Another Company Gets Bailed Out?

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This morning, McAfee (NYSE: MFE  ) agreed to acquire former Motley Fool Rule Breakers recommendation Secure Computing (Nasdaq: SCUR  ) for $465 million in cash. And you thought only banks got bailouts.

A bailout by any other name...
Technically, this isn't a bailout. McAfee is acquiring a network security business with several technically advanced products and services under its belt. Topping the list is TrustedSource, which acts like a credit check for data traveling across a network. Bits sent from an address with a reputation for spreading malicious content get stiff-armed at the network gateway.

Other Secure Computing products including the Sidewinder firewall and the WebWasher filtering system, which upstart Finjan claims violates its patents. McAfee's purchase suggests that the in-process litigation between Finjan and Secure either will soon be settled, or is not as serious as some might believe.

So why even refer to this as a bailout? This isn't Bank of America (NYSE: BAC  ) rescuing Merrill Lynch. Nor is it perfectly reminiscent of the combine-before-we-die mishmash that led to Sirius XM (Nasdaq: SIRI  ) .

Yet Secure Computing's financials have been anything but secure in recent quarters. Debt plagued its balance sheet before Aladdin Knowledge Systems (Nasdaq: ALDN  ) agreed to pay $65 million in cash for its SafeWord authentication technology. Free cash flow -- once a staple of the business -- went missing in the second quarter.

At the same time, big competitors such as Cisco (Nasdaq: CSCO  ) , McAfee, and Symantec (Nasdaq: SYMC  ) have been toying with greater investments in network security. CEO John Thompson told MarketWatch in August that Symantec would be looking at cash-starved peers; observers considered Secure Computing a prime target.

There's rain in those clouds
No longer, McAfee wins the prize. Will the purchase be worthwhile to investors? I think so. Security remains critical, because digital attacks are on the rise worldwide. Some recent headlines:

  • "Malware Poses as iPhone Game," eWeek, Sept. 18, 2008
  • "Hacked Texas National Guard site serves up malware," ComputerWorld, Sept. 18, 2008
  • "Brad Pitt named as top malware lure," InfoWorld, Sept. 17, 2008

You read that right. Hackers are using Mr. Angelina Jolie to spread digital nastiness. Wonderful.

Overall, researcher Webroot says that 85% of malware -- otherwise known as any combination of bits and bytes whose purpose is to compromise your system or data -- is now distributed via the Web. It's as strong an argument as I've yet seen for the TrustedSource technology.

How will McAfee implement it once it takes control? The press release announcing the deal refers to extending McAfee's "in-the-cloud" security as a service offering, which, in turn, is an allusion to Artemis -- a process for fingerprinting data in real-time using a Web-connected database. TrustedSource should make the database richer.

Old rebels die hard
And for those Rule Breakers subscribers who hung on even after we sold? They're getting $5.75 a share, a 23% premium to yesterday's close, and 8% higher than our selling price. Not a bad deal in a market where tech is tanking right alongside everything else.

The price might have been higher save for the $84 million in preferred equity on Secure Computing's books, taken on to fund the purchase of TrustedSource from CipherTrust in 2006.

Therein lies the tragedy of this stock market story. Secure Computing acquired a compelling technology, and built a decent offering around it. But never took those assets to a higher level, and returns suffered.

I guess that's why we call these things bailouts. Chalk up another one.

Symantec is an Inside Value pick. Bank of America is an Income Investor recommendation.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. He also hunts for the best of tech as a contributor to Rule Breakers. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings here. The Motley Fool has a perfectly solvent disclosure policy.

Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2008, at 7:25 PM, Z1chopper wrote:

    This is what happens when a board gets hold of a company and forgets what the spirit of this company was only a year ago.

    They got rid of head of sales and the head of their legal and their CEO who all brought their own personalities to this company. They never did have that many bad quarters but when they did have a miss they would get crushed, everytime. And I am not forgetting about all the employees who worked so hard to make this company grow. Even you guys thought this companies was a good bet a few months ago. The board thought they knew better than everyone else and than ran the company into the ground. To bad they didn't know the people who did business with Secure also liked the people running it.

    I still can't believe this has happened.

    Everyone including the board has lost a lot of money with this deal.


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