UPDATE 4-Cisco to buy Sourcefire, more network security deals seen

Tue Jul 23, 2013 3:31pm EDT

* Cisco to pay $76 per share, a premium of 28.6 pct
    * Deal likely to close during second half 2013
    * FireEye, Fortinet, Barracuda Networks could be targets


    By Nicola Leske
    July 23 (Reuters) - Cisco Systems Inc said on
Tuesday it plans to purchase cybersecurity company Sourcefire
Inc for $2.7 billion, a deal that analysts say should
spark more acquisitions in the industry as large vendors seek to
profit from growing demand for IT security. 
    Cisco, which has been seeking targets to boost its network
security business, said it will pay $76 per share in cash for
Sourcefire, a premium of 28.6 percent over its closing price on
Monday of $59.08. 
    "We looked broadly at all the major players ... Sourcefire
fit perfectly," Cisco's business development chief Hilton
Romanski said in an interview. 
    Cisco has made it a priority to improve its security and is
pushing to offer multiple security capabilities in hardware,
software and cloud. Sourcefire is strong in intrusion detection
and protection appliances, which is one of the higher growth
segments within security.
    Sourcefire shares rose 27.8 percent to $75.51 in afternoon
trading while Cisco stock was down 0.3 percent at $25.64. 
    Analysts said the valuation may be high but the deal made
sense for Cisco, which has lost market share in network security
to small, innovative rivals such as Juniper Networks Inc
, Check Point Software Technologies, and Palo
Alto Networks Inc. 
    Cisco wants to be the top player in security and shed its
reputation of lagging in that area, company security head Chris
Young told analysts on a conference call.
    "We will not rest until we are the number one security
partner for our customers, hands down," Young said.
    More acquisitions should be on the way in the tech security
sector, which Research firm IDC has said spending this year
should generate 7.8 percent revenue growth for vendors.
    "We view this morning's news as 'game changing' for the
cyber security space as we expect a surge of consolidation to
take place over the next 12 to 18 months," Daniel Ives, a tech
analyst with FBR Capital Markets, said in a research note.
    He added that larger technology players such as IBM,
Juniper, Symantec, and EMC could look to
acquire smaller security players to help drive growth given the
high priority security has in IT spending.
    Brian White, an analyst at Topeka Capital Markets, said Dell
 and Hewlett Packard could also be seeking to
expand their security offerings, and the Sourcefire acquisition
could be the beginning of more transactions.
    Potential targets are smaller, more nimble companies that
provide up-to-date network security to combat advanced hacking
attacks. Security protection needs have grown more complex with
the proliferation of web applications, social media and video
streaming.
    Palo Alto Networks, Fortinet as well as
privately held FireEye and Barracuda Networks are considered top
picks. 
    FBR's Ives said Fortinet could be worth around $39 a share
for example. Fortinet shares rose 5.5 percent to $21.57 in
afternoon trading.
    Cisco said it will integrate Sourcefire, based in Columbia,
Maryland, into its security business. Sourcefire founder and
Chief Technology Officer Martin Roesch and other top executives
will join Cisco's security group.
    BMO analyst Tim Long said adding Sourcefire gives Cisco's
business about 20 percent more scale and improves the cloud
security offering. 
    "We see this acquisition turning Cisco's security business
from low single-digit growth to mid high-single-digit growth,"
Long said.
    Cisco said the deal should close during the second half of
this year, and it expects the acquisition to be slightly
dilutive to non-GAAP earnings in fiscal year 2014.
    Young did not rule out further acquisitions because cyber
security threats were constantly changing and adversaries were
well-funded.
    "As the landscape changes we will respond, organically and
non-organically," Young said.
    Cisco Chief Executive John Chambers said in December that
Young had a "blank check" to overhaul the business.
 
    RBC Capital Market analyst Mark Sue said in terms of
acquisition targets "product, platform, channel integration will
be important for Cisco, which has yet to be the customer's first
choice for security".
    Centerview Partners advised Cisco on the deal.
    Sourcefire hired Qatalyst partners, according to a source
familiar with the matter.