July 12, 2019

Breakingviews: Old buyouts surf software’s frothy wave

by Breakingviews.

Old buyouts are readying to surf software’s frothy wave. McAfee may return to public markets three years after private equity firm TPG Capital bought 51% of it from chipmaker Intel, according to the Wall Street Journal. Private equity ownership and acquisitions have buffed the firm up, even as PC anti-virus software has matured. But the idea McAfee’s value has doubled also rests on voracious demand for tech stocks.

Next to hotshot software startups like Zoom Video Commiunications or cloud security firm CrowdStrike, McAfee is a senior citizen. Founded over three decades ago, the company went public during the dot-com boom. Its aura faded as the rise of smartphones meant PCs were replaced less often, and Microsoft included anti-virus software with its operating system. In 2011, Intel agreed to buy McAfee for $7.7 billion. However, it made an uncomfortable fit with the chipmaker, and the unfavorable long-term trends continued.

In 2016, TPG paid $1.1 billion for control, and later brought on fellow buyout firm Thoma Bravo as a co-investor. Free from Intel and under the watch of private equity, the firm has improved bookings and cash flow, according to a person familiar with the situation. A few acquisitions in hotter areas such as cloud security may add some allure.

Whether it’s worth $5 billion is for McAfee’s owners to prove. That value, reported by the Wall Street Journal, would represent double the price of its equity in the 2016 deal. Certainly, investors are clamoring for new issues. Companies with $2 billion-plus listings this year have seen a median rise of more than a third in their share price. Public software companies are also running hot, as cloud software firms show rapidly rising revenue and old guard enterprise software firms attract buyers. Think of chipmaker Broadcom’s widely reported talks to buy McAfee’s $16 billion rival Symantec.

The big challenge will be to show that McAfee’s present and future are different from the past. At least it has done so before. The company’s founder John McAfee fled authorities in Belize in 2012, and later released a video in which he criticized the product while snorting a white powder and shooting a gun at a computer. He’s connected with McAfee only in name these days. Still, a float wouldn’t be this company’s first new start.


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