Sourcefire: A Summary of Red Flags from Kerrisdale Capital

50% probability to FIRE getting acquired “in the next few years” as part of its valuation analysis. Assumptions like this are reckless. To begin with, the April 10th appointment of John Becker at CEO, replacing Marty Roesch who served in an interim role, reduced the odds of a near-term takeover. If FIRE had been in back door negotiations for a sale of the company, it wouldn’t be necessary to grant Mr. Becker a 400,000 share restricted stock and option

package

 that would partially accelerate on a change of control. Secondly, a survey through precedent network security deals reveals that many have already passed over Sourcefire in favor of other platform acquisitions. IBM (

IBM

)

acquired

Internet Security Systems in August 2006, HP (

HPQ

)

acquired

TippingPoint via the 3Com deal in November 2009, Intel (

INTC

)

bought

McAfee in April 2010, and Dell (

DELL

) paid $1.2bn

for

 SonicWall in March 2012. The two firms most cited as acquirers, Cisco (

CSCO

) and Juniper (

JNPR

), already market in-house, highly-ranked next-generation firewall systems. Finally, the Israeli-based Check Point agreed to

acquire

 FIRE in 2005 only to have the deal

blocked

 by the U.S. government on security grounds. At 21% of 2012 revenue, the federal government is by far Sourcefire’s largest customer and has its IPS systems installed throughout its official networks. The government is extremely interested in ensuring FIRE remains domestically controlled. Because of this, the possibility of an acquisition by a foreign buyer is effectively nil while national security risks would complicate a transaction with a U.S. buyer, especially one that has interests abroad. These reasons, in addition to Sourcefire’s high 6.8x LTM revenue