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Strategies & Market Trends : Speculating in Takeover Targets
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From: richardred11/1/2010 10:39:54 AM
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IBM Said to Have Approached Security-Systems Maker Fortinet About Takeover
By Serena Saitto and Peter Burrows - Nov 1, 2010 9:41 AM ET



Sam Palmisano, president and chief executive officer of International Business Machines Corp. Photographer: Joshua Roberts/Bloomberg
Fortinet CEO Ken Xie

Fortinet Chief Executive Officer Ken Xie. Photographer: Kim White/Bloomberg

Fortinet Inc., a maker of network- security systems, has received a takeover approach from International Business Machines Corp., according to two people close to the situation.

Fortinet is working with Morgan Stanley and exploring its strategic options, said the people, who asked not to be identified because the talks haven’t been made public. Discussions with IBM may be at an advanced stage, one person said, though a deal could still unravel. Fortinet rose as much as 23 percent in Nasdaq Stock Market trading.

The company, with a market value of $2.14 billion based on its closing price Oct. 29, focuses on all-in-one systems that keep networks secure, and it caters to companies ranging from small businesses to large phone carriers. IBM Chief Executive Officer Sam Palmisano has said he plans to spend about $20 billion on acquisitions in the next five years, adding tools to deliver cloud-computing services via the Internet, as well as software to help customers analyze data.

“Fortinet’s focus on enterprises, services providers and government entities maps particularly well against IBM’s existing client base and should help broaden the company’s solution set for and appeal in new and emerging markets,” said Charles King, principal analyst at research firm Pund-IT in Hayward, California. The company would give “potential suitors an immediate leadership position in the increasingly business- critical threat-management market.”

IBM, the world’s largest provider of computer services, approached Fortinet six to eight weeks ago, according to one of the people.

Stock Surge

Ed Barbini, a spokesman for IBM, declined to comment, as did Rick Popko, a spokesman for Fortinet, and Morgan Stanley spokeswoman Mary Claire Delaney.

Fortinet, based in Sunnyvale, California, went public a year ago and its shares had gained 71 percent this year before today amid speculation that it might become an acquisition target. It climbed $4.02, or 13 percent, to $34.02 at 9:38 a.m. in Nasdaq trading, after climbing as much as $6.77.

IBM, based in Armonk, New York, was little changed at $143.62 in New York Stock Exchange composite trading.

Fortinet almost doubled net income to $14 million in the third quarter from $7.89 million a year earlier, as sales jumped 29 percent to $85 million. The company raised $156.3 million in its November initial public offering, the first by a Silicon Valley startup in almost two years.

Filling Gaps

IBM and other companies, including Hewlett-Packard Co., Oracle Corp. and Intel Corp., are using takeovers to add technology that can help them cater to corporate customers building data centers to handle a Web-traffic boom.

“IBM’s move is part of a bigger trend where technology companies are trying to fill the gaps in their portfolios,” said Rajesh Ghai, an analyst at ThinkEquity LLC in San Francisco. “Fortinet is growing very fast, and IBM is looking at high-growth companies also because the return on cash on a balance sheet is very low.”

IBM has spent more than $20 billion on 100 purchases since Palmisano took over in 2002, as he shifts IBM’s focus to software and services from hardware. His largest takeover was business-management software maker Cognos Inc., for $5 billion.

To build up its data-center technology, HP agreed to spend $2.35 billion in September for the money-losing storage maker 3Par Inc., after an 18-day bidding war with Dell Inc. more than tripled 3Par’s share price.

To contact the reporters on this story: Serena Saitto in New York at ssaitto@bloomberg.net; Peter Burrows in San Francisco at pburrows@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net.
bloomberg.com
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