Palo Alto Networks Inc (PANW.N), which makes firewalls to protect companies from cyber attacks, said it would buy a tiny Israeli security firm, Cyvera, for about $200 million in a move that some analysts expect will crimp profits over the next few years.
Palo Alto's shares fell as much as 7 percent in late morning trading.
FBN Securities analyst Shebly Seyrafi estimated that the deal would lower Palo Alto's profit by about 10 percent in 2014 and by about 20 percent in 2015.
Seyrafi, however, kept his "outperform" rating on the company's stock, saying the acquisition of the early-stage Cyvera was Palo Alto's "investment in the future."
Cyvera's software protects businesses from cyber threats by blocking unknown, zero-day attacks on computers running Microsoft Corp's (MSFT.O) Windows software, including ATMs and cash registers.
Palo Alto Chief Executive Mark McLaughlin told Reuters that the company planned to add technology to fight attacks on Apple Inc's (AAPL.O) Mac computers, and mobile devices such as those running on the iOS and Google Inc's (GOOG.O) Android operating system.
Cyvera currently has about six customers, according to McLaughlin.
Zero-day cyber attacks exploit a vulnerability in computer systems and networks known only to the attacker.
FBR Capital Markets analyst Daniel Ives said he viewed the deal "as a very smart acquisition that could significantly expand their (Palo Alto's) total addressable market opportunity in cyber security."
Seyrafi estimated that the deal would increase Palo Alto's total addressable market by about a quarter to $20 billion.
Ives said he saw the space as an "arms race" as cyber security players such as Palo Alto, Check Point Software Technologies Ltd (CHKP.O) and FireEye Inc (FEYE.O) are all in the process of building out their product wings.
The deal is Palo Alto's second acquisition after it bought privately held Morta Security Inc, which was founded by former National Security Agency officials, in January. (r.reuters.com/zuf87v)
Palo Alto's rival FireEye bought cyber forensics and security software firm Mandiant Corp for about $1 billion in December.
The growing threat of online crime has increased demand for cybersecurity products as companies are no longer relying solely on anti-virus software to protect their networks.
FireEye said last month that it would start selling intrusion prevention systems, which help companies detect attacks that breach their firewalls, by the middle of this year.
Palo Alto will pay about $88 million in cash and $112 million in stock for Cyvera.
The deal is expected to close in the second half of its fiscal year 2014, Palo Alto said.
Tel Aviv-based Cyvera has 55 employees. Palo Alto, which had 1,375 employees as of January 31, ended the quarter with $501 million in cash and cash equivalents, and no debt.
Palo Alto's shares were down 4.6 percent at $73.06 on the New York Stock Exchange in noon trading.
The stock had gained 44 percent between July 2012, when the company went public, and Friday's close.
(Reporting by Soham Chatterjee in Bangalore and Jim Finkle in Boston; Editing by Kirti Pandey)