Why Checkpoint Software Is Not for Sale

Mar. 9.07 | About: Check Point (CHKP)

Sometimes I think that analysts are paid by the word, rather than by the performance of their stock picks. That can be the only reason for the Citi analyst’s report on Checkpoint’s (NASDAQ:CHKP) possible purchase by private equity firms. Gil Schwed is never going to sell Checkpoint to private equity firms. I am so sure of my opinion that I am willing to eat my hat on YouTube if I am wrong.

On the surface, there is some plausibility to the analyst’s premise. The new masters of the universe are private equity guys. They are sitting on piles of cash. Banks are throwing money at them at low interest rates. There is nothing that they cannot buy -- except for a Zionist.

For certain Chief Executives of public companies, there is an appeal to working in private equity. Public company CEOs endure more public scrutiny than their counterparts in the private sector. Much maligned CEOs like Home Depot’s Robert Nardelli have joined private equity shops and vowed never to work in the public sector again.

But billionaire Checkpoint founder Gil Schwed does not have that problem. He is treated like a rock star by his shareholders. If anything, he has the opposite problem. His shareholders do not ask tough enough questions. No one balks at his rich stock option awards. This is probably because he made his initial stockholders millionaires.

There is a plus side to all the adoration. It has allowed Gil the luxury of managing his company for the long term and not having to worry about massaging quarterly earnings. To his credit, Schwed refused to be pressured into jumping into an acquisition until he found the right one. He rightly has refused to pay a dividend to his stockholders. He knows that Checkpoint can better use the money that would pay a 2% dividend to make acquisitions with a thirty percent growth rate.

He treats his shareholder’s money like it is his own. Guess what? Much of it is his and the other co-founders'.

In the aftermath of the blowup of the Sourcefire acquisition by Checkpoint, I had the pleasure of spending time with Eyal Desheh, CFO of Checkpoint. Although they hired the best lawyers and lobbyists, everyone knows that Checkpoint was stymied in their attempt to buy Sourcefire by the Bush Administration.

There were many sound business reasons why Checkpoint did go to the mat on the Sourcefire acquisition. Among them, the company was afraid of burning their bridges with the American government for the next acquisition. They also did not want to sustain any more body blows to the company image.

There was also a Zionist reason. Eyal confided in me that the company did not want to hurt the position of the government of Israel. When Mr. Desheh said this, I was sitting right across from him and looking him in the eye. There was no question of his sincerity. In this age of worship of the almighty dollar, his Zionism was so touching that it brought a tear to my eyes.

How does this relate to the sale of Checkpoint to private equity firm? Gil Schwed and company know the way private equity firms work. They often slash jobs and costs upon their takeover of a company. They do not want to be the reason for headlines in Israeli newspapers like “5000 jobs cut at Checkpoint” or “Checkpoint headquarters moved to New Jersey”.

In fact, Schwed has a friendly competition with Amdocs (NYSE:DOX) going. He wants to beat them and be the number one company in Israel.

The report troubled me for another reason. Without saying it directly, the analyst is implying that he no longer sees Checkpoint as a growth stock.

Private equity guys are not in the venture capital business. They are not looking for growth. They buy businesses that they think that are steady but not spectacular earners. This could mean that Checkpoint and all the network security firms are becoming commoditized like chip stocks. Fittingly, Blackstone Group has recently made a bid for Freescale Semiconductor.

Commoditization usually means a collapse in the price earnings ratio. I remember when Intel (NASDAQ:INTC) traded at a forward P/E of 50. It now trades at 14 forward P/E. The same thing could happen to Checkpoint.

People have become blasé about network security. That malaise will continue until there is a new virus or a big company’s security is breeched.

The street reacted with great excitement on the news of Checkpoint’s acquisition of Protect Data AB. The stock rebounded 30%. That is old news now. As my boss at Merrill Lynch used to say, what are you going to do for me today?

At a price of 22, I would hold Checkpoint or use it as source of funds. You could score a double with Checkpoint in your investment portfolio but not a homerun. If Checkpoint makes another stellar acquisition or the son of the Trojan virus attacks, I will have been wrong and Checkpoint stock is going to the races.

CHKP 1-yr chart
CHKP 1-yr chart