets as being -$281.86 million even if its total equity is listed as $131.66 million.

The world of data security has consolidated and it is possibly the recent McAfee acquisition by Intel Corporation (NASDAQ: INTC) which has gotten data security companies back on the M&A radar.

There is good news despite our overly conservative concerns.  Thomson Reuters has non-GAAP estimates of $1.51 EPS and $363.3 million in revenues for 2011 and $1.66 EPS and $378.6 million in revenues for 2012.  At $22.89 today, Websense trades with forward multiples as follows:

• 2011 is 15-times earnings and 2.56-times revenues
• 2012 is 13.8-times earnings and 2.45-times revenues

Aggressive growth investors who think that Websense could be worth far more to a strategic buyer can easily argue that this company is cheap and that it could fetch a higher price.  Conservative investors who would look at Websense solely from the eyes of a financial buyer (private equity) have plenty of ammunition to argue that the stock is expensive.  Our take is a mix of the above. Websense is expensive from a financial buyer’s point of view but the company would be an incredible bolt-on acquisition that could instantly be worth far more for a solid strategic buyer.

We’d probably be a bit surprised if Websense gets gobbled up by a private equity buyer.  If so, then it means that the EBITDA and ‘hidden value’ calculators came out in a manner which we do not evaluate companies on.  But… With Dell Inc. (NASDAQ: DELL) and Hewlett-Packard Co. (NYSE: HPQ) having almost an insatiable desire to acquire services and product suites, with Intel Corporation (NASDAQ: INTC) having Pac-Manned McAfee, and with the myriad of security solutions that are greatly needed today, there is no reason to not believe that Websense will garner interest from a strategic buyer.

The market cap today is roughly $930 million.  A $1 billion acquisition will not even take the $22.89 price above the 52-week high as its 52-week range is $17.03 to $27.96.  Websense shares were in the low-$30s on a split-adjusted basis at its peak back in 2005 and 2006.

If you were to hold a gun on us to pick an ultimate value for a buyout, it seems that there is probably more than the 7.5% implied upside to the $1 billion mark and an implied $24.60 share price from a strategic buyer.  A strategic acquisition of Websense makes plenty of sense.  Does that mean it can fetch north of $30.00?  That is another issue and an issue we will leave up to the potential buyers out there.

JON C. OGG

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