Altiris' Secure Deal

Altiris (Nasdaq: ATRS) develops systems-management software that helps companies integrate and synchronize their complex IT environments. About a year ago, customers said they wanted Altiris to expand into vulnerability management, and now the company has responded -- not by creating its own technology, but by buying it.

After looking at about a dozen companies, Altiris has agreed to buy Pedestal Software, a privately held company with about 50 employees, for $65 million in cash. Pedestal has two products that address Altiris customers' needs: SecurityExpressions, which scans for problems in things like antivirus systems, firewalls, security patches, and security and configuration settings; and AuditExpress, which performs a complete vulnerability audit.

Altiris knew it had to make a move like this to maintain -- and grow -- its customer base. The company could have built its own system, but it would have been moving into unfamiliar territory, and it knew that big cash outlays may not necessarily equal project success. It also knew that federal regulations like Sarbanes-Oxley and the Health Insurance Portability and Accountability Act (HIPAA) have made it even more crucial to monitor security threats. Just look at the turmoil at ChoicePoint (NYSE: CPS), which is under intense regulatory scrutiny because of an unauthorized breach of customer records.

So it made sense for the company to buy what it needed, rather than reinvent the wheel. And Altiris picked what seems to be a good company. Pedestal's revenues are expected to reach $17 million to $18 million -- mostly in licensing revenues -- compared with 2004 revenues of just $5 million to $6 million. The licensing revenues consist of income generated from new customers, not maintenance fees from existing customers. That shows just how strong the demand is for Pedestal's products.

Altiris is no slouch itself. For the fiscal year ended Dec. 30, 2003, Altiris generated roughly $100 million in revenue, and it currently sports a market cap of about $690 million.

The Pedestal deal is expected to increase earnings per share by the third quarter of 2005. Altiris will integrate Pedestal's products on a fast track -- four to six months -- and will aggressively price the Pedestal product line. It also sees a big opportunity for cross-selling into Pedestal's customer base of about 100.

Heading into this fast-growing market, Altiris will face competition from such biggies as Symantec (Nasdaq: SYMC), NetIQ (Nasdaq: NTIQ), and Computer Associates (NYSE: CA). It will also be under pressure to produce an easily implemented platform that can stand up to the new regulatory requirements. Fortunately for Altiris, that's exactly what Pedestal does.

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