Activity in the high-speed security market has been perking up.

Last week, WatchGuard Technologies Inc. (Nasdaq: WGRD) signed a definitive agreement to acquire RapidStream Inc. for $48 million in cash and stock. The deal, which is expected to close early in the second quarter, might just be the beginning of consolidation in the security market, observers say (see WatchGuard Posts Earnings, Purchase).

“I don’t expect the market for VPN [virtual private networking] to remain as large as it has been,” Current Analysis analyst Joel Conover predicts. “Consolidation isn’t over. I think there’ll be massive consolidation over the next year.”

"Security has been very over-funded, both on the product and on the service side,” says Infonetics Research Inc. analyst Jeff Wilson, emphasizing that he hopes this means there’ll be more consolidation in the industry.

While most observers applaud consolidation in the security space, last week's announcement took many by surprise. For starters, RapidStream, a privately owned maker of ASIC-based firewall and VPN appliances, has products very similar to WatchGuard's. Exactly what the product line will look like after the acquisition is hard to say.

"I think you’ll see a merger of technology and products,” said Jim Cady, president and CEO of WatchGuard on a conference call. He wouldn’t comment further on the product line, saying it would be revealed once the acquisition of RapidStream was finalized.

Despite the overlapping products, Infonetics' Wilson says the acquisition was definitely a good move by WatchGuard. RapidStream has a faster VPN, faster firewall, and better scaleability, he says. WatchGuard "gets a hardware platform with better quality. That’s the kind of thing that would take a long time for them to develop on their own.”

And with the acquisition, WatchGuard can expect to be able to target much larger customers than the mainly small offices and branch offices addressed by the WatchGuard Firebox SOHO.

To add to the product confusion, however, RapidStream announced just over two weeks ago that it was making a family of security appliances designed to run Check Point Software Technologies' (Nasdaq: CHKP) Next Generation (NG) software, available sometime during the first quarter of 2002 (see RapidStream Releases Security Package).

The question now is: What will happen to the CheckPoint deal when RapidStream becomes a part of WatchGuard?

CheckPoint was not available for comment, but Vince Liu, president, CEO and cofounder of RapidStream says that, although he can’t disclose much about the acquisition at this stage, the CheckPoint deal will go forward.

“We’re not backing down at all,” Liu says, pointing out that both the deal with CheckPoint and the acquisition by WatchGuard are paving the way for a larger market share for RapidStream. “This is a very exciting milestone for RapidStream. It’s great news. We know we have the best product and the best technology... This expands the market very quickly.”

Gaining market share is also part of WatchGuard’s motivation for the acquisition. While the company has been around for a while, it hasn’t posed much competition for bigger players like NetScreen Technologies Inc. (Nasdaq: NSCN).

“This wasn’t the most obvious acquisition,” Conovar of Current Analysis says. “This is a dog-eat-dog market. WatchGuard was at the bottom of the list, and RapidStream didn’t really exist at all.” Together, he believes, they might just have a chance to compete against companies like NetScreen.

WatchGuard hopes that the acquisition, along with a revamping of its marketing and sales, will generate a higher demand for WatchGuard products and help the company recover from 2001 fourth quarter and annual results, characterized by Cady as “disappointing.” The results, also announced friday, were in line with lowered guidance, released on December 21, 2001.

Under the terms of the acquisition agreement, WatchGuard will buy RapidStream with a combination of about $17 million in cash and approximately $31 million in stock and options. The number of shares issued will be based on a 20-trading-day average of WatchGuard stock price, ending two days prior to the closing of the deal.

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com