Seeking Growth, Raytheon Reshuffles Forcepoint Cybersecurity Unit

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Raytheon (NYSE:RTN) is revamping its majority-owned cybersecurity company, seeking to jump-start a unit heralded as a potential growth engine, but which so far has underwhelmed.

Forcepoint, which is 80% owned by Raytheon, is combining its business securing critical infrastructure — including power plants, water filtration systems, and healthcare and financial services networks — with its government unit. As part of the consolidation, Forcepoint has hired Eric Trexler, who formerly handled national security programs at McAfee, as vice president of sales for the business.

Cybersecurity padlock

Image source: Getty Images.

“Our customers demand hardened cyber technology that can help them more quickly identify abnormal activity and behavior to improve the protection of their systems from unauthorized access, exploitation or data exfiltration,” Sean Berg, general manager of the government business, said in a statement. “Eric brings to Forcepoint a deep understanding of the cyber challenges that intelligence, defense, and civilian agencies face day-to-day.”

A slow rebuild

Raytheon in 2015 invested $1.57 billion for a controlling stake in what was then known as Websense and combined that commercial cybersecurity company with its own in-house tech unit to offer military-grade cyber defense to civilian and government customers. So far, that combined unit, which was rebranded as Forcepoint, has stuttered. Heavy internal investment and a handful of bolt-on acquisitions have sunk margins, and growth has been hard to find.

That’s a tough track record for a unit that was previously billed as a hidden gem inside of Raytheon: With former Websense owner Vista Partners still owning a 19.7% stake in the entity, there has been speculation that Forcepoint could eventually be spun out as an independent.

Talk of a spinoff, for now at least, is on hold. Raytheon CEO Tom Kennedy on a Jan. 25 call with investors called 2017 “a rebuilding year” for Forcepoint, with the company revamping its sales force and adjusting its focus to target large enterprises instead of small to mid-sized businesses. Kennedy said he expects “double-digit growth and also double-digit margins in 2019,” which means 2018 will be another year of transition.

Cyber’s growing importance

Raytheon has also argued that it is unwise to judge Forcepoint solely on the unit’s operating results, claiming that the company’s expertise has opened up new opportunities for Raytheon that are not included in Forcepoint’s results.

“When I go, for example, to the Middle East and I meet with the heads of state there, one of the questions they have about cyber is: How do we have all these capabilities?” Kennedy said during the earnings call when defending Forcepoint.

Forcepoint can also potentially help Raytheon at home, where the Pentagon is making defense contractor security a priority. Deputy Defense Secretary Patrick Shanahan in a speech at an industry conference last week said contractors need to “practice good hygiene” when it comes to cybersecurity, saying that when it comes to secure networks, “we want the bar to be so high that it becomes a condition of doing business.”

Patience needed

Fortunately, Raytheon’s missiles, sensors, and other units are more than making up for the sluggishness at Forcepoint. Shares of the company jumped 32% in 2017 thanks to expectations for increasing military spending and belief that Raytheon is particularly well-positioned to take in a significant portion of those extra dollars.

Raytheon in 2017 reported sales of $25.3 billion, up 5% from a year prior, though profit did fall by 8% largely because of adjustments made to account for changes in U.S. tax law.

With Vista Partners still holding a stake, Raytheon is eventually going to face a decision about the future of Forcepoint and how important it is to have the unit under its control. But with the company’s core businesses firing on all cylinders, investors are unlikely to dwell on Forcepoint in the near term.

There’s still time for Raytheon to get Forcepoint right.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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