Now Raytheon-controlled subsidiary will be responsible for scanning every link posted on Facebook

Raytheon Comp. (RTN) -- America's fifth largest publicly traded defense contractor by market cap -- made a bold bid to establish itself as the leader in cybersecurity contracting.  The Cambridge, Mass. weapons firm announced a convoluted deal to partially purchase Websense Inc. -- a top cloud defense startup -- and to merge it with one of its own units.  The merged entity will provide a "unified cyber analytics" and "defense-grade cybersecurity" with a focus on cloud data mining and security solution for government networks.

I. Making a More Secure Web?

The deal is being guided by venture capital firm Vista Equity Partners LLC.  Terms of the deal were not available, but Reuters is reporting that the deal effectively amounts to a $1.7B USD majority stake purchase by Raytheon -- nearly a year's worth of profit for the defense giant.

Websense -- based in Austin, Texas -- was found in 1994 and went public in 2000 under the ticker symbol "WBSN".  It has been ranked by market research firm Gartner Inc. (IT) in the top five in terms of so-called "secured web gateway" (SWG) solutions.  The technology can use keyword based filtering as well as other more sophisticated content classification algorithms, including data fingerprinting.

Raytheon offered this infographic, justifying the growing value of its pricey purchase.

Many of the applications of SWG are transparent and subject to little controversy.  SWG solutions can offer a means to block malware, phishing, and spam, for example in email systems or via filtering of internet traffic.

Indeed most of Websense's business has ostensibly been aimed at these sorts of ends.  But the deal will likely receive scrutiny -- in part -- as Raytheon is paying far more than one might expect for the company.  Clearly Raytheon sees some growth potential or additional value in Websense.  Could such factors give cause for concern?

II. Deal Raises Privacy and Censorship Concerns

A potential answer to that quesiton can be found in the controversy surrounding the SWG space at large.  Websense has seen its own solutions raise privacy and censorship concerns in recent years.  Such concerns are by no means unique to Websense -- they're common among companies that do what Websense does.  That said, it's worth examining what precisely these concerns are.

Future business is one hot topic.  Filtering might allow internet service providers (ISPs) to block piracy or other undesirable forms of traffic.  Likewise, sales in the military-intelligence space might be used to spy on citizens or to block political dissent.

That said such controversy remains largely theoretical as SWG is primarily applied at present in the private sector, and in securing non-military government networks, e.g. school internet access, etc.  Indeed most of Websense's current business forcuses on such applications.  However, such efforts bring their own share of controversy as they often end up blocking access to legitimate content along with truly illicit.  

Websense's school network filtering solutions were accused of censorship when their overaggressive keyword-based filtering blocked legitimate content along with forbidden materials.
[Image Source: VentureBeat]

There's been incidents where access to sexuality-related science resources were blocked erroneously by the filters, which mistook the materials for pornographic content.  (In some cases access was also intentionally blocked by censors in the Middle East, according to reports.)  Likewise Websense was mired in controversy several years back for blocking access to legitimate LBGT resource sites for teenagers in schools.  Websense said the blockage was unintentional and was due to algorithmic errors in the filter which mistook the sites for pornographic content.

Given the recent revelations of keyword-based spying by the U.S. National Security Agency (NSA), one esoteric concern is that the new Raytheon unit could lobby for increased spending on efforts to spy on U.S. citizens.  Such efforts might have a marginal impact on security, but would certainly increase Raytheon's profits, adding to the unit's private sector take.

NSA eagle
[Image Source: CNN]

Such concerns are heightened due to a deal between Websense and Facebook, Inc. (FB), the world's largest social network.  TechCrunch reported that the deal -- sealed on Oct. 2011 -- would involve Facebook contracting Websense to scan all links shared by its more than a billion global users.  The scans are ostensibly conducted for safety purposes, but there may the possibility to subvert them for espionage purposes, as well.
Facebook scan
Facebook links are scanned by Websense under a 2011 deal. [Image Source: TechCrunch]

TechCrunch reported on the quiet arrangement:

Going forward, when a Facebook user clicks on a link, the new system will first check the link against Websense's system to determine whether or not it's safe. If it's not, a message is displayed warning the user that the link is potentially harmful and suggests you return to the previous page.

Considering that Facebook's data is a top target for the NSA, there's a compelling question of whether Raytheon might sell the NSA or other spy agencies backdoor access to databases of Facebook data.

III. A Big Payday for Websense's Owners

These controversies, said, the deal is certainly attractive from a financials standpoint for Websense's current owners.  Websense is currently privately held after Vista Equity Partners completed a $906M USD May 2013 buyout deal to buy all outstanding shares of the company and take it firm private.  The deal valued Websense at $24.75 USD/share.

Vista equity partners

According to The Wall Street Journal -- who first reported on the deal -- Raytheon paid an estimated $1.7B USD for an 80 percent stake in the new unit.  If accurate, that means Vista Equity Partners, not only nearly doubles its initial investment price, it also gets to retain a 20 percent minority stake in the new unit, which is valued at another $425M USD, based on the purchase price.

For Raytheon and its investors, on the other hand, the purchase is a more questionable proposition, given Websense's financials.  In its last reported income year (2012) before going private the firm made a profit of $18.3M USD on a revenue of $361.5M USD.

Raytheon merger

It appears the firm has grown since then, but by not more than 30-50 percent.  The combined firm will have an estimated 21,000 clients (mostly schools and private sector clients) and $500M USD in revenue, according to The WSJ.  The WSJ report states:

The price Raytheon is paying for control of Websense is equivalent to more than four to five times the cyber company’s annual sales, a pricey multiple for the defense industry.

So while this deal should give Raytheon investors, privacy advocates, and anti-censorship advocacies pause, it's a big win for at least one party -- the hedge fund that bought out Websense shareholders two years back.

Sources: Raytheon [webpage on acquisition], WSJ, Reuters

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