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One of the interesting things that I learned about the many conferences being held this week was that, unlike most other Israeli tech companies, Check Point (Nasdaq: CHKP) will not be at any of them, or at least has not announced on its website that it that it will be attending any of them. If indeed this is the case, it is rare and could perhaps be a hint that the company is busy with mergers or acquisitions and would rather not talk to investors and analysts for the time being.

Against this background of merger activity comes the rating upgrade for Checkpoint from Jeffries & Co. analyst Katherine Egbert. Last week she upgraded Check Point from “Neutral” to “Buy” and set a target price of $22, an upgrade that sent the stock up by almost 9% over the week, the first such gain for a long time.

Egbert certainly did not base her recommendation on third-quarter sales since, like many other technology companies, Check Point makes 40-50% of its quarterly sales target in the last month of the quarter, which has only just begun. This trend is especially noticeable during the seasonal weakness that typifies the summer months of July and August. Last year, for example, the company issued a warning, at the beginning of October, that the third quarter would be weaker than expected, following which the stock tumbled 9%.

Check Point president and CEO Gil Shwed, who received two million options at $16.80 each at the last shareholders meeting on July 30, can already begin smiling. He has pretax profit on paper of $4 million, in one month. This specific allocation leads me to conclude that he is not about to sell the company he founded 13 years ago to Hewlett Packard (NYSE: HPQ), or another giant. I think that he will opt, instead, for an acquisition or a merger with a company of a similar size to Check Point, a move that will make a substantial contribution to its sales line.

In his letter to investors in July, Shwed wrote that he sees Check Point as a company in the security sector that is “leading it towards the future.” So I don’t think he will be leading it to a future as a division within HP. He noted that Check Point has the necessary strategic vision, and the right mix of products and focus on customer requirements to ensure its continuing success in the field of network security both this year and in years to come.

Meanwhile, I noticed that the privately-held critical network security company Sourcefire Inc., has now joined Checkpoint through a back door entrance, after the original merger was blocked for state security reasons earlier this year by the US Senate Committee on Foreign Investment in the US [CFIUS]. Apparently, the Americans feel that anything that isn’t safe enough in Israeli hands will be safer in Finnish hands instead.

Last Tuesday, Nokia Corp. (NYSE: NOK) announced that it would offer Sourcefire's Intrusion Prevention System on its portfolio of high-performance IP Security Platforms, and as is known, Check Point sells a substantial amount of its software on Nokia’s hardware platforms. With the latest announcement, Nokia has beefed up its security solutions which compete with those offered by Cisco Systems Inc. (Nasdaq: CSCO), and the new player in the field, IBM (NYSE: IBM), which recently acquired the leader in intrusion prevention technologies, Internet Security Systems Inc. (Nasdaq: ISSX).

Shwed would have obviously preferred to acquire Sourcefire and integrate its solutions with Check Point’s software platforms, rather than refer his customers to Nokia. With Nokia and Sourcefire set to join forces, Check Point is now even more dependent than ever on Nokia’s hardware platforms. In the past there were rumors that still seem exaggerated to me today, which alleged that Check Point would acquire Nokia’s entire network security solutions unit, which has annual sales of hundreds of millions of dollars but barely makes a profit, and may even be losing money too.

Published originally by Globes [online], Israel business news - © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Source: Why Check Point Won't Be Sold to HP (But May Be Looking at Merger Opportunities)