Security: The best deals...
... are often the ones not made
Published 12:14, 28 May 12
It’s easy to look back and evaluate acquisitions that were completed, whether it be soon after or long after the fact, and evaluate the success. But overlooked sometimes, are the deals that do not close for one reason or another, or never even get off the ground.
As I was going through some earnings statements for the first quarter, I was reminded of one definitive acquisition deal that fell through, and another that may have been nothing more than a rumour, and started thinking about how the market might differ today had the transactions been completed.
The more recent news first: in late 2010, there were rumours (which were denied by Fortinet at the time) that IBM was interested in acquiring the UTM market leader. In July 2010, Fortinet's quarterly revenue was roughly $85M and the stock was trading at about $8/share. The stock price had doubled by the end of the year and currently sits at just under $23/share (a 188% gain) with revenue for the most recent quarter (CY Q12012) of $117M. Had IBM actually acquired Fortinet what would the business look like today?
First of all, IBM would have a UTM product, which it currently does not after dropping the MX line in early 2011. The high end data centre and service provider business may look similar (or be even bigger considering IBM's customer base). But the small and mid-market segments likely would not be as strong as they are, leaving the health of our hypothetical overall business uncertain.
Reaching a bit further back, some forget that Check Point made a push to acquire a then four year old Sourcefire in 2005. It was not an insignificant deal, as Check Point agreed to a price of $225M. However, the US government indicated it would block the deal and Check Point withdrew its bid. At the time, Sourcefire's annual revenue was $33M and when the company eventually went public in 2007, the stock price was $16. This eventually fell into the $5-$7 range, with Barracuda Networks eventually offering to acquire the company for $187M in 2008.
Today, Sourcefire's revenue for the most recent quarter was $46M, with total 2011 revenue of $166M and a stock price of $54/share - more than 650% higher than its mid-2008 average of $7). From Check Point's view, things likely worked out as well, with annual revenues rising from $579M in 2005 to $1.25B in 2011, and a stock price of roughly $20/share in late 2005 increasing 170% to $54 today. But if the deal had gone through, would Check Point look any different today?
The biggest questions are whether having Sourcefire's technology in-house would have impacted the hardware business and thus the Nokia deal in 2009, or lessened Check Point's firewall focus in the mid to late 2000s. Also worth wondering is if the Snort ecosystem would be different without an independent Sourcefire.
Looking specifically at the success from a stock price perspective, I took a sample of some of the other players in the security space - specifically five of the largest public companies- as a point of reference. In fairness, all of these companies have significant businesses outside of the security market, but still the exercise was revealing.
From December 1, 2009 (soon after Fortinet went public) to today, the average rise in stock price for Sourcefire, Check Point and Fortinet was 126%. Comparatively, the average of the other large public players was -21%. At least as of now, investors seem positive on the fact that these three vendors are independent.
At this point in time, it's somewhat difficult to see any of the group being acquired. Check Point ranks behind only Symantec, McAfee, Cisco and IBM in total security product revenue according to IDC's 2010 vendor shares, meaning an acquisition would be on the scale of the Intel/McAfee transaction, and there are very few of those.
The probable cost for Sourcefire and Fortinet prices-out all but the very largest vendors, so it's difficult to see a realistic match in the market. Interestingly, these three vendors will only compete with one another more moving forward. Sourcefire recently entered the next-generation firewall space which puts it in direct competition with both Check Point and Fortinet. And Check Point's IPS blade business continues to grow, pitting it against Sourcefire in that market.
If someone had laid out these scenarios back in 2005 and 2006, it could have been considered a stretch, so six years from now the conversation could be just as different. However, ultimately the security markets appear to be better off without the deals occurring.
Posted by John Grady