Raytheon buys cyber security company Websense in $1.7bn deal

Raytheon has bought a majority stake in cyber security company Websense in a $1.7bn deal to form a new company, as part of a push by defence contractors into the booming security market.

The New York-listed defence company announced on Monday that it will buy an 80 per cent stake in the new venture. Raytheon will combine its cyber security unit with Websense, an Austin-based security software maker, creating a venture will an enterprise value of $2.3bn, the company said.

The defence contractor will use the unit to expand beyond the cyber security work it does for the US government and intelligence agencies, as other industries become increasingly anxious about becoming a victim of an attack like the one that hit Sony Pictures or US health insurer Anthem.

Thomas Kennedy, Raytheon's chairman and chief executive, predicted the sophisticated threats posed by "well-funded, nation-state adversaries and criminal networks" will grow in size and scale as companies become more reliant on mobile and the cloud.

"The new joint venture will combine Raytheon cyber products and Websense capabilities to deliver the advanced, defence-grade technology solutions needed to meet this evolving threat," he said.

The announcement came on the first day of the RSA conference, the world's largest cyber security gathering, in San Francisco.

Venture capitalists are predicting a boom in cyber security deals, with larger technology companies, banks and defence contractors among the buyers, in anticipation of rising cyber security budgets.

Cyber security start-ups raised a record level of VC funding last quarter, passing $1bn for the first time, and almost doubling from the same period the year before, according to data from private company research firm PrivCo.

Websense was taken private in 2013 by Vista Equity Partners, a private equity firm that will retain a 20 per cent stake in the new venture, for about $1bn. The company has expanded from selling primarily an internet blocking tool, for companies and schools to control what content their users can see online, to offering broader cyber security solutions.

Raytheon forecasts that the combined company, as yet unnamed, will have sales of $500m this year and margins of about 20 per cent. The defence company will also lend the new unit $600m as part of the deal.

Daniel Ives, an analyst at FBR capital markets, said Websense's valuation almost doubling in less than two years despite "very modest growth" showed the demand for cyber security deals.

"We see traditional defence players becoming incrementally more aggressive in the cyber security landscape as protecting sensitive data and intellectual property remain crucial to the success of many government programmes," he said. "As we have seen with the high-profile attacks on Anthem, Sony, JPMorgan, Target and eBay, the cyber security spending wave is showing no signs of slowing; thus, we believe traditional technology stalwarts need to acquire in this white-hot area."

Most of the big US military contractors have developed cyber security businesses in recent years.

Raytheon's investment in Websense is also one of a number of recent initiatives by military contractors to exploit military technology for civilian uses. Lockheed Martin is seeking to market a civilian air cargo version of its C130 transport aircraft and use some of its nuclear propulsion expertise for power generation.

Defence companies are under pressure to diversify to offset the decline in US military spending in the wake of the wars in Afghanistan and Iraq.

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