SafeNet backs out of deal


SafeNet Inc., the Belcamp-based network security company, said yesterday that it was backing out of a deal to acquire British Internet security firm nCipher PLC and that its chief financial officer had left the company.

The company also revised its first-quarter earnings estimates to reflect lower-than-expected sales and earnings.

SafeNet's decision to pull out of the $150 million acquisition of Cambridge, England-based nCipher comes one week after the United Kingdom's Office of Fair Trading said that it was investigating the deal for possibly stifling competition. The deal would have been SafeNet's 11th acquisition in the past six years.

"We do not at this point in time expect to continue to focus on any large [merger and acquisition] transactions, but rather we will focus on running our business and running it more effectively," Anthony Caputo, SafeNet's chairman and chief executive officer, said in a conference call with analysts yesterday afternoon.

Britain's fair trading office, a government watchdog for consumers that aims to maintain competitive markets, had said that the nCipher deal would bring together two of the U.K.'s largest suppliers of encryption and decryption technology, possibly thwarting competition and leading to less innovation and higher prices for consumers. The deal was being examined by Britain's Competition Commission, and the investigation was expected to add six months to a deal previously scheduled to close this month.

Caputo said when the acquisition was referred to the competition commission that SafeNet "chose not to proceed because that formal board would have taken at least four months, probably longer, to do their review and would have been expensive and, most importantly, distractive in terms of our running our business."

The announcements were released after the market closed, and SafeNet officials could not be reached for comment late yesterday afternoon.

SafeNet offered few details in its press release about why Chief Financial Officer Ken Mueller was leaving, other than to say that Carole Argo, president of SafeNet and a former CFO of the company, will serve as interim CFO.

Argo will also continue her role as president.

Mueller could not be reached for comment.

Caputo made a statement about Mueller's departure during the conference call. When pressed by an analyst to discuss it further, he said: "We have until recently been a company that was marked by consistent execution of our business plan and accurate, timely reporting. Recently, we've had some issues in that area, and we and he concluded that" this would be the best move.

SafeNet said it expects revenue for the first quarter to be between $63 million and $65 million. The company had previously said revenue would be between $65 million and $69 million. Caputo said SafeNet could not predict first-quarter earnings per share but said expenses would be higher than planned because of recent accounting and Sarbanes-Oxley work totaling $800,000. Expenses from the nCipher deal will cost the company an additional $600,000, Caputo said.

Last month, SafeNet filed a document with the U.S. Securities and Exchange Commission saying it would adjust some of its 2005 earnings, strengthen its accounting staff and improve its financial reporting.

SafeNet said in the filing that it had "identified one material weakness pertaining to insufficient staffing and technical expertise in the company's accounting and financial reporting functions" and that it had hired two new accountants and created a new position of "director of recognition of revenue."

Shares of SafeNet fell more than 14 percent to $22.30 in after-hours trading. Its shares fell 14 cents, or 0.54 percent, to close at $25.97 yesterday during regular trading on Nasdaq.

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