Wall Street Gives Check Point The Kiss Off (CHKP)

| About: Check Point (CHKP)

Check Point Software Technologies Ltd. (CHKP), the Israeli enterprise and personal firewall software company, was downgraded by JPMorgan, HSBC and Cowen last week as its purchase of U.S. network securities provider, Sourcefire, fell apart. The Committee on Foreign Investment in the U.S. had decided to take a harder look at the deal.

Investors ran for cover and the stock dropped. But was the deal really that important? Sourcefire is used on some government computer systems, and granted, it has a good business. The deal was set for $225 million and some estimates had put Sourcefire revenue at $25 million. Check Point said that it would pursue a relationship with Sourcefire via partnerships instead of M&A.

All this sound and fury obscures what a good business Check Point has, merger or no merger. The company's revenue has risen from $433 million in 2003 to $515 million in 2004 to $579 million in 2005. Operating income in 2005 rose 29% to $332 million. Most companies would die for operating income margins like that. The company also has an excellent balance sheet.

Every indication is that Check Point is staying ahead of the curve with new product introductions. The information and security press still give the company's software and solutions high grades.

Sourcefire's intelligent network defense systems, revenue base, and customers would have been assets to Check Point. But, firms like McKinsey & Co. and KPMG bad-mouth mergers as a route to growth on a fairly regular basis. One McKinsey report noted that of 160 acquisitions by public companies, it could only find 12% that had "dramatic revenue acceleration over the next three years".

At $20, Check Point is trading about 20% below where it was last October. Funny, their numbers look better now, and they don't have the execution risk of a deal that looked good on paper, by may or may not have worked.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited site on the internet, according to Media Metrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. He has also served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.