In the face of a generally rising stock market yesterday, shareholders of Internet security company VeriSign (NASDAQ:VRSN) felt left out and shouted in unison, "Somebody take these guys' credit cards away!" The company announced that it just spent $40 million to acquire Reston, Va.-based iDefense, a privately held Internet security consultant and protective software maker.
iDefense's stock in trade appears to be as follows: The company employs 45 workers in the U.S. and retains the services of an additional 200 contributors in 30 countries. In addition to the breadth of its network, iDefense has contributors who speak many languages and have connections with the Internet community in many locations around the globe. These assets help identify Internet threats, such as phishing scams, viruses, and distributed denial-of-service attacks, before they become major problems for Internet service providers or their end users. According to iDefense, its capabilities were key to ensuring that its clients learned of the advent of the SoBig and Blaster viruses in time to take proper protective measures.
It's successes like these that have made the company one of the preferred providers of Internet security services to the U.S. government, as well as to some of the world's biggest companies and financial institutions. And it's that special relationship that iDefense has with so many valuable clients -- the U.S. government in particular -- that makes it valuable to VeriSign.
How valuable, you ask? It's hard to say, given that the most recent published sales figures for iDefense put its revenues at $3.5 million. That would make for an 11 to 12 times sales multiple on this $40 million deal -- which may explain the 1.2% drop in price that VeriSign's stock suffered upon the deal's announcement. More likely, though, the current multiple is considerably lower than that, as iDefense has been growing rapidly. And in any case, VeriSign's $820 million cash hoard and $227 million in annual free cash flow mean that even if VeriSign overpaid a bit, it can probably afford to do so.
Whatever the multiple, VeriSign apparently feels the price is worth paying for an additional entry in the massive government IT security market, which is currently worth more than $6 billion per year, amidst competitors such as Entrust Technologies (NASDAQ:ENTU) and RSASecurity (NASDAQ:RSAS). It also believes that iDefense's Internet intelligence capabilities will enhance the value of VeriSign's Managed Security Services group (responsible for advising clients on security issues and modifying their equipment to meet threats as they arise). If either or both of those beliefs prove true, this should prove to be $40 million well spent.
For more Foolishness on VeriSign (free of viruses and phishing scams, of course), read these stories on the company by my colleague Tom Taulli:
- More Good Signs From VeriSign
- VeriSign Doesn't Connect
- Can You Hear VeriSign Now?
- Not Quiet on European Cell Phones
- Judge Tells VeriSign U CAN'T
Fool contributor Rich Smith owns no shares in any company mentioned in this article.
