Alarm:clock and acquisition maths

Alarm:clock takes issue with the multiple paid by Cisco on the acquisition of Ironport, citing an 8X multiple that does not compare favourably to Secure Computing’s acquisition of Cyphertrust.

I always get slightly annoyed by shortcuts in reasoning, and this is a shining example, for two reasons:

  • without data on the underlying growth of the respective  businesses, using static comps to compare companies is useless.  At the very least you should run comps over multiple years and rely on PEG (price-earnings growth) ratios
  • value is also dependent on the acquiror; when the CFO of Cisco runs his ROI model, he takes into account the extent to which he can leverage the IronPort product across his distribution and sales channels.  In the case of Cisco, selling into entreprise, the answer is "a lot"

In fact from the very numbers disclosed on Alarm:clock it looks like the Ironport revenue scaled from $25M in 2005 to c. $100M in 2006 (although I cannot be sure the multiple is not on a forward basis).  On a standalone basis you can imagine they could double revenues, with Cisco they could do better.  Maybe not such a poor buy !

Whilst I do not know if Cisco overpaid, I am conceptually much more on the side of a Charles King (from Pund-IT Research, can’t beat that) intereviewed by the Red Herring:

"The dot-com boom days are gone—large vendors are looking for startups with good technology, and profitable businesses that can operate as standalone firms,” said Mr. King. “You spend the kind of money being spent by Cisco, IBM, and EMC and you know they are looking for startups that can pay for themselves pretty quickly.”

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