Today: Fortinet looks to challenge market leader Cisco Systems and stand apart from other security companies with acquisition of Silicon Valley Wi-Fi networking company Meru Networks.
The Lead: Fortinet acquires Sunnyvale neighbor Meru Networks for $44M
As Silicon Valley’s security sector grows, Fortinet is looking to stand out from the crop of young upstarts and challenge industry leader Cisco Systems by selling its own hardware, with help from a local pioneer in Wi-Fi networking.
Fortinet and Meru Networks announced an acquisition agreement Wednesday that values Meru at $44 million, with Fortinet committing to pay $1.63 a share in cash for its Sunnyvale neighbor. Fortinet also debuted a new subscription service aimed at companies that allow employees to provide their own mobile devices and connect to their networks, which the hardware and software knowledge acquired in Wednesday’s deal could boost.
“It’s a wireless, mobile world, and security is obviously becoming more important,” John Whittle, vice president of corporate development and general counsel at Fortinet, said Wednesday in an interview. “With this convergence between Wi-Fi and security, we have the security products, they have the wireless products, and we can bring those together.”
Most of Silicon Valley’s new wave of network security companies focus on software to fight and detect threats, while working with hardware partners. Cisco has managed to take the most market share in a heavily fragmented industry by combining cloud-focused wireless networking products from its $1.2 billion purchase of Meraki with security solutions acquired with Sourcefire for $2.7 billion. Hewlett-Packard mimicked that move this year, buying Voltage Security and Sunnyvale-based Aruba Networks while prepping an enterprise-focused company.
“Fortinet may be much smaller than Cisco, but they can definitely be heard in the marketplace,” IDC analyst Nolan Greene said.
Fortinet has attempted to find a sweet spot between Cisco and its younger rivals. Greene, a networking research analyst, noted that the company began selling hardware a couple years ago, and describes their current offerings as “fairly robust” and improving with its Meru purchase.
“This was a fortuitous opportunity for them to find a company that was able to be bought at a discount, that has a fairly well-established brand and a longtime customer base,” Greene said.
Meru is the last company still pitching a single-channel architecture for wireless networks, Greene said, and brings a wealth of research and development experience as well as patents. The 13-year-old company has a customer base that is heavy on health care and education, where the dangers of the bring-your-own device trend can be multiplied.
“Without knowing where the device has been when its not on your premises, there’s risk from what that device can be exposed to,” Greene explained. “If there’s any opening on a network, any vulnerability, it can introduce malware, bots, all kinds of ugly stuff onto the network.”
Fortinet’s Whittle declined to discuss Fortinet’s strategy for any future acquisitions, but noted that the company’s $1 billion in cash and lack of debt offers flexibility. FBR Capital Markets analyst Daniel Ives — who said the Meru acquisition is a “differentiator that beefs up (Fortinet’s) suite and tangentially goes after some of that Cisco pie” — believes these types of small acquisitions are key for Fortinet to expand its customer base.
“Fortinet is doing all the right things fundamentally and this is another feather in the cap for them,” Ives wrote in an email Wednesday.
Fortinet expects the deal to close in the third quarter, and will combine the companies instead of running Meru as a separate entity. Meru reported having 381 employees, half outside the United States, at the end of 2014, during which the company lost $20.9 million, or 89 cents a share, on sales of $90.9 million.
Fortinet gained 0.4 percent to $39.43 Wednesday, and Meru jumped 15.8 percent to $1.61 to more closely mirror the acquisition price.
SV150 market report: Stocks bounce back as Apple gains
Wall Street rebounded Wednesday from a rough start to the holiday-shortened week, as Apple helped guide indexes to strong gains.
The Cupertino company gained 1.9 percent to $132.04 Wednesday despite widespread discussion of an iPhone glitch. Apple acknowledged that a specific string of characters could shut down a user’s iPhone when received in a text message, and said it was working on a fix as pranksters sent the message to friends. Apple also received good news from General Motors, which announced iOS and Android systems will be available in several of its 2016 models.
Google added 1.4 percent to $539.79 while preparing for the Thursday kickoff of its annual developers conference, which is expected to focus on the many different potential uses for Android; for live coverage of the keynote address Thursday morning, go to www.siliconvalley.com. Yahoo gained 1.2 percent to $43.38 after San Jose judge Lucy Koh ruled the Sunnyvale company must face a class-action suit from non-Yahoo email users who had their correspondence scanned, and The Wall Street Journal reported that Google and Yahoo had joined Twitter in kicking the tires on a potential Flipboard acquisition. After announcing earnings Tuesday afternoon, Workday had the worst day in the SV150, falling 11.3 percent to $82 as analysts fretted about competition from Oracle. Other companies that reported earnings Tuesday experienced better reactions: TiVo gained 3.4 percent to $10.71 and Nimble Storage added 1.9 percent to $25.87. Palo Alto Networks divulged results Wednesday afternoon, and slid slightly after closing with a 2 percent drop at $160.65. Ahead of a planned initial public offering, San Francisco’s Fitbit was sued by competitor Jawbone, which claims Fitbit poached its employees and ideas.
Up: Nvidia, SanDisk, Juniper, AMD, Gilead, Pandora, EA, Netflix
Down: Workday, Palo Alto Networks, SunPower
The SV150 index of Silicon Valley’s largest tech companies: Up 28.28, or 1.59 percent, to 1,807.82
The tech-heavy Nasdaq composite index: Up 73.84, or 1.47 percent, to 5,106.59
The blue chip Dow Jones industrial average: Up 121.45, or 0.67 percent, to 18,162.99
And the widely watched Standard & Poor’s 500 index: Up 19.28, or 0.92 percent, to 2,123.48
Sign up for the 60-Second Business Break newsletter at www.siliconvalley.com. Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/jowens510.
