Ailing Sourcefire rebuffs bid

The Baltimore Sun

Sourcefire Inc., a Columbia security-software company that has struggled with losses since going public last year, said yesterday that it has rejected a $186 million acquisition proposal from a California anti-spam firm.

In a terse new release, the company said its board "believes that the proposal substantially undervalues Sourcefire." Officials declined to comment beyond the release.

The unsolicited $7.50-a-share offer from Barracuda Networks Inc. is 13 percent above Sourcefire's closing price on May 23, the last full day of trading before Barracuda proposed the deal. But it's half what investors paid when Sourcefire held its initial public offering in March last year.

Sourcefire makes software, based on open-source technology, that protects secure networks from hackers. Its customers include federal intelligence agencies.

"Sourcefire has some really good technology," said Dean Drako, president and chief executive of Barracuda, which sells Web site filtering and anti-spam applications. "On the business side, they have stumbled a little bit, unfortunately. ... Together, the companies would both be stronger."

He declined to comment on whether the privately held company, which employs nearly 500, would make a counteroffer.

Sourcefire's stock leaped to $7.75 a share when the Nasdaq exchange opened yesterday, closing at $7.64, up $1.01 from the day before.

Barracuda publicly announced its intentions late Thursday, arguing that it is "uniquely positioned to address the challenges that have impacted the company's performance and stock price."

Sourcefire reported a net loss of $5.6 million last year. Its chief executive, who announced in February that he would step down, said the company underestimated the costs associated with being public. But Ken Allen, an investment analyst with Baltimore-based T. Rowe Price Group Inc., one of Sourcefire's largest investors, said the losses are also a reflection of the company's decision to aggressively invest in growth.

Allen said he agrees with Sourcefire that the offer is too low.

"The multiple at $7.50, which was the proposed offer, is less than 1.5 times sales, which is cheap for a growing software business," he said. "I think it's worth more stand-alone and could be worth much more to an acquirer. ... They're the only public stand-alone and probably the only significant stand-alone, public or private, in intrusion prevention."

Todd C. Weller, a Stifel, Nicolaus & Co. Inc. software analyst who does not own Sourcefire stock, said the offer doesn't seem compelling. Sourcefire has about $4.50 per share in cash reserves, "so they're really only offering $3 per share for the business," he said.

In 2005, before going public, Sourcefire agreed to be acquired by Israeli-based Check Point Software Technologies Ltd. for $225 million - 21 percent more than Barracuda's recent offer. The deal collapsed in March 2006 because of government concerns about a foreign company taking over a firm that provides network security for secretive federal agencies.

Considering that Sourcefire has grown since, Allen said, the Check Point offer was "dramatically" higher than Barracuda's."The company has more than doubled since Check Point offered that, and this [new] offer is less than half of what Check Point offered on an enterprise value basis," he said.

But Drako noted that Sourcefire's share price was about $6.60 before Barracuda's offer. "That's what the market says the company is worth, so who am I to contradict the market?" he said.

Sourcefire is best known for selling software designed to work with its open-source intrusion-prevention technology, Snort. It acquired the open-source software Clam AntiVirus last year. The code behind open-source products is free and open for anyone to see.

Barracuda includes Clam AntiVirus in its customer product, and it's fighting a claim by online security company Trend Micro Inc. that this use of the software is infringing on one of Trend Micro's patents. Drako, who has called it an attack on the free and open source software community, said yesterday that Sourcefire faces the same potential threat and would benefit from joining forces.

Weller, the Stifel analyst, said a possible future patent claim against Clam AntiVirus doesn't strike him as a reason for Sourcefire "to panic and look to sell the company."

Peter Brown, executive director of the Free Software Foundation, said software companies are at risk of patent-infringement battles regardless of whether their coding is open source or proprietary.

Federal appeals judges are currently considering whether the scope of patents is too broad, Brown said.

"There's a lot of patent trolls out there," he said.

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