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(Reuters) - FireEye Inc said on Wednesday it paid $200 million to buy privately held iSight Partners in a move to boost its cyber intelligence offerings for governments and businesses as the sector consolidates.
The deal brings together two of the world's most prominent cyber firms: FireEye's Mandiant forensics unit is a leader in helping companies investigate cyber attacks, while iSight has uncovered major cyber campaigns from Iran, Russia and other nations.
It follows a steep decline in valuations of public and private cyber security firms, which some investors consider too richly valued after a series of high-profile cyber attacks on the U.S. government, Sony Corp and Target Corp spurred interest in the sector.
Many private tech companies in other sectors have also seen steep drops in valuation in recent months.
The iSight deal, which closed Jan. 14, calls for paying another $75 million in cash and stock to iSight shareholders if the business meets certain sales targets through mid-2018.
Even then, the total of $275 million would be less than a third of the $1 billion valuation that iSight Chief Executive John Watters said last year he was hoping to get in a potential 2016 initial public offering.
ISight has 250 experts in 17 countries tracking about 16,000 adversaries, or about 20 times the number currently followed by FireEye. In 2015, it had about $50 million in billings, an indicator of future sales based on signed subscriptions, according to FireEye.
Both companies already have significant government businesses, but FireEye is stronger in the corporate market and said it hopes to distribute new intelligence products to those customers.
Watters said in August he hoped to raise another $100 million in financing during 2015 and then take iSight public in late 2016 at a valuation of at least $1 billion.
Watters told Reuters in an interview that he decided to sell after the market for funding became more difficult.
"Investors are more discerning," Watters said. "I thought our ability to execute alone was risky and would not give us the full leverage of what we could achieve through a merger."
FireEye shares have been among the biggest victims of reduced hopes for cyber firms, tumbling 67 percent in the past six months. The PureFunds ISE CyberSecurity ETF fell 27 percent and the Nasdaq Composite Index dropped 14 percent during the same period.
FireEye Chief Executive Dave DeWalt declined to say whether the firm had been approached by potential buyers, but did not rule one out.
"My job is to run the company as best I can and to create the best shareholder value," he said. "If big companies come along to acquire us and they give us a great payout, you've got to consider it."
Venture investors said that record M&A activity for the sector should continue to accelerate thanks to lower valuations and start-ups struggling to get additional private funding.
"Companies are taken out before they want to get taken out," said Sean Cunningham, managing director with Trident Capital Cybersecurity.
In the first three quarters of 2015, security firms signed some 211 M&A deals, more than the 192 record number of deals for all of 2014, according to AGC Partners.
FireEye also released preliminary fourth-quarter results, saying it expects to report quarterly revenue of $184 million to $185 million, compared with the average forecast of $186.9 million according to data from Thomson Reuters I/B/E/S.
It also projected fourth-quarter billings of $257 million to $258 million, at the high end of its previous forecast of $240 to $260 million.
The better-than-expected earnings pushed FireEye's shares up more than 5 percent in after-hours trading, the stock at one point reaching $16.30, a $1.43 climb from the closing price.
"There were death-like expectations going into this quarter," said Daniel Ives, FBR Capital Markets analyst. "This gave the Street something to hang their hat on."
Reporting by Jim Finkle in Boston and Heather Somerville in San Francisco; Editing by Jonathan Weber, Bill Rigby and Dan Grebler