I Love Security

Art Coviello recently made a bold prediction: within a couple of years, there will be no more stand-alone network security companies. The president of RSA Security, which is a division of EMC (NYSE: EMC  ) , likely knows what he's talking about, and it all points to a likely flood of merger and acquisition deals in the sector. And I love it.

Basically, security software is a "must have" as data becomes a highly valued corporate asset. No doubt, it can be costly and very damaging if there is loss of data, as it could lead to identify theft, credit card fraud, and even extortion.

Besides, there's also catastrophic event risk, with examples like 9/11 and Hurricane Katrina. Can a company quickly reconstruct its data after such a disaster?

Moreover, there are myriad laws that require security, such as Sarbanes-Oxley, the Health Insurance Portability and Accountability Act (HIPAA), the Gramm-Leach-Bliley Act, and the Basel Committee on Banking Supervision (Basel II).

Oh, and of course, the threats to corporate networks continue apace. For example, according to CERT-CC data, there were about 3,780 disclosed vulnerabilities in 2004 and 5,990 in 2005.

So, it shouldn't be a surprise that over the past year there's been a myriad of M&A deals in the security software space. Some of the notable ones include EMC's $2.1 billion purchase of RSA; IBM's (NYSE: IBM  ) $1.3 billion acquisition for Internet Security Systems (ISS); and Cisco's (Nasdaq: CSCO  ) $830 million deal for IronPort Systems.

Clearly, big-time tech companies love security.

So, who else might be on their radar screen?

A good prospect is Check Point Software Technologies (Nasdaq: CHKP  ) . Interestingly enough, the company has been aggressive with its own M&A program lately. Perhaps the most important deal was for Protect Data AB, which secures mobile devices. This should turn out to be a nice revenue driver.

Furthermore, Check Point is a strong cash flow generator. In the fourth quarter, the company had about $77.7 million in cash flow from operations, and it's aggressively buying back its stock.

True, it's dicey to try to find the next buyout candidate. Keep in mind that Check Point has been a rumored buyout candidate for many years.

But if a deal does happen, it should be very good news. After all, recent transactions have been at high valuations, with revenues multiples of five times and better. That's certainly a lovely thing for investors.

Further Foolishness:

Fool contributor Tom Taulli does not own shares of any company mentioned in this article.


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