MessageLabs - For Sale or IPO?

The Sunday Times carries a report that Messagelabs has appointed advisers JP Morgan Cazanove and Citigroup to “consider its future”. The Sunday Times suggests that this is ahead of an IPO which could value the firm at c£400m. See £400m web fraud firm to float If this proves to be true, it would be excellent news. We need a healthy IPO market and all we have had in the last year or so (with the exception of Telecity) is UK quoted SITS companies going private. Indeed we have lost around 20% of our quoted brethren in the last year alone.

However, I’m afraid that the most likely outcome will be a trade sale. In the last year alone in this space, Google has acquired Postini for £325m and Cisco bought IronPort.

Messagelabs Views

I first visited Messagelabs at their HQ in Gloucester in 2005. I was shown their Houston-style control room with its mass of screens showing current virus threats and their spread around the world. It was mega impressive.

MessageLabs provides a fully managed messaging security service. Even if you don’t use them yourself, you will have received e-mails with the footnote “This email has been scanned by the MessageLabs Email Security System.” The e-mail security market is dominated by software solutions from Symantec, McAfee, Trend, Sophos etc. But the MessageLabs solution is based on messages going via its datacenters now on four continents. They currently have 530 staff, 18,000 clients and 7.5m end-users, 800 partners and process upwards of 1b e-mail messages a week.

MessageLabs growth has been impressive. When I went to see them in 2005 the MessageLabs bit had revenues of c£42m in the year to 30th June 05. This has grown to £72.5m in the year to 30th June 08 – up 22% in the last year alone. Profits have been more elusive – but they have now broken into the black for the first time; making £5.5m ‘operating profit’ in the year to 30th June 08. The messaging security market is pretty immune from economic slowdown – its just something you have to do whatever. IDC reckons the market is worth £1.3b and is growing by 23% pa.

Brothers Ben and Jos White formed Star back in 1995, with MessageLabs following in 1999. They have since raised £10m in 1999 from RIT Capital, Rothschild and Weinstock and a further £25m in 2000 from MDP and Catalyst. When I visited them in 20005,. Star was the ‘profit machine’ and was spun-off in an MBO, led by Ben White, in June 2007. However, the White brothers retained their stake in MessageLabs. They has already passed executive management to CEO Adrian Chamberlain in 2006. The Whites and the management team still own more than 50% of the company.

When I met Ben White he was an evangelist for the remote datacentre methodology. Even back then, he believed that “all the servers in broom cupboards throughout the land will migrate to datacentres”. Having the filter in one place does have many attractions as it can eliminate threats at the internet level before they reach corporate networks and end users.

What makes MessageLabs different from other software vendors is its combination of internet-level (or in the cloud) scanning, fully managed services and its predictive technology, Skeptic. Skeptic proactively monitors, tracks and provides protection against emerging threats before they get near the customer’s network. Skeptic learns from every message it sees, updating and evolving with every new threat. They like to see it as a utility service, much like turning a tap on and being certain to get clean, filtered water. MessageLabs just thinks that email ought to be cleaned in the system rather than at your office or home.

If my suspicion, that all this publicity will end in a trade sale rather than an IPO, is correct the buyer will likely be from the US and the UK will lose another example of a fine indigenous SITS company. Shame, but inevitable.