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.
(Reporting by Nicola Leske in New York, Supantha Mukherjee in Bangalore; additional reporting by Nadia Damouni in New York; Editing by Sreejiraj Eluvangal, Maureen Bavdek, Sofina Mirza-Reid and Nick Zieminski)