Consolidation marches through Net security

Small, single-product companies are getting scooped up by larger firms with better distribution.

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A new wave of acquisitions, this time among smaller companies, is moving through the Internet security industry, with one acquisition yesterday, another today, and reports of merger talks between two European firms.

CyberSafe, run by ex-IBM and Perot Systems exec Jim Cannavino, today announced it has acquired Canadian encryption firm Sagus Security in a deal for an undisclosed amount of cash and stock.

Yesterday Alladin Knowledge Systems purchased eSafe Technologies, an Israeli firm with a Seattle sales office that has software to block hostile Java applets, for about $11 million in cash and stock.

Today British encryption firm Zergo Holdings Plc said it's in merger talks with Baltimore Technologies, an Irish digital-certificate company that just opened U.S. operations, according to Bloomberg News.

The three deals reflect a number of themes in the continuing consolidation of Internet security firms, the most important being that one-product companies are being swallowed by larger firms with better distribution. In addition, Internet security firms are trying to bolster their security consulting forces to help companies integrate complex technologies.

"There is tremendous demand for computer security consulting," said CyberSafe's Katherine Hutchinson, vice president of marketing. The purchase of Sagus, a privately held firm that like CyberSafe has annual revenues of more than $10 million, also gives CyberSafe a distribution network in Europe and an East Coast foothold to use for customer support for European customers.

Larry Dietz, security analyst at Current Analysis noted eSafe's problems with catching hold in the market, though it has around $5 million in annual revenue.

"While eSafe was able to establish its technology, it was never able to jump over the hurdle of distribution, and Aladdin is a longtime player in the security world," said Dietz, noting that Aladdin's main business is software license management. The Israel-based firm is expected to hit around $40 million in revenue next year.

Zergo, the British firm now talking with public-key infrastructure player Baltimore, in September signed a marketing partnership with Unisys.

"Some companies are reluctant to seek an initial public offering in the current climate so a merger like this would be a good way for Baltimore to gain access to capital," said Jemma Houlihan, a technology analyst at ABN Amro..

Zergo, which is traded publicly in London, earlier acquired Security Domain, which has e-commerce software. Baltimore is a privately owned Irish company in which Irish financier Dermot Desmond holds a 60 percent stake.

In September, President Clinton and Irish premier Bertie Ahern signed a joint statement on Internet commerce using Baltimore Technology's digital signature system.

Bloomberg contributed to this report