SACC Partners, LP Writes Letter to WatchGuard Technologies (WGRD) Expressing Concerns Over Rights Agreement, Urges Sale of Comp
May 03 2006 - 1:38PM
PR Newswire (US)
LOS ANGELES, May 3 /PRNewswire/ -- The following statement has been
issued by Bryant Riley, Founder & General Partner of SACC
Partners, LP: The Board of Directors of WatchGuard Technologies,
Inc. WatchGuard Technologies, Inc. 505 Fifth Avenue South, Suite
500 Seattle, WA 98104 Members of the Board of Directors: As you are
aware, SACC Partners, LP has been a shareholder of WatchGuard
(NASDAQ:WGRD)for the past two years having acquired approximately
2% of the outstanding shares. As a large shareholder and a proud
user of several WatchGuard Firebox Core, SOHO and Firebox Edge
appliances, we are excited about the opportunities in front of the
Company. That said, however, we have been very disappointed with
the financial performance of the Company over the past few years.
Thus, we were encouraged to learn that Vector Capital Corporation
("Vector") has expressed an interest in acquiring WatchGuard as
indicated in a letter from Vector, dated February 17, 2006 and
disclosed in a recent 13-D filing. While we are encouraged by your
recent hiring of Wachovia to review strategic alternatives, we want
to emphasize to you that we are strongly against your proposal to
put a Rights Agreement in place at the annual meeting scheduled to
take place Thursday, May 4th. We agree with ISS that having a
poison pill in place is NOT in the best interest of shareholders as
it entrenches management and the board and discourages legitimate
suitors from pursuing an acquisition of the Company. Therefore, we
have submitted our vote AGAINST the Rights Agreement. Over the past
year, WatchGuard's execution has been poor and we have not seen any
material progress in the "eighteen-month turnaround" program, which
was initiated soon after the Company hired its current CEO and
Chairman. The company has shown five straight quarters of declining
revenues (year-over-year) and the Company generated its tenth year
of operating losses since its inception in 1996. In our opinion,
WatchGuard's performance has simply been unacceptable.
Additionally, we have been disappointed in the Company's lack of a
buyback program over the last year and a half. You have publicly
stated that acquisitions are not in your long-term plan and that
the Company and shareholders would be rewarded by focusing on
improving operations. However, you have refrained from a share
buyback despite exiting the 4th quarter with $77.8 million in cash
and a relatively small cash burn. Given your apparent lack of need
for cash and your belief that a focus on operations will result in
stronger profitability we are disappointed that you have refrained
from repurchasing shares even when the company's enterprise value,
based on share prices in the market, has fallen to as low as $30
million dollars. While we believe there are significant growth
opportunities in the IT Security market overall, we are concerned
that increasing competition as well as the costs of being a public
company will limit WatchGuard's growth potential in both the
near-term and long-term. Given how fragmented the IT Security
industry is, especially as it relates to UTM providers, we believe
that consolidation is inevitable and we have indicated many times
that we believe WatchGuard would make a compelling acquisition
target for a strategic or financial buyer. We also believe strongly
that your size and growth prospects make it difficult to be a
profitable public company given the costs associated with being
public. For example, selling to a public company would result in
the streamlining of executive management, removal of Board fees and
related costs including D & O insurance, rationalization of
sales and research as well as auditing costs to name a few. Whether
a purchase by Vector or a purchase by a competitor, we believe that
the timing is appropriate and that you should aggressively pursue
this opportunity. We agree with Vector that as a nimble private
company WatchGuard could more effectively pursue its strategic
objectives. Thus, we urge you to seriously consider Vector's offer
and pursue a sale of the Company sooner rather than later. Regards,
Bryant Riley Founder & General Partner SACC Partners, LP 11100
Santa Monica Blvd., Suite 800 Los Angeles, CA 90025 DATASOURCE:
SACC Partners, LP CONTACT: SACC Partners, LP, +1-310-966-1445
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