Fortinet Value Detected After Pricey Cisco Deal: Real M&A

After Cisco Systems Inc. paid the highest multiple since 2002 for Sourcefire Inc., investors are betting other Internet security providers such as Fortinet Inc. can also win premium valuations in a sale.

Cisco agreed this week to buy anti-hacking technology maker Sourcefire for about $2.7 billion, or 12 times revenue, according to data compiled by Bloomberg. William Blair & Co. said the next probable targets are Fortinet and Imperva Inc., which rose to a three-month and record high, respectively, after Cisco’s deal even though they trade for two of the group’s highest valuations, data compiled by Bloomberg show.

On the Web, “you’re seeing an increased number of attacks, you’re seeing increased sophistication of attacks and frankly the cost associated with this is reaching a very meaningful level,” Rob Owens, a Portland, Oregon-based analyst at Pacific Crest Securities, said in a phone interview. “Some of the large tech bellwethers will be willing to pay higher price tags for the opportunity” to profit from that trend.

Technology companies are bolstering their cybersecurity offerings to serve corporations and governments coping with attacks on their computers. Fortinet, a $3.4 billion maker of firewalls, could fetch an 86 percent premium to yesterday’s stock price in a sale, FBR & Co. said. Oppenheimer Holdings Inc. sees Palo Alto Networks Inc., which analysts estimate will boost sales faster than every peer but one through 2015, as another attractive acquisition.

Highest Multiple

Rick Popko, a spokesman for Sunnyvale, California-based Fortinet, declined to comment on whether it would be interested in selling itself. A representative for Santa Clara, California-based Palo Alto Networks said the company didn’t immediately have a comment. A representative for Redwood Shores, California-based Imperva didn’t respond to a request for comment.

Cisco’s bid for Sourcefire valued the company at about $2.7 billion including retention incentives, or 12 times the $233 million in revenue it posted in the past year. That’s the highest multiple paid for a U.S. Internet security provider in more than a decade, according to data compiled by Bloomberg.

The high price tag highlights the increasing importance of Internet security services as corporations and governments seek better protection from hackers, according to Daniel Ives, a New York-based managing director and analyst at FBR. International Business Machines Corp., Juniper Networks Inc. and EMC Corp. are likely to follow Cisco’s lead and strike deals for cybersecurity operators, he said.

Hacking Charges

After a U.S. Federal Reserve website was breached and denial-of-service attacks disrupted banks, President Barack Obama issued a Feb. 12 executive order directing the government to develop voluntary cybersecurity standards for companies operating the nation’s vital infrastructure. Yesterday, the U.S. charged five people for stealing more than 160 million credit card numbers in what prosecutors called the largest hacking and data breach scheme in American history.

“Hacking has become a major risk,” Ives said in a phone interview. The need to protect data “has gone from, ‘Maybe we’ll have that,’ to ‘We need to have that as an organization.’ That’s what’s fueling the growth and that’s what’s fueling” takeover interest.

Fortinet and Imperva, a $1.2 billion company that sells data-security software, are the most likely next targets, said Jonathan Ho, a Chicago-based analyst at William Blair.

After the Sourcefire acquisition was announced, Fortinet jumped 4.8 percent on July 23 to $21.43, the highest price since April, while Imperva rose 3.5 percent to what was then a record high of $49.66.

Not Cheap

Today, Fortinet shares fell 1.2 percent to $20.73. Imperva lost 0.6 percent to $50.78.

“They’re large assets that can move the needle for some of the bigger organizations,” Ho said in a phone interview.

A deal for either wouldn’t be cheap. Fortinet’s price-sales ratio of 6.1 yesterday was higher than 69 percent of computer peripherals and infrastructure software companies valued at more than $1 billion, while Imperva’s multiple of almost 11 topped 93 percent, data compiled by Bloomberg show.

Fortinet could fetch $39 a share in a takeover based on the amount paid for Sourcefire, FBR’s Ives said. Oppenheimer’s Shaul Eyal estimates as much as $50, or more than double yesterday’s closing price, and said Cisco could want Fortinet to further bolster its security offerings.

For Cisco, “Sourcefire basically brought access to the high-end security markets,” New York-based Eyal said. If Cisco Chief Executive Officer John Chambers wants to supplement that, “Fortinet is the way to do it.”

Tripling Revenue

Robyn Jenkins-Blum, a spokeswoman for San Jose, California-based Cisco, declined to comment.

Palo Alto Networks, which has a market value of $3.5 billion, may also be an attractive target, according to Eyal and Michael Turits, a New York-based analyst at Raymond James Financial Inc.

Analysts project the company will generate $713 million of sales in fiscal 2015, almost triple the amount in fiscal 2012, according to the average of estimates compiled by Bloomberg. That’s a faster growth rate than 97 percent of similar-sized peers, data compiled by Bloomberg show.

Qualys Inc., a $507 million maker of cloud-based security technology, and Proofpoint Inc., a $917 million developer of compliance software, may appeal to technology companies such as Juniper, said Frederick Ziegel, a Petoskey, Michigan-based analyst at Topeka Capital Markets Inc.

Playing Chess

Juniper “will continue to look at acquisitions in a variety of areas and make investments where we believe they will align with our overall strategy,” said Cindy Ta, a spokeswoman for the Sunnyvale, California-based company.

Dave Farmer, a spokesman for Hopkinton, Massachusetts-based EMC, declined to comment on the company’s acquisition strategy, while noting its purchases of Internet security providers including Aveksa Inc. James Sciales, a spokesman for Armonk, New York-based IBM, also declined to comment, while Sunnyvale, California-based Proofpoint didn’t respond to a request for comment.

“There’s a huge consolidation taking place in the enterprise security” industry, Philippe Courtot, the chairman and CEO of Redwood City, California-based Qualys, said in a phone interview. He declined to comment on whether his company would sell itself.

Today, shares of Palo Alo Networks fell 1.1 percent to $49.29, while Qualys’s stock price was unchanged at $16.01. Proofpoint advanced 3.3 percent to $26.93.

Following Cisco’s Sourcefire deal, the need to stay competitive may be enough for companies such as IBM, Juniper and EMC to justify expensive deals, said Ives of FBR.

“It’s a game of chess,” he said. “Cisco made the first move, and the other vendors can’t just sit there twiddling their thumbs.”

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