Cisco Systems Inc. (CSCO:US), the biggest maker of networking equipment, agreed to acquire Sourcefire Inc. (FIRE:US) for about $2.7 billion, adding anti-hacking technology used extensively by the U.S. government.
Cisco will pay $76 a share in cash, the San Jose, California-based company said today, a 29 percent premium over Sourcefire’s closing price yesterday. Cisco said the deal value includes outstanding equity awards and retention incentives.
Chief Executive Officer John Chambers is expanding in cybersecurity to fend off competition from smaller rivals such as Palo Alto Networks Inc. (PANW:US) and Fortinet Inc. (FTNT:US), which make Internet firewalls. Sourcefire’s intrusion-detection products may help Cisco win more business from corporate and government customers seeking to beef up network protections as hacker attacks become more sophisticated and widespread.
“This is certainly going to boost the revenue, but more so than anything else it is going to give Cisco engineers technical acumen and establish credibility with Cisco in this space,” Jason Ader, an analyst at William Blair & Co., said in an interview. “Sourcefire’s products are a lot better.”
Cisco’s shares fell less than 1 percent to $25.65 at 11:51 a.m. in New York, and they had advanced 31 percent this year through yesterday. Sourcefire surged 28 percent to $75.47.
Fortinet increased as much as 8.1 percent to $22.09, the biggest intraday gain since January, amid speculation that it might be acquired. The Sunnyvale, California-based security company could be valued at $39 a share in a takeover, according to Daniel Ives, an analyst at FBR Capital Markets.
“We expect a surge of consolidation to take place over the next 12 to 18 months on the heels of strong secular trends, massive cyber threats, and as larger technology players look to become bigger players,” Ives wrote in a research note today.
Juniper Networks Inc., Symantec Corp., EMC Corp. and International Business Machines Corp. are among the companies that may use deals to expand in cybersecurity, Ives said. Besides Fortinet, potential targets include firewall-providers Check Point Software Technologies Ltd. and Palo Alto Networks.
Sourcefire, based in Columbia, Maryland, builds security platforms for corporate and government customers including firewalls, intrusion detectors and advanced malware protection.
Last year, about 19 percent of total revenue came from one customer that distributes Sourcefire’s products to the U.S. government, the company said in a filing. Sales rose 35 percent to $223.1 million in 2012. The company’s initial public offering in 2007 raised $86.6 million.
Many of Sourcefire’s products are built on Snort, an open-source program developed in 1998 by Sourcefire founder Martin Roesch. The technology is used by most Fortune 100 companies and 30 of the largest U.S. government agencies to detect attempted attacks on their networks, according to the company (FIRE:US).
Sourcefire’s business with the U.S. government is a “very valuable” part of the deal and will give Cisco more access to key federal cybersecurity decision-makers, Christopher Young, senior vice president of Cisco’s security group, said in an interview.
“These guys made a lot of investments in advanced malware, a lot of investments in the cloud and security intelligence,” Young said. “The security market is in transition, and the game is moving to advanced malware identification and advanced threat defense.”
Excluding the retention-based incentives, Cisco’s offer values Sourcefire at about $2.2 billion, including net cash and options, according to data compiled by Bloomberg. That’s about 141 times earnings before interest, taxes, depreciation and amortization, the data show. The median paid in a survey of more than 20 Internet-security deals is about 15 times Ebitda, the data show. The largest such transaction was Intel Corp.’s takeover of McAfee Inc. for $7.7 billion, completed in 2011.
Tel Aviv, Israel-based Check Point tried to buy Sourcefire for about $225 million in 2005, then withdrew its offer, citing scrutiny by the Committee on Foreign Investment in the United States. The committee, an arm of the U.S. Department of the Treasury, was reviewing the deal over the transfer of sensitive technologies to a foreign company.
The boards of Cisco and Sourefire have approved their transaction, which is expected to close during the second half of 2013. Cisco said the purchase will be slightly dilutive to adjusted earnings in fiscal 2014 due to purchase accounting adjustments and integration costs.
Centerview Partners LLC advised Cisco on the transaction.
Cisco in May agreed to acquire JouleX for $107 million, adding software that helps companies manage power usage as mobile devices spur a surge in data traffic. In April, Cisco agreed to purchase U.K. networking company Ubiquisys for about $310 million, gaining technology that helps wireless carriers provide better service to smartphone and tablet users.
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