Well, it certainly hasn't been dull since I first wrote about Secure Computing (NASDAQ:SCUR). I received lots of email responses, all of which I read and sincerely appreciated. I did some more digging to try to understand the situation more fully, given that some things were unclear, in my view, in the press release. And we now have a very interested third party joining the fun. CyberGuard (NASDAQ:CGFW) made an unsolicited bid to buy Secure Computing outright for $297 million in a stock-for-stock deal. This sent shares up 10.1% to $7.01.
In my search to find additional information, I read two investment reports that said that Secure Computing received 30% of its sales from the U.S. government (including more than one customer) in the third quarter of 2003, 19% in the fourth quarter of 2003, and 21% in the first quarter of 2004. Thus, I was incorrect to use the 10% figure from the 10-K.
So let's use the 21% number from last quarter and $23.7 million in revenue Secure Computing expected in the second quarter. Assuming the government made up 21% of sales again, it would have purchased $5 million of products and services. A 40% shortfall in revenue from the government would equate to $2 million in lost revenue, which corresponds to the change the company disclosed in its press release.
But the imbalance between the revenue loss and the earnings loss still concerns me. I will challenge my assumptions again by not using the 10% net margins to calculate earnings. A change of $0.03 per share in earnings equates to just more than $1 million on a fully diluted basis, using 35.6 million shares outstanding. So, to lose that much net income on the revenue decrease could mean any combination of four things. First, costs are too high. Second, the company makes higher margins on sales to the government. Third, there are some additional charges that will be disclosed at a later date. Or lastly, I am just missing something -- heck, I couldn't spell peloton correctly until a few days ago.
I speculated about the first possibility in the first article. Losing high-margin sales is never good and could be a major component for why shareholders sold off and the stock suffered a flurry of downgrades. But history is on its side for higher amounts of government sales in the third quarter, so there is a possibility of making up some of the gap. For the shareholders' sake, I hope the federal government sales force is up to the task. With regards to additional charges, we'll have to wait and see if there are any, and you, the reader, can decide about the last possibility.
Although I am not sure Secure Computing is undervalued, CyberGuard clearly thinks it is. It made a bid to purchase the company for $297 million, a 22% premium over Friday's closing stock price of $6.37. CyberGuard even thinks it can achieve a parenting advantage as it expects $14 million in cost savings. For bravehearts who have more knowledge than I do, perhaps there is a risk arbitrage opportunity here -- with the operative word being risk, given that the bid is unsolicited.
Regardless of all the activity, I am content to sit in the peloton and wait for things to unfold around me, mainly the earnings conference call and the upcoming 10-Q.
Fool contributor David Meier does not own any of the stocks mentioned.
