Entrust: A Nortel spinoff that survived

On the face of it, Bill Conner's eight-year term as CEO of Entrust Inc. wasn't a brilliant success.

In 2001, the former Nortel executive took over a security software firm that had seen 95 per cent of its value vanish in the previous year. Conner then presided over the loss of another 71.7 per cent of the firm's worth.

We can be precise because Conner, 50, revealed Monday that he had reached a deal with an affiliate of U.S. private equity firm, Thoma Bravo, to sell Entrust for $114 million (all figures U.S.).

Of course, it's really not fair to judge the performance of a tech CEO against the manic standard of the tech bubble.

Indeed, in many ways Conner saved Entrust -- which remains one of Canada's most valuable software companies and employs about 300 developers in Kanata and 100 workers elsewhere.

The firm is headquartered in Dallas because that's where Conner wanted to live. He also knew there were advantages to having a U.S. address when knocking on the doors of America's largest corporations.

There's little question Conner was over-optimistic in 2001. He had been a member of Entrust's board of directors for three years, and should have known the company's prospects were uncertain at best.

On his second day in the top job, Conner revealed a quarterly net loss of nearly $51 million on sales of $31.5 million. His firm was bleeding to death.

"The first order of business was to stop the hemorrhaging," he said Monday. "The next step was to innovate and acquire new businesses."

None of this was easy. Entrust would lose money in 20 of its next 32 quarters. Early in Conner's reign, Entrust was very nearly crushed by software giant Microsoft, which began offering a less robust version of Entrust's software for free.

Conner responded by diversifying away from a near- total reliance on a technology known as public key infrastructure -- a system for securing online data and authenticating who is sending and receiving it.

In its most recent quarter, about 25 per cent of Entrust's software sales were derived from non-PKI products such as anti-fraud software.

Perhaps more importantly, Entrust has a very steady business featuring the sale of professional services -- which involves helping large corporations develop and maintain tamper-proof communications and data networks.

Last year, the services unit accounted for 62 per cent of the firm's $100 million in revenues. While professional services is not a fast-growing business, it's steady and profitable.

Despite Entrust's recent return to slim profits, Conner recognized his company didn't have enough heft to survive in the long-term.

"One hundred million dollars in sales is small compared to what's out there," he said, in reference to security software giants such as Symantec, IBM and Microsoft.

Eighteen months ago, Conner began his hunt for a merger partner or a potential acquirer. He canvassed rivals, systems integrators and software firms that might want to include security technology in their own products.

Chicago-based Thoma Bravo recently raised $822.5 million, which it plans to invest mainly in U.S. companies. The 29-year-old investment group has in recent years purchased a series of software firms that, like Entrust, sell licences to large organizations. The acquisitions include Attachmate (software for managing secure networks) and JDA Software (products for managing supply chains) -- to name two that are familiar to Ottawa-area software developers.

Thoma Bravo's $1.85 per share offer represents a 22-per-cent-plus premium over Entrust's average price during the previous 30 trading days.

Unusually, the acquisition agreement contains a clause allowing Entrust to solicit richer takeover proposals by May 13.

Entrust closed Monday on Nasdaq at $1.80 per share, suggesting that investors don't believe a bidding war is about to break out.

Given the huge amount of time Conner has spent canvassing alternatives, that assessment is probably right.

Eight years ago, had you suggested to Conner that he would one day sell his company to a private equity firm for Monday's negotiated price, he would have cleared the room with his 120 decibel belly laugh.

He made his peace a long time ago with what is reasonable in terms of the expectations for Entrust. For good measure he is planning to stick around to make sure the transition sticks.

Thoma Bravo is keeping Conner at the helm of Entrust, along with the rest of his management team.

Conner has been a key figure at Entrust since its inception in a quiet corner of the mid-1990s version of Nortel. He takes little comfort from the fact Entrust is today worth considerably more than Nortel, which is struggling to reorganize under the protection of bankruptcy court.

But he does like the fact Entrust finally appears on solid footing. For once, Nortel employees are envious.