In an article published online today at BusinessWeek, we learn how Secure Computing’s CEO John McNulty came to the decision to surrender a substantial amount of his company’s equity in order to acquire CipherTrust yesterday for approximately $274 million in cash and stock.
Since it already appears Secure Computing is long on vision and short on execution — the company has yet to fully integrate and benefit from its acquisition of CyberGuard, which closed in January of this year — there is no reason to believe that the grandiose plans McNulty has for CipherTrust will come to fruition. In fact, it is likely that McNulty, who didn’t appear to take enough time after the CyberGuard acquisition to derive hard-earned lessons from the experience, has vastly underestimated the challenge of successfully integrating the technologies and people of CipherTrust into the would-be enterprise-security empire of Secure Computing.
The BusinessWeek article also reveals that CipherTrust’s CEO Jay Chaudhry seems to have pushed McNulty into cutting the deal sooner than he might have preferred. Apparently Chaudhry claimed, in a conversation with McNulty a few months ago, that larger players were interested in CipherTrust and would take it off the board if Secure Computing didn’t act quickly.
What follows is a relevant excerpt from the BusinessWeek article:
A few months back, Chaudhry called McNulty and warned him there wasn’t a lot of time: “He said, ‘I will put everything else on hold if you can move forward and try to put together a deal that makes sense.'” McNulty wasn’t thrilled, but badly wanted CipherTrust’s technology—which includes a network of offices that monitor Web activity and e-mail all over the world, identifying hackers by the way they launch attacks before they strike. It reads and analyzes some 120 billion messages a month and catches and blocks more than 250,000 infected “zombie” computers that are doing hackers’ bidding every day. McNulty saw it as a valuable underpinning to bolster all three company’s existing technology and couldn’t let it slip through his fingers.
McNulty clearly had his reasons for pursuing an acquisition of CipherTrust, but it appears that he allowed his counterpart at CipherTrust to pressure him into moving faster than logic dictated. I think it’s a fundamental principle that one company should never buy another one simply to keep it out of the hands of a competitor. If it doesn’t suit your business model, if it doesn’t fit your corporate culture, if it doesn’t pass rigorous due diligence, then you should not proceed. While it seems that McNulty definitely had considered how CipherTrust’s products and technology meshed with those of Secure Computing, he also appears to have rushed the deal, perhaps circumventing some due diligence in the process, just so that he could beat somebody else to the altar with CipherTrust.
But was there anybody else pursuing CipherTrust, or was that a salesman’s ruse employed by Chaudhry to close the deal? From what I have heard, none of the major players in network security were actively engaged in takeover talks with CipherTrust, though the company had approached nearly all of them in a bid to generate interest.
Whatever the case, Secure Computing will have to live with the results now. McNulty can be sure that shareholders, who reacted sharply to a significant earnings shortfall that was announced yesterday along with the acquisition of CipherTrust, will be watching closely. They have shown, along with market analysts covering the company, that they are not afraid to express their disapproval.