Rumors are swirling. Days after Aladdin Knowledge Systems (NASDAQ:ALDN) agreed to purchase the SafeWord authentication technology from Secure Computing (NASDAQ:SCUR) for $65 million in cash, Symantec (NASDAQ:SYMC) CEO John Thompson told MarketWatch that it's a good time to look at smaller, cash-starved peers.
To Fools like our own Sarah Goddard, that sounds like a bid in the making for Secure, a former Rule Breakers recommendation. "I saw this and thought of all [Secure] holders," she wrote on the discussion boards last week. I understand why; both Secure and Symantec are in the digital security business. But I think Thompson has other ideas.
Secure Computing and Symantec are actually very different. Secure specializes in hardware that works with other data-center devices to protect the outer edges of a network, otherwise known as the "enterprise gateway." Symantec makes software. Its Norton AntiVirus -- as close to a Windows-sized hit as you'll find in this industry, at least among firms not named Microsoft -- resides on desktops, and all its tools for protecting networks are software-based.
Rebel turns aging hipster
There's also a question of what value Secure would bring to Symantec. Additional growth? I'm not so sure; look at the numbers from its second quarter. Secure Computing reported 7% revenue growth and 5% growth in billings. Cash flow -- central to my original thesis for investing in Secure -- is down roughly 50% from last year's levels.
Looking ahead, analysts expect Secure to improve earnings more quickly than Symantec, but not by much: 14.7% vs. 11.8% over the next five years. Blame competition for that; Secure has at least as much as Symantec does. Blue Coat (NASDAQ:BCSI), Check Point Software (NASDAQ:CHKP), Websense, and Cisco (NASDAQ:CSCO) all compete with one or more of Secure's products.
To me, Cisco is the most dangerous name on that list. Its routers, best described as onramps to the Web's various freeways, are becoming more functional. Given time, they could absorb many of the features now provided by Secure's distinct boxes. Visualize the outcome: A network operator, invested in dozens if not hundreds of routers deployed in several data centers -- alongside many more servers -- saves money and power expense by not installing dozens of Secure boxes.
A precious Juniper needs protecting
That's the theory. In reality, Secure Computing sells the only firewall that's never been breached: Sidewinder. And its TrustedSource technology acts as a global credit check for data, analyzing Web traffic for malicious content. The result is a better border guard, one that has ready access to "Wanted" posters for the Web's most notorious denizens. On the list? Sorry, pal, you don't get through.
I thought that TrustedSource -- acquired from privately held CipherTrust in 2006 -- would protect and even expand Secure Computing's margins. It's a distinct service, as I wrote at the time. Alas, it may not be distinct enough: Cisco acquired similar, though less pervasive, technology from IronPort for $380 million in early 2007. Secure has produced inconsistent growth since, although for many different and not always related reasons.
Which brings us back to the question in the title: Should Symantec buy Secure Computing? No. If Cisco were Secure's biggest worry, Juniper Networks (NASDAQ:JNPR) would be a far better acquirer. It has the cash -- more than $2 billion at present -- and the need -- it sells "adaptive security" in its routers, though to me it appears lightweight when compared with TrustedSource.
Grinding the rumor mill
Secure Computing is a good company. I no longer own shares primarily because it's no longer a growth story, and I don't do turnarounds.
That said, my suspicion of Secure is born of years spent in and around Silicon Valley. I've seen superior technology tossed aside like empty popcorn tubs at a movie theater, with the credits still rolling. Those who buy technology consider sustainability as important as technological prowess. We don't know whether Secure Computing is sustainable in its current state. And if we can't tell, it's at least a 50-50 bet that tech buyers won't gamble to find out -- all of which argues for a buyout.
... Just not a Symantec buyout. What are you waiting for, Juniper?
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