2023-04-04 14:33:35 ET
Summary
- Media reports suggest cybersecurity and e-signature software provider OneSpan is exploring a sale.
- A number of financial acquirers might be among the potential buyers.
- A quick glance at valuation suggests OSPN could be worth 10%+ above current share price levels.
Event-Driven Radar is a new series of articles dedicated to specific investment ideas where I expect short-/medium-term catalysts to help drive up the share price of the companies. The key aim of these articles is to succinctly highlight interesting investment situations, including their key aspects and risks. Some of these ideas will be readily actionable while others will have clear potential to turn into attractive setups.
Today's article covers the potential buyout of OneSpan ( OSPN ).
What Happened?
In early March, Reuters reported that OneSpan has hired an investment bank and is exploring a sale. OSPN's share price has jumped 31% since February 28.
What Does OSPN Do?
OneSpan is a $0.7bn market cap provider of mobile and identity security software and hardware. Since May '22, OSPN divides its business into the following segments:
- Digital Agreements . The segment comprises OSPN's primarily cloud-based e-signature software, allowing customers to sign transactions and agreements. The company's e-signature business primarily serves financial institutions. The segment also includes tangential services, such as Notary and Virtual Room. The segment generated 22% of OSPN's revenues in 2022.
- Security Solutions . This segment primarily entails the company's mobile and identity security software, which is licensed to enterprise customers. The software allows for customer authentication in such applications as banking. OSPN provides a mobile security platform which its clients (i.e., banks) can integrate into their mobile applications. OneSpan's mobile security software offerings are sticky as customers must implement OSPN's back-end software. The segment also comprises OSPN's legacy hardware tokens (allowing banking clients to authenticate transactions) which management has been transitioning away from. Security Solutions generated 78% of OSPN's sales in 2022.
Potential Buyers
A number of private equity firms might be interested in OneSpan given the high M&A activity by PE firms in the software space recently. Driven by contracted company valuations, financial buyers have stepped up to acquire a number of software businesses (as indicated by PE firms dominating the list of the top 10 largest enterprise software company acquisitions in 2022). The cybersecurity space in particular has seen increasing acquisition activity from PE buyers, including Thoma Bravo acquiring identity protection software providers SailPoint ($6.9bn), Ping Identity ($2.8bn), and ForgeRock ($2.3bn), Vista Equity Partners scooping up security awareness training software vendor KnowBe4 for $4.6bn and Francisco Partners buying security-focused data analytics software provider Sumo Logic for $1.7bn.
Why Now?
A sale would be quite opportunistic. OneSpan has been undergoing a significant transformation in recent years. Following management changes in 2021, in May '22, the company launched a new strategy aimed at focusing on the high-margin e-signature business while transitioning away from hardware (i.e., authentication tokens) revenues. Declining hardware sales have contributed to negative/flat revenue growth in 2020-2022, effectively masking e-signature segment's performance in the company's financials. Going forward, OSPN's performance is expected to inflect given continuing tailwinds surrounding the e-signature market which is expected to grow at 37% CAGR in 2022-2027, reaching $25bn in size globally (vs $5bn currently). Incremental growth is anticipated to come from tangential services, several of which OSPN has already launched, such as Virtual Room ( launched in Sep '22) and Notary ( launched in Feb '23). On the cost side, OSPN expects $20m-$25m in annualized cost savings driven by measures such as headcount reduction and decreased leased office space, with $10m already achieved as of Dec '22. This compares to $6m in 2022 adjusted EBITDA.
How Much Is OneSpan Worth?
My SOTP valuation implies a price target of $19.68/share, or 11% above current share price levels.
Some comments on the valuation assumptions below.
Digital Agreements . OSPN's e-signature business is the #3 player in the industry, behind Adobe ( ADBE ) and DocuSign ( DOCU ). I believe it could be fair to value OSPN's e-signature business at 5x 2024E revenues. The segment's closest peer DocuSign is currently trading at 4.1x/3.8x 2023E/2024E revenues. In 2022 DOCU and OSPN's e-signature business have displayed similar gross margins (79% for DOCU vs 77% for OSPN's Digital Agreements) and sales growth (19% each). Having said that, the expected sales growth of DOCU of 7-8% in 2023-2024 is much more moderate compared to OSPN's 8-9%, considering that the majority of OSPN's revenues (78% in 2022) come from low-growth Security Solutions segment. Worth noting that OSPN captures a much smaller e-signature market share (<1%) than DOCU (77%). Importantly, however, OSPN is an industry leader in the financial services vertical (the majority of the world's largest banks are among OSPN's customers) where DOCU has only minimal presence. The key here is that OSPN offerings combine its e-signature and mobile security software into a single platform, which suits the needs of financial institutions that need customizable and complex (i.e., highest security) software offerings. This is in contrast to DOCU's offerings, which are mass market-focused and do not provide such an advanced security functionality.
Security Solutions . I value OSPN's identity security software and hardware business at 2x TTM revenues. The segment's closest comparable Gemalto was acquired by Thales in 2019 at 1.6x TTM revenue. Similarly to OSPN's Security Solutions division, Gemalto operates in the identity and access management space, providing mobile identity/authentication/banking software and hardware tokens. OSPN's CEO has noted that the company's token capabilities have been similar to those of Gemalto. Another reference point here is Broadcom's acquisition of Symantec in 2019, valuing the target at 2.2x revenues.
Other Interesting Aspects
- Activist investor Legion Partners owns a sizable 8% stake. Since becoming a shareholder in 2018, the activist has already managed to win a proxy fight, with OSPN eventually replacing its entire management team back in 2021. Legion, which has been described as a "behind-the-scenes" type of activist, has a history of owning companies that were eventually partially/wholly sold, including Momentive Global (acquired by Symphony Technology in Mar '23), Nexeo Solutions (acquired by Univar in Sep '18) and NN (Life Sciences Division sold in Aug '20). OSPN is Legion's second-largest position as of Feb '23. The activist acquired a significant portion of its stake at or below current share price levels ( 2018 and 2022 ).
- Two other activist investors also hold ownership stakes in OSPN, including Altai Capital (owns 6%) and Ancora (3%). Altai Capital initiated a position in Nov '22, noting it might engage with the company's management regarding a number of things, including strategic alternatives and direction of the company. Meanwhile, Ancora Advisors sent a letter to the company back in 2019, urging it to explore a sale.
- OSPN's management might be willing sellers here. OSPN's CEO Matt Moynahan would receive a large payout in case of a company sale. He would receive $3m from the vesting of PSUs if the company was sold at $30/share and $10m at $40/share. Note that this does not include any RSU/PSUs that Moynahan currently has ( 312k in RSUs) and is entitled to receive on an annual basis going forward. For reference, the CEO currently owns $1.6m worth of OSPN's stock (at current prices) and gets $1m in base salary + annual cash bonus. Worth noting that the company's CEO (hired in Nov '21) has a track record of steering businesses which were eventually sold, including Forcepoint (sold to Francisco Partners in 2020 for $1.1bn) and Arbor Networks (acquired by Netscout in 2015, Moynahan was the President of the company).
Takeaway
OneSpan currently presents an interesting situation with a potential short-term catalyst. Recent private equity interest in the space, the expected business inflection, and activist pressure all suggest a buyout might in the cards here. SOTP valuation based on publicly-listed peers and comparable industry transactions suggests the company might be worth north of $19/share in a sale scenario. Given this, OSPN might currently be interesting to track for event-driven investors.
For further details see:
Event-Driven Radar: Some (E-) Signs Point To OneSpan Sale