Take a look at what is perhaps the leader in data security, Check Point Software Technologies Ltd. (CHKP). Many investors may not even know that they are an Israeli-based security venture, which means they were not subjected to the US rules on 128-bit data encryption maximized rules that the US imposed on all US-based companies in the 1990s. The government watchdog "CFIUS" had its eye on a recently announced transaction where Check Point was going to acquire privately-held Sourcefire, which claims to be the world leader in real-time network defense solutions. Sourcefire is at work in leading financial, healthcare, manufacturing, technology and educational organizations throughout the U.S., Europe, Asia and Latin America. But here is the kicker:
Sourcefire solutions are trusted by all branches of the military, the largest civilian agencies, and domestic, internal and military intelligence organizations. This kicker has all the earmarks of a red flag, and that is exactly what came up. Just last night Check Point announced that with consent of the U.S. government, Check Point and Sourcefire have agreed to withdraw its existing CFIUS application related to Check Point's acquisition of Sourcefire.
According to the press release (excerpt):
The companies have determined that it would be more effective to create a customer focused business partnership. "We've decided to pursue alternative ways for Check Point and Sourcefire to partner in order to bring to market the most comprehensive security solutions," said Gil Shwed, Check Point's CEO.
In short, this deal was going to be scrutinized, even though this may just be to show Dubai that we will be prejudiced against the Israelis and others owning what are deemed critical infrastructure assets rather than the US just being prejudiced against Arabs owning critical infrastructure assets.
This acquisition was going to allow CHKP stock to have potentially another growth engine in what has been a relatively mature data security market. If you think this analysis is flawed, then go run 18-month charts on these stock tickers: CHKP, MFE, WGRD, RSAS, & SYMC.
The Street has reacted by punishing the stock based on would have been a core growth engine for CHKP stock, and the earnings numbers are having to be ratcheted down as well. Morgan Keegan maintained its Market Perform rating, but noted that this may have added $0.04 to the 2006 EPS. JPMorgan cut this to a Neutral from Outperform, and both Cowen and Merrill Lynch cut their Buy ratings down to Neutral. Pacific Crest said this destroys any compelling reason to own the stock, CIBC trimmed its target from $28 to $26, and Jefferies trimmed its $22 target down to $21. Even Susquehanna cut this down to Neutral today and Wachovia cut its rating to Market Perform from an Outperform rating. Usually I am in the business of being skeptical when it comes to what they have to say, but I agree with them this morning.
As far as CHKP stock is concerned this is going to have to be left up to the technicians and chartists from here on out now. It also looks like the fundamental crowd is going to have to hang their hat on the fact CHKP may be looking like a "Value Stock" as opposed to a great tech or growth story.
HOW CAN YOU PLAY THIS OUTSIDE OF CHKP?
This was just a situation that turned out bad for CHKP, but was signaled back at the end of February and beginning of March around the same time as the Dubai Ports issues were making headlines every hour in the US.
The price tag was $225M for a company that reportedly had $35M in approximated revenues last year. So what is the likely scenario going forward? One of the US data security must acquire this private company. They now know what the management team is willing to sell out at, and they may even be able to get it cheaper since the one natural predator is now out of the way.
I reviewed Sourcefire's technology partners (http://sourcefire.com/partners/techpartners.html) which you will see on that link. It may be too small for an IBM to mess with, but either Symantec Corp. (SYMC) or VeriSign, Inc. (VRSN) could benefit from acquiring this company.
Both companies have shown that they will do deals, but VRSN is the one that is more apt to do this small of a deal. VRSN is the one that is more apt to do this small of a deal and the one that has been doing smaller deals of late. SYMC is also a partner, but they have been so battered over the SYMC/VRTS merger that they may feel like doing more deals is just not worth it. I obviously cannot assure that this is in the works, but this is what should happen and VRSN makes the most sense of the two. I would also expect that IF they (NASDAQ:VRSN) do the deal that the street will reward them based on the analyst comments and actions against CHKP this morning.