Fortinet Said to Be Approached by IBM; Shares Soar

IBM CEO Sam Palmisano
Sam Palmisano, president and chief executive officer of International Business Machines Corp. Photographer: Joshua Roberts/Bloomberg

Fortinet Inc., a maker of network-security systems that sold shares to the public last year, has received a takeover approach from International Business Machines Corp., said two people with knowledge of the situation.

Fortinet is working with Morgan Stanley and exploring its strategic options, said the people, who asked not to be identified because the plans aren’t public. Discussions with IBM may be at an advanced stage, one person said, though a deal could still unravel. Fortinet rose 6.3 percent in Nasdaq Stock Market trading. A Fortinet representative said there are no talks with IBM and declined to comment on whether IBM made an approach or whether any talks were held.

The company, with a market value of $2.27 billion, focuses on all-in-one systems that keep networks secure, and it caters to companies ranging from small businesses to large phone carriers. IBM Chief Executive Officer Sam Palmisano has said he plans to spend about $20 billion on acquisitions in the next five years, adding tools to deliver cloud-computing services via the Internet, and software to help customers analyze data.

“Fortinet’s focus on enterprises, services providers and government entities maps particularly well against IBM’s existing client base and should help broaden the company’s solution set for and appeal in new and emerging markets,” said Charles King, principal analyst at research firm Pund-IT in Hayward, California. The company would give “potential suitors an immediate leadership position in the increasingly business-critical threat-management market.”

IBM Approach

IBM, the world’s largest provider of computer services, approached Fortinet six to eight weeks ago, according to one of the people.

Ed Barbini, a spokesman for IBM, declined to comment, as did Rick Popko, a spokesman for Fortinet, and Morgan Stanley spokeswoman Mary Claire Delaney.

Fortinet, based in Sunnyvale, California, went public a year ago and its shares have gained 81 percent this year amid speculation that it might become an acquisition target. It climbed $1.88 to $31.88 at 4 p.m. in Nasdaq trading, after climbing as much as $6.77.

IBM, based in Armonk, New York, slipped 28 cents to $143.32 in New York Stock Exchange composite trading.

Fortinet almost doubled net income to $14 million in the third quarter from $7.89 million a year earlier, as sales jumped 29 percent to $85 million. The company raised $156.3 million in a November 2009 initial public offering, the first by a Silicon Valley startup in almost two years. The shares were priced at $12.50 apiece.

Filling Gaps

Fortinet was co-founded in 2000 by Ken Xie, now chief executive officer, who previously started and ran NetScreen Technologies Inc. That company was bought by Juniper Networks Inc. in 2004 for about $3 billion.

IBM and other companies, including Hewlett-Packard Co., Oracle Corp. and Intel Corp., are using takeovers to add technology that can help them cater to corporate customers building data centers to handle a Web-traffic boom.

“IBM’s move is part of a bigger trend where technology companies are trying to fill the gaps in their portfolios,” said Rajesh Ghai, an analyst at ThinkEquity LLC in San Francisco. “Fortinet is growing very fast, and IBM is looking at high-growth companies also because the return on cash on a balance sheet is very low.”

IBM has spent more than $20 billion on 100 purchases since Palmisano took over in 2002, as he shifts IBM’s focus to software and services from hardware. His largest takeover was business-management software maker Cognos Inc., for $5 billion.

To build up its data-center technology, HP agreed to spend $2.35 billion in September for the money-losing storage maker 3Par Inc., after an 18-day bidding war with Dell Inc. more than tripled 3Par’s share price.

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