Case Studies

The Borrower

This privately held company, founded in 1997, provides software-as-a-service security solutions to broadband service providers throughout North America. The firm streamlines the provisioning of primarily security-related value-added services—including firewall, anti-spyware, parental controls, and fraud protection—to broadband service provider subscribers.

The Industry

The global broadband market is a $67 billion dollar industry with an estimated 264 million broadband subscribers worldwide. According to International Data Corporation (IDC), the global broadband market is expected to grow rapidly to $122 billion or 406 million subscribers by 2010. Demand for security software in this sector is anticipated to follow suit.

The Challenge

As with many technology companies, as this software company transitioned from an early-stage venture business to a mature business with positive cash flow, it accumulated an array of equity investors with disparate objectives. More than a decade into its existence, the company’s stakeholders mapped out as follows. Management held a 15% stake in the company, a passive equity investor held 45%, and various other individual and small institutional investors owned 40%.

Over the course of its first ten years, management experienced great success, delivering in excess of $10 million in annual EBITDA to investors and providing tangible value to its customers. Wanting to cash in on the increased value of their investment, and in need of liquidity, the passive equity investors and other small institutional investors decided to sell their stake in the company.

Management had a decision to make: should they replace the existing equity investor or recapitalize the business through the prudent use of debt, effectively increasing their ownership in the company? They needed the assistance of a financial partner with expertise in the technology sector to help make the decision and execute the transaction by the fast approaching deadline set by the outgoing equity investors.

The Solution

With over 30 years of experience in the technology sector, CapitalSource’s Technology Lending Group performed an in-depth analysis of the business and, with an eye on the projected growth within the industry, stepped in to assist and complete the transaction. Preferring to control its destiny, and feeling good about growth estimates in the global broadband market, management decided on a leveraged recapitalization transaction rather than partnering with a new private equity firm. With an efficient and effective loan process, CapitalSource was able to provide a $30 million senior credit facility, comprised of a $3 million revolver, a $17 million first lien term loan, and a $10 million second-lien term loan within the specified deadline.

The new capital structure allowed senior management to increase their equity ownership while placing only a moderate amount of debt on their balance sheet.

CASE STUDY WRITTEN: 11/08


Header photo credit: ( c ) 2008, The Washington Post. Photograph by Nikki Kahn. Reprinted with Permission.