Websense to Acquire SurfControl


Editor's summary:
o All cash transaction valued at approximately US$400 million.
o Expected to be accretive, with cost synergies of more than US$60 million.
o Creates an organization with the scale to compete more effectively with large global security and software companies.
o Accelerates strategic initiatives with small and mid-sized (SMB) customers.
o Benefits customers and partners through enhanced product offerings.

SAN DIEGO, April 26 / -- Websense, Inc. (NASDAQ:WBSN) today announced that its subsidiary, Websense SC Operations Limited, has made a pre-conditional cash offer to acquire all of the issued and to-be-issued ordinary shares, excluding treasury shares, of SurfControl PLC , a provider of on-demand and software-based Web and email security solutions. Under the terms of the proposal, SurfControl shareholders will receive 700 pence in cash for each SurfControl share. The proposal values SurfControl's existing issued share capital at approximately 201 million Pounds sterling (approximately US$400 million).

"The combination of Websense and SurfControl is expected to benefit customers, partners and shareholders by creating an IT security solutions company with the scale and product offering to compete more effectively with large global security software companies. Additionally, by improving operational efficiencies, we believe we can generate operating margins in the combined business similar to the historical levels we have achieved in our own Web security business," said Gene Hodges, CEO, Websense, Inc. "A further objective of the acquisition is to complement and accelerate our stated growth initiatives, particularly in the strategically important SMB segment. We are especially excited about having SurfControl's BlackSpider(R) on-demand content security solution available to our global customer base."

"After the transaction closes, we are committed to supporting SurfControl's and Websense's customers and channel partners. We believe the combination is a win for the customers and partners of both companies," added Hodges. "We plan to introduce a customer satisfaction and retention program and pledge to support SurfControl's layered software Web security solutions at least through 2010. We also plan to enhance these products with data from the merged research databases of the two companies. We also plan to renew existing SurfControl subscriptions at competitive levels, similar to their historical prices. Channel partners are expected to benefit from the opportunity to offer a broader set of solutions to their customers, backed by the threat research capabilities and financial strength of Websense."

"This proposal offers a significant premium to SurfControl's shareholders which fairly recognizes the value that has been built through the focused strategy of excellence in execution we have pursued," said Patricia Sueltz, CEO of SurfControl. "I believe that SurfControl today provides a unique combination of security solutions for its customers through software, appliances and on-demand services. The proposed acquisition by Websense represents another major step in the development of SurfControl's business, which will become part of a larger organization better positioned to compete in the growing market for Internet security services. On behalf of the board, I would like to thank all of our employees for the dedication they have shown in pursuit of our goals and the value they have created for our shareholders."

Financial Benefits
In addition to the improved prospects of the combined company, Websense believes the combination creates the opportunity to deliver significant accretion to earnings and cash flow from operations. The accretion is the result of retaining SurfControl's anticipated future bookings, while reducing expenses through consolidation and restructuring of the combined operations. Estimates of future bookings assume some customer attrition, which is anticipated to be partially offset by sales of SurfControl products to Websense customers and sales of Websense products to SurfControl customers and by new customer bookings resulting from expanded distribution capabilities. The opportunities for additional sales include selling SurfControl on-demand Web and email security and layered email security products to Websense customers and selling Websense Web security and information leak prevention products to SurfControl customers.

The transaction is expected to close approximately four months following regulatory approval by United States (US) and United Kingdom (UK) agencies. Following the close, the combined business is expected to:

o Be slightly dilutive to Websense's non-GAAP earnings per share in the
first quarter following the close.
o Be at least 20 percent accretive to non-GAAP earnings in the next
12 months (the second through fifth quarters post-close), with
additional accretion thereafter. The estimates of accretion to non-GAAP
earnings per share are based on estimates of the future pro forma
revenue for the combined company, which exclude the impact of the
write-down of an estimated 90 percent of SurfControl's deferred revenue
required by US GAAP purchase accounting.
o Generate incremental pro forma cash flow from operations of
approximately $15 million in the next twelve months (the second through
fifth quarters post-close), increasing to at least $30 million in 2009
and at least $50 million annually by the end of 2010. These estimates
of incremental pro forma cash flow from operations exclude non-
recurring cash and non-cash restructuring costs and expenses associated
with the transaction and take into account the expected cost savings
and estimated net impact of customer attrition and new sales
opportunities for the products of both companies.
o Achieve cost synergies of approximately $10 million in the first
quarter after the transaction closes, and at least $60 million in the
next 12 month period (the second through fifth quarters post-close),
prior to any of the non-recurring cash and non-cash restructuring costs
and expenses associated with the transaction. The non-recurring cash
out-of-pocket expenses involved in obtaining the cost synergies are
expected to be substantially incurred within 15 months of the close of
the transaction.

The transaction is being financed through a combination of Websense's existing cash resources and non-equity new banking facilities provided by Bank of America and Morgan Stanley Senior Funding Inc. Additionally, at close, or shortly thereafter, Websense expects to have debt of approximately $180 million to $200 million and cash and marketable securities totaling approximately $50 million. Websense intends to reduce the balance of debt aggressively through internally generated cash flows.

The transaction, which has been unanimously approved by the boards of both companies, is subject to the conditions and the satisfaction or waiver of the Pre-Conditions which relate to the obtaining of regulatory clearances from the relevant UK and US regulatory authorities, as set out in full in Part A of Appendix 1 to the Rule 2.5 Announcement available on the company's Web site at www.websense.com/acquisition. The proposal will not proceed if the Pre-Conditions and the Conditions (set out in full in Part C of Appendix I to the Rule 2.5 Announcement) have not been satisfied by the close of business on July 26, 2008, or such later date (if any) as SurfControl, Websense and Websense SC Operations Limited may, with the consent of the Panel, agree. Prior to the closing of the transaction, Websense and SurfControl will operate as separate businesses.

Conference Call
Websense is hosting a conference call and simultaneous webcast today at 5:00 p.m. ET (2:00 p.m. PT), to discuss the announcement. To participate in the call, investors should dial 800-795-1259 (domestic) or 785-832-0301 (international) 10 minutes prior to the scheduled start of the call. The webcast may be accessed via the Internet at www.websense.com/investors. An audio archive of the webcast will be available on the company's Web site and a taped replay of the call will be available for one week at 888-203-1112 or 719-457-0820, passcode 2084474.

About SurfControl
SurfControl provides an offering of security solutions to protect its customers from Internet threats, deliver business and regulatory compliance, and enable business continuity. SurfControl believes that security should be treated as a science, delivering protection at multiple points "in the cloud" with on-demand security services, on the network with software and appliances, and on the desktop and mobile client. All of SurfControl's solutions for Web, e-mail and endpoint security are backed by industry-leading threat detection technologies, delivered by SurfControl's Global Threat Experts who work 24/7 to provide customers with dynamic zero-day protection. The company protects more than 16 million users in over 25,000 customers worldwide, and employs more than 600 people in offices across Europe, the Americas, and Asia/Pacific.

About Websense, Inc.
Websense Inc., (NASDAQ:WBSN), headquartered in San Diego, Calif., is a Web security and Web filtering software company trusted to protect 25 million employees worldwide. Websense proactively discovers and immediately protects customers against Web-based threats such as spyware, phishing attacks, viruses and crimeware with maximum protection and minimal effort. With diverse partnerships and integrations, Websense enhances its customers' network and security environments.

This press release should be read in conjunction with, and is subject to, the full text of the Rule 2.5 announcement. This announcement does not constitute an offer or invitation to purchase any securities. SurfControl shareholders are advised to read carefully the formal documentation in relation to the Proposal once it has been dispatched.

US Non-GAAP Financial Measures
SurfControl's historical financial statements for its fiscal year ended June 30, 2006, and its subsequent fiscal quarters are prepared in accordance with the Financial Reporting Standards adopted by the European Union (IFRS). All pro forma combined financial information is based upon a combination of Websense's historical financial statements prepared in accordance with United States generally accepted accounting principles (US GAAP) and SurfControl's historical financial statements prepared in accordance with IFRS. SurfControl has not reconciled its historical financial statements to US GAAP.

This announcement also contains certain financial measures that are not calculated in accordance with US GAAP, including pro forma revenue, pro forma earnings per share and pro forma operating cash flow. Websense management believes that these US non-GAAP financial measures provide meaningful supplemental information regarding the expected benefits of the Proposal to investors in Websense.

FCMN Contact: kpatterson@websense.com

Source: Websense, Inc.

CONTACT:Investors, Kate Patterson, +1-858-320-8072, kpatterson@websense.com, or Media, Cas Purdy, +1-858-320-9493, cpurdy@websense.com, both of Websense, Inc.

Web site: http://www.websense.com/

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