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Tech biz: Kaspersky Lab and General Atlantic do a deal



Inside Kaspersky Lab's anti-malware HQ in Moscow,  photo by Steve Ranger/silicon.com
Inside Kaspersky Lab's anti-malware HQ in Moscow, photo by Steve Ranger/silicon.com
Any comparison between the Facebook / Goldman Sachs financing deal and the recent arrival of VC fund General Atlantic (GA) in the capital of Kaspersky Lab should, of course, be taken with a very large grain of salt.

Nonetheless, both are high growth tech companies that have chosen to focus on business development and to postpone an initial public offering.

While the financial crisis was the biggest factor in the steep 2009 - 2010 drop in tech IPO's, going public seems to have become less attractive (or at least less urgent) to many entrepreneurs, due to costs and distractions such as increased regulatory scrutiny, constant filings and high investment banking fees.

The facts

Based in Moscow, Kaspersky Lab is a fast growing player in the domain of end point security, with particular success in the consumer market for malware protection.

On January 20, 2011, it announced an agreement with General Atlantic LLC (GA), a well known, growth-oriented VC firm. Under the terms of the deal, GA will become the second largest shareholder in the privately held company, acquiring a significant stake from a minority shareholder. At this stage, no new capital was injected into the company.

Both companies expect that GA will be an “activist shareholder”, providing expertise and help in growth on a global scale.

Eugene Kaspersky, CEO, co-founder and controlling shareholder of Kaspersky Lab, presented the agreement as a "partnership" and "a strategic step" in the company's global growth plans, with "a long-term, experienced international growth investor."

According to Natalya Kaspersky, Chairperson of the Board, co-founder and a significant minority shareholder, the company had “been approached by many private equity firms during the last decade.” In order to take the next step in global development, the Board chose “a partner who will provide better added value in terms of strategy development and who will help to mature the organisation.”

Financial terms were not disclosed.

Duquesne Group analysis

As could be expected, reports immediately surfaced in the Russian press and then onto the Internet about the financial terms, which have not, however, been confirmed by the companies.

In the always lively and often colorful IT industry, speculation - about whether a price was too high or low and who wins or loses - is a long tradition in what might be called “deals as a spectator sport”, especially in takeover battles.

In this case, the deal is for the friendly acquisition of a minority stake, with CEO Eugene Kaspersky remaining the controlling shareholder. In these circumstances, we would not expect a sophisticated investor such as General Atlantic to pay more than warranted by current market conditions.

Indeed, a rough, "back-of-the-envelope» analysis of the rumored numbers yields valuation parameters in line with the overall Tech M&A environment, where valuations bottomed in early 2009 but came back by end 2010 to pre-crisis levels.

Looking at roughly comparable companies and on a relative basis, the deal looks consistent when compared with the market cap of Symantec, a much larger security company, and entirely reasonable versus the acquisition price of Sophos, a privately held malware specialist, and even more so in the case of McAfee, acquired by Intel with a stiff 50% premium.

However interesting all of this may be for “deal aficionados”, the important question about the agreement is the potential impact of the arrival of GA on the Russian company’s growth and business development.

Duquesne Group recently published a research note based on conversation with Kaspersky Lab. (See "2010: Cyber Crime gets worse, Cyber War gets serious and Kaspersky Lab gets ready".) On the business issues, our conclusion was that the company’s strategy - including a major push into the business market - makes sense, but that successful execution will be very challenging, on the managerial, financial, human and commercial levels.

Overall, we see the new agreement in a very positive light, as a small - but important - step towards successful execution of the company's strategy for global growth. In particular we see three main advantages.


  • Financial flexibility, without the need for a public offering in the short term

The immediate advantage of the deal is to provide an exit strategy for a major minority shareholder, but in a way that the Board considers is aligned with the best interests of the company.
Kaspersky Lab has always been self financing. No new equity was injected and management maintains that the company does not at present need new capital. We believe, however, that at some point it almost certainly will.

The business plans are very ambitious, not only in terms of customers (consumers and business, present and new geographies) but also in terms of a necessarily broader product portfolio. While the company clearly prefers organic to external growth, acquisitions are now on the table.

As a strategic financial partner, GA will have a "ring side seat" on the company's business development and will be well placed to help arrange financing if needed as opportunities arise.

  • Growth expertise, including M&A

The company has achieved remarkable (organic) growth over the last several years by doing well in its current market segments. It has now reached the point where maintaining this high growth and value creation will also require it to move into related segments and expand in newer geographies.

As noted above, acquisitions will probably be a part of the picture, a domain in which the company recognises that it has limited expertise. The agreement will allow it to call upon the M&A skills of its partner, for example, for targeting opportunities, ensuring due diligence and achieving successful integration.

More broadly, GA will be able to provide a welcome external viewpoint on a variety of business development issues. It sometimes might take on, as appropriate, the always useful role of “devil’s advocate”, challenging the assumptions and reasoning behind strategic plans to help ensure optimal decisions.

A word of caution is in order. This situation will be entirely new for Kaspersky Lab, although not for GA. As in any relationship, everything looks good at the beginning. Over time there will probably be some divergent opinions, possibly people issues and of course normal internal company politics. All of this should be manageable, but it is good to keep in mind the well known truth that an important business relationship - like a marriage - takes work to make it work.

  • Reinforcement of the brand for the business market

The Russian company's brand is already strong in the consumer market, at least in its current main geographies. In any case, tech consumers very rarely consider shareholding structures in making their choices.

In the business market, it's another story. For large corporates, in particular, a potential supplier must have "credibility", an amorphous but important requirement. In this respect, the previous shareholding structure (ten individuals) might have been a handicap.

With a leading VC growth firm as the second largest shareholder after a visionary founder, the new capital structure looks appropriate for a serious technology company with global ambitions. It should help boost the credibility of the brand on the corporate market.

There is also a second more or less psychological issue. However international its operations, the company is generally perceived as basically Russian, which we believe could still -unjustifiably – sometimes be an issue in certain markets. A future offering of managed security services, for example, could conceivably be somewhat problematic in some corporate and public sectors in some countries.

While Kaspersky Lab and GA do not see this as an issue, it is in any case clear that the deal could help "globalise" the company's image. There is certainly no need to minimise the company's strong Russian roots. After all, Russia's engineers and scientists are respected around the world. In terms of image, the roots should indeed be Russian, but the story is becoming global.

The cautionary note in this whole area is that, in the business market for technology, winning customer mindshare - a key objective in technology marketing - is just as important as having the right image. To really build the brand, we continue to think that Kaspersky Lab can and should aim for “thought leadership” with IT decision makers.

Conclusion

The agreement with General Atlantic provides financial flexibility while allowing the company (wisely we think) to focus on growth without the distractions of going public at this stage. It brings in very useful expertise in business development and should help to some extent strengthen the brand for the business market.

Overall, the deal is a clear signal that Kaspersky Lab is starting serious execution of its strategy, but (as we have seen) many challenges remain, especially on the marketing and commercial level.

Tuesday, February 1st 2011
Duquesne Advisory
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Duquesne Advisory

Duquesne Advisory Ltd is a European firm, headquartered in the UK, dedicated to researching, understanding and advising clients worldwide on opportunities and trends in Information and Communications technology.

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Duquesne Advisory delivers in-depth analyses of Information and Communications Technologies, their implementations and their markets. Research is based on critical observation of the market by the analysts and their on-going contacts with the vendor community, together with hands-on, practical experience in consulting engagements.

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The analysts of Duquesne Advisory leverage the Firm’s ongoing market and technology research to undertake high added value consulting engagements for both ICT users and ICT providers. Focused on client service, their approach is rigorous and methodical, and at the same time pragmatic and operational.