Cisco Systems will purchase cybersecurity company Sourcefire for US$2.7 billion, a deal that analysts say should spark more acquisitions in the industry as large vendors seek to profit from growing demand for IT security.
Cisco, which has been seeking targets to boost its network security business, said it will pay US$76 per share in cash for Sourcefire, a premium of 28.6 percent over its closing price on Monday of US$59.08.
"We looked broadly at all the major players ... Sourcefire fit perfectly," Cisco's business development chief Hilton Romanski said.
Cisco has made it a priority to improve its security and is pushing to offer multiple security capabilities in hardware, software and cloud. Sourcefire is strong in intrusion detection and protection appliances, which is one of the higher growth segments within security.
Sourcefire shares rose 27.8 percent to US$75.51 in afternoon trading while Cisco stock was down 0.3 percent at US$25.64.
Analysts said the valuation may be high but the deal made sense for Cisco, which has lost market share in network security to small, innovative rivals such as Juniper Networks, Check Point Software Technologies, and Palo Alto Networks.
Cisco wants to be the top player in security and shed its reputation of lagging in that area, company security head Chris Young told analysts on a conference call.
"We will not rest until we are the number one security partner for our customers, hands down," Young said.
More acquisitions should be on the way in the tech security sector, which research firm IDC has said spending this year should generate 7.8 percent revenue growth for vendors.
"We view this morning's news as 'game changing' for the cyber security space as we expect a surge of consolidation to take place over the next 12 to 18 months," Daniel Ives, a tech analyst with FBR Capital Markets, said in a research note.
He added that larger technology players such as IBM, Juniper, Symantec, and EMC could look to acquire smaller security players to help drive growth given the high priority security has in IT spending.
Brian White, an analyst at Topeka Capital Markets, said Dell and HP could also be seeking to expand their security offerings, and the Sourcefire acquisition could be the beginning of more transactions.
Potential targets are smaller, more nimble companies that provide up-to-date network security to combat advanced hacking attacks. Security protection needs have grown more complex with the proliferation of web applications, social media and video streaming.
Palo Alto Networks, Fortinet as well as privately held FireEye and Barracuda Networks are considered top picks.
FBR's Ives said Fortinet could be worth around US$39 a share for example. Fortinet shares rose 5.5 percent to US$21.57 in afternoon trading.
Cisco said it will integrate Sourcefire into its security business. Sourcefire founder and CTO Martin Roesch and other top executives will join Cisco's security group.
BMO analyst Tim Long said adding Sourcefire gives Cisco's business about 20 percent more scale and improves the cloud security offering.
"We see this acquisition turning Cisco's security business from low single-digit growth to mid high-single-digit growth," Long said.
Cisco said the deal should close during the second half of this year, and it expects the acquisition to be slightly dilutive to non-GAAP earnings in fiscal year 2014.
Young did not rule out further acquisitions because cyber security threats were constantly changing and adversaries were well-funded.
"As the landscape changes we will respond, organically and non-organically," Young said.
Cisco CEO John Chambers said in December that Young had a "blank check" to overhaul the business.