Cisco: Enthusiastic Response To IronPort Deal

Cisco Systems (CSCO) received a warm reception from the Street for Thursday morning’s announcement of plans to acquire privately held IronPort Systems, a maker of e-mail and Web security systems, for $830 million in cash and stock. It helps that the company expects no dilution from the deal on fiscal 2007 non-GAAP earnings.

More than that, investors seem enthused about Cisco’s determination to expand its offerings in the security sector.

Prudential’s Inder Singh noted in a research note today that IronPort holds 9% of the market for secure content management appliances, and 12.5% of the market for messaging security appliances. (By appliances, he means basically specialized servers.) He also notes that IronPort recently acquired PostX, a company which provides email encryption technology, and partners with Vontu, a data leakage prevention company. “We believe Cisco’s move strengthens its security portfolio, and integrating IronPort technologies raises the competitive pressure against other messaging security vendors such as Symantec (SYMC) and CipherTrust,” a unit of Secure Computing (SCUR).

Bill Choi, an analyst with Jefferies & Co., estimates that IronPort’s last 12 months revenue topped $100 million, while growing more than 50% quarter-over-quarter. As Merrill Lynch’s Tal Liani points out, that makes the deal look pretty expensive, at more than 6x expected 2007 sales, assuming a growth rate this year or more than 40%. On the other hand, Liani notes, Merrill expects the security gateway market to grow 36% compounded through 2009, supporting “a premium valuation.”

Samuel Wilson, an analyst with JMP Securities, wrote today that he thinks Cisco will make additional security acquisitions, noting that the company has been a laggard among Cisco’s other “advanced technology” businesses. He says multiple sources say Cisco is looking at vendors in the data leakage market. “We believe that Cisco’s acquisition of IronPort makes sense as Cisco works to get the mojo back into its security practice,” he writes. “The firewall/VPN market, Cisco’s traditional strength, is a mature market with a higher penetration rate.”

Cisco today gained 73 cents to $28.46, a new 52-week high; after hours it added another 15 cents to $28.61.