Sometimes you just gotta wonder what tech executives are thinking. Cisco is buying Sourcefire for $2.7B. That prices the target at a 540 P/E (my calculation, based on their year-end 2012 earnings). Who the holy heck pays that much for a company?! It's not like Cisco is incapable of developing enterprise security technology themselves if they really wanted it. I got a peek inside their headquarters in 2006 and they had plenty of capability even then. They could have prowled the expo floor at any of the tech trade shows I've attended for startups developing network security. Startups building firewalls can be owned for much less than several billion.
Cisco is buying a company that earned just a hair over $5M last year and those earnings have declined precipitously in the last three years. I would understand paying a premium for growth but not for shrinkage. Sourcefire has begun to dig itself out of its retained earnings deficit but that doesn't necessarily mean Cisco is getting a bargain.
Security sector executives need not get overly excited about seeing their own companies getting snatched up at premia. Any consolidation in the sector will need to happen right now, like in the next few months, before the US economy tips back into recession and businesses seriously cut back their IT spending.
In normal times I'd be tempted to short Cisco's stock on news like this but I'll stay on the sidelines. If the deal makes sense it won't be because of the price.
Full disclosure: No position in CSCO or FIRE at this time.
Cisco is buying a company that earned just a hair over $5M last year and those earnings have declined precipitously in the last three years. I would understand paying a premium for growth but not for shrinkage. Sourcefire has begun to dig itself out of its retained earnings deficit but that doesn't necessarily mean Cisco is getting a bargain.
Security sector executives need not get overly excited about seeing their own companies getting snatched up at premia. Any consolidation in the sector will need to happen right now, like in the next few months, before the US economy tips back into recession and businesses seriously cut back their IT spending.
In normal times I'd be tempted to short Cisco's stock on news like this but I'll stay on the sidelines. If the deal makes sense it won't be because of the price.
Full disclosure: No position in CSCO or FIRE at this time.
