Deal Alert: Cisco Buys Sourcefire (FIRE) for $2.7 Billion

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					Robert DeFrancesco’s
July 23, 2013

Deal Alert: Cisco Buys Sourcefire (FIRE) for $2.7 Billion

Read the July 2013 issue of Tech-Stock Prospector on your Amazon Kindle or
Kindle for iPad/iPhone reading app.

Here are some of the topics covered in the July 2013 issue:

*Mid-year update on the 8 TSP Tech Disruptors
*Splunk makes sense out of machine data
*A promising new growth vertical for NetSuite
*The deal pipeline builds at Guidewire Software
*ServiceNow pulling various growth levers
*Why Imperva continues to raise revenue guidance
*The key players to know in business analytics
*The bullish case for Cisco Systems
*Akamai Technologies accelerates mobile networks
*Can Aruba Networks hold its own against Cisco?
*How Ruckus Wireless benefits from Wi-Fi offloading
*A networking company to watch: SolarWinds
*Why some savvy investors were Demandware buyers
*Qualys gains market share in cloud-based IT security
*Riverbed Technology finds a new growth niche
*Palo Alto Networks is scorching firewall competitors
*Deal Report: IPO success for Gigamon

Order the July 2013 issue of TSP here:


Cisco Systems (CSCO) today announced that it is paying $76 a share in cash for
networking security vendor Sourcefire (FIRE, $75.48) in a transaction worth $2.7
billion. This represents a deal premium of 28.6% to yesterday’s closing price.

I think this is a smart use of funds for Cisco because security offers one of the best
growth outlooks in the networking segment. But Cisco is paying up for Sourcefire,
which is expected to come in with 2013 revenue growth of around 25% and 2014
growth of 20.7%. The deal has a forward price-to-sales valuation of 8x on
Sourcefire’s 2014 consensus revenue estimate.

Adjusting for a lower top-line growth rate than Sourcefire (FIRE), I calculate a
comparable buyout valuation for networking security vendor Fortinet (FTNT,
$21.21) of around $3.98 billion—or $24.56 a share, a 15.7% premium to the
current price. For this Fortinet estimate, I use a 5.8x forward (on 2014) price-
to-sales ratio and do not take into consideration any cash/investments on the
balance sheet.

A few smaller security players that we cover are seeing nice gains today off the
Cisco-for-Sourcefire deal announcement:

*Imperva (IMPV, $50.07) +4.3% Mkt cap: $1.2 billion (for more, see TSP #137)
*Infoblox (BLOX, $31.17) +3.8% Mkt cap: $1.5 billion (see TSP #136)
*Proofpoint (PFPT, $25.61) +3.6% Mkt cap: $870 million (see TSP #135)
*Qualys (QLYS, $16.03) +1% Mkt cap: $507 million (see TSP #137)

The following article on Sourcefire ran in the May 2013 issue of Tech-Stock
Prospector (TSP #135) when the stock was trading at just over $54:

Shares of networking-security vendor Sourcefire (FIRE, $54.18—TSP Watch List)
jumped 13.4% over the three sessions immediately following the release of Q1
results despite the fact that the company missed the consensus estimates on both
the top and bottom lines. Revenue of $56.2 million still showed growth of 21% and
came in within the guidance range of $56 million to $58 million.

Investors reacted positively because management said it still sees 2013 revenue
growth of at least 25% even though the always-lumpy federal business fell off the
cliff in Q1, declining nearly 37% from the year-ago level. Thankfully, Sourcefire has
two other growth engines: U.S. commercial revenue (52% of total revenue) in Q1
rose 40% and international revenue (37% of total) advanced 32%.

With the weakness in the U.S. federal business, this vertical accounted for just 11%
of total revenue in the quarter. On the earnings conference call, management said
several deals in the U.S. federal sector failed to emerge from the procurement
process in time to make the quarter. It was emphasized that there were no
competitive issues on the federal side—deals were not lost, simply pushed out by
the sequestration. A more accurate picture of U.S. federal spending on security is
expected to emerge over the next six to eight weeks, as agencies are now in the
process of determining where to direct recently released funds.

Management said 2013 could end up looking a lot like 2011, when nearly 50% of all
federal revenue for the year was recognized in the third quarter. This indicates that
Q2 will be another problematic quarter for the federal vertical. On the positive side,
management said it should be able to meet the 2013 top-line revenue growth target
of 25% even if the U.S. federal vertical turns out to be basically flat for the year.

It was revealed on the call that there are a lot of big deals in the pipeline across the
non-federal markets. With all of these seven-figure deals brewing in the U.S.
commercial and international segments, it is good to know that Sourcefire is not
relying on a big 2H rebound in the U.S. federal business to make its overall numbers
for the year.

Some interesting tidbits emerged on the call. First off, Sourcefire won a number of
deals in Q1 where it displaced legacy firewalls. For a vendor that traditionally sold
only intrusion-prevention systems (IPS), this is big news. The trend toward firewall
replacements started to show some traction in Q4 and added momentum in Q1.
Given the strength in the U.S. commercial business, there is no doubt that the
company is picking up market share.

 Sourcefire is definitely benefiting from its new multi-product strategy and is
disrupting the overall networking security market. The company’s relatively new
FirePower platform (only a third of the installed base is on it) bundles a next-
generation firewall (NGFW) with next-generation IPS, setting the company apart
from the competition.

The company’s FireAMP offering is another killer product. It is an intelligent,
enterprise-class advanced malware analysis and protection solution that uses Big
Data to discover, understand and block advanced malware outbreaks, advanced
persistent threats (APTs) and targeted attacks. While the competition only offers
point-in-time protection, FireAMP delivers continuous, real-time advanced
protection. The difference is the competition can miss attacks because of timing
issues, but FireAMP is always on guard.


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Tech-Stock Prospector Managing Editor Rob DeFrancesco has more than 20
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Description: Cisco today announces a big acquisition in networking security, paying a 28% premium for Sourcefire. Now to figure out the next M&A targets in security.