Cisco Systems, Inc. (NASDAQ:CSCO) just announced plans to buy Sourcefire, Inc. (NASDAQ:FIRE) for $2.7 billion. The move helps bulk the networking giant up in an area where it had started to fall behind. Are Radware Ltd. (NASDAQ:RDWR) and Fortinet Inc (NASDAQ:FTNT) the next targets?
All Cash, Bail
Sourcefire, Inc. (NASDAQ:FIRE)’s top line has been growing steadily for a decade, but it only turned profitable in 2009 after a string of share net losses. Although it has made money every year since then, first quarter sales were down compared to the fourth quarter of last year. The shares initially sold off on the news, but have since recovered.
That sales weakness, however, appears to have been a buying opportunity for Cisco Systems, Inc. (NASDAQ:CSCO), creating a quick windfall for shareholders. Although Sourcefire, Inc. (NASDAQ:FIRE) has solid prospects as a stand alone company, the all-cash deal doesn’t offer much upside unless a competing bid comes along. That’s not likely and the shares will drop if the deal falls apart. Take profits.
What the Buyers Gets
Cisco Systems, Inc. (NASDAQ:CSCO) will be buying a company that specializes in devices that monitor networks for security threats. Notably, Sourcefire, Inc. (NASDAQ:FIRE) recently launched products that look specifically for malware in network settings and, more interestingly, in the high-growth mobile space.
The purchase will bolster Cisco Systems, Inc. (NASDAQ:CSCO) in an area in which competitors have taken the lead. Although it doesn’t fully close the gap, it at least increases the company’s competitive position. Cisco Systems, Inc. (NASDAQ:CSCO)’s top and bottom lines had been growing steadily up until 2008. Although sales quickly picked up after dipping in 2009, earnings and profit margins have been more variable.
And the shares have been largely range bound since the technology bust at the start of the century. The last four years of seesaw earnings haven’t helped any. Although the Sourcefire deal isn’t a transformative deal, it shows that Cisco is working to address its weaknesses. That makes this around 2.7% yielder worth a look for growth and income investors. Note, too, that its price to earnings ratio of 14 is about two points lower than its five year average PE.
Who’s Next?
Radware Ltd. (NASDAQ:RDWR)’s specialty is denial of service attacks. This is when a computer system is flooded with requests to the point where it becomes overwhelmed and basically shuts down. It can be an incredibly costly form of cyber attack. The company sells a devices that monitors network activity looking for malicious behavior. The device reacts in real time to stop the attack.
Sales have grown steadily over the last ten years, but were flat year over year in the first and second quarters. More concerning, earnings were down about 35% or so year over year in each quarter, too.
The weak first quarter caused the stock to sell notably lower, a drop from which it has yet to recover. That could make now a good time for a buyer to step in. More aggressive investors, meanwhile, might also find now a compelling time to look at the shares since cyber defense spending is only going to increase from here.
Fortinet Inc (NASDAQ:FTNT) provides an all-in-one cyber protection system called FortiGate, along with a collection of management tools that support the product. FortiGate provides firewall, virtual private network, antivirus, intrusion prevention, web filtering, and antispam tools, among others.
The company’s top line was up year over year in the first quarter, but like the other two cyber specialists here was sequentially lower in the first quarter. The shares sold off after it reported results and have yet to fully recover. Second quarter earnings, meanwhile, were lower by a third. Like Radware, this weak spell could make now a good time for investors or an acquirer to step in.
Buying Protection
The cyber protection industry is only just heating up. The Sourcefire deal could be the start of an acquisition binge by larger players looking to bulk up fast in a hot sector. Based on the all cash deal, investors should sell Sourcefire shares to lock in gains.
Fortinet is about twice the size of Sourcefire, so an acquisition would be that much more expensive. Still, its products and customer base would make a nice addition to an industry giant trying to bulk up. Radware, a much smaller player than the other two, would be an easier target. And both have plenty of potential as stand alone entities once their businesses solidify.
The article Tech Giant Bulking Up For Cyber War originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Sourcefire. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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