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Economic Crisis Good For Acquisitions, Mergers

Cold economy a hot time for firms to either buy their way into new technologies and expand, or to merge and bulk up
It's a great time to make an acquisition if you're a security company flush with cash: Security vendor valuations are stabilizing as the economy slows, and selling or merging with another company may be the only way for some smaller and less established firms to survive in this climate.

The security industry already has seen consolidation during the past few months, with major acquisition deals such as McAfee's purchase of Secure Computing, and Symantec's of MessageLabs. And mergers, such that of Marshal and 8e6 Technologies, which was announced today, are likely to become more common for smaller players in the coming months, industry analysts say.

"The economic downturn and anticipated slowdown in spending has made many companies that have great technology but weak balance sheets seek the shelter of a buyout, a merger, or an asset sale," says Nick Selby, director of the enterprise security practice at The 451 Group. "The number of companies out there that are like this is high, and we believe that this is a historic buying opportunity for those sufficiently heeled to survive the downturn and emerge stronger."

So far, enterprises haven't taken an ax to computer security in the wake of the global financial crisis. But security vendors aren't waiting for the other shoe to drop.

The merger of European email security vendor Marshal with U.S.-based Web security firm 8e6 is an example of teaming up for immediate expansion, analysts say. The new Marshal8e6 is aimed at corporate and Internet email, Web, and instant messaging security, according to the privately held company, which with the merger now has 20,000 customers in 96 countries.

"This merger makes a lot of sense for both sides, given that 8e6 was exclusively focused on Web security and Marshal was primarily an Email security vendor. The two sides can complement each other fairly well," says Chenxi Wang, principal analyst for security and risk management at Forrester Research. "In uncertain economic [times], this type of consolidation helps vendors."

As long as the two vendors are strong and not struggling, that is. Otherwise, a merger isn't the answer. "Mergers of equals are rare as they don't really help the situation at either company. Why would two struggling companies fair better as one?" says Peter Firstbrook, research manager with Gartner "They won't unless there are incredible synergies across products and they can drive significant cost out of the company while increasing revenue."

Cash-rich security companies looking to buy new technologies to flesh out their portfolios, or for a fast way to expand their geographic presence, are in the catbird seat. "It's a great time to buy companies for their technology and for synergies...because valuations are going to be more realistic. You're going to get a good price," says Richard Stiennon, chief research analyst at IT-Harvest. Companies like IBM and RSA, for example, which have the cash and may be looking for new revenue streams, could profit from the current economic climate, he says.

And successful security firms, such as Arbor Networks and nCircle, may be attractive acquisitions, he says. "There are a lot of opportunities for rollups in the security appliance space, and international rollup opportunities," Stiennon says. Security market sectors such as NAC and data leakage prevention, which were already ripe for consolidation, will likely be bought sooner now that the economy is weak, he adds.

Of course, not all vendors will survive in the end. "I expect most vendors will get acquired for their technology and customers," Gartner's Firstbrook says. "Only a few startups that don't have enough customers or sufficiently unique IP [intellectual property] will simply shutter their doors."

Ed Macnair, president and CEO of Marshal, says that the merger between his company and 8e6 was something the two companies began discussing a year ago. It wasn't a knee-jerk reaction to the economic crisis, according to Macnair. "We would have liked to have done it sooner," he says. "We were looking at options to accelerate growth, and there are tremendous synergies between the two organizations -- geographic and product synergies."

And the merger obviously puts both companies in a better position to compete in an uncertain market, analysts say.

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