When Dell sold SonicWall and other software assets to Francisco Partners in June, ChannelE2E noted that Francisco Partners also owned WatchGuard -- a key SonicWall rival. It begged the question: Might the private equity parent ultimately merge SonicWall and WatchGuard?
Fast forward to present day, and some pundits worry that Francisco Partners' ownership of both SonicWall and WatchGuard could trigger conflicts of interest. As Bloomberg notes:
"Together, WatchGuard and SonicWALL command an estimated 40 percent of the market for security devices aimed at small- and medium-sized businesses. Both provide unified threat management (UTM) technology, which intercepts spam, scans for viruses and blocks sites for security, legal and productivity purposes, among other things.
It means Francisco will own two direct competitors that can't easily be combined, partly because WatchGuard and SonicWALL will be housed in separate funds, each with their own set of investors. To be sure, the overlap concerns only a portion of each of their businesses, and Francisco believes it's not an issue because the broader market is dominated by larger players including Sophos and Fortinet."
Same Parent, Similar M&A Targets?
But here's where the situation gets extra interesting. Let's assume a super-hot startup called Acme Co. emerges in the security market. What if both SonicWall and WatchGuard want to bid to buy Acme?
During that scenario, Bloomberg wonders:
- Should Francisco bifurcate its investment committee to ensure there's no information leakage?
- Will the SEC intervene on the basis that the funds' returns may be compromised if one business benefits from having a working knowledge of the other's strategy and snares market share?
- Do Francisco's co-investors on WatchGuard and SonicWall (Vector and Elliott's Evergreen Coast Capital, respectively) have a view? And will prospective targets be hesitant to sell to the firm based on the risk that it could back a competitor?
Those are important questions -- though they are bridges that Francisco partners doesn't need to cross right now. Instead, the far bigger priority -- at least for channel partners: SonicWall's new owners need to prove the company remains committed to its partner ecosystem. We'll be watching for updates on that front in the days and weeks ahead.