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RSA Gets Sticker Shock

Shares of RSA Security (RSAS) dropped 14% as Wall Street jeered the hefty price tag on an acquisition.

The Bedford, Mass., company also set plans for a big restructuring and said its finance chief is leaving to take another job. RSA shares dropped $1.84 in heavy trading to $11.35.

RSA said it would buy closely held Cyota, a New York City-based company that develops online security software for financial institutions, for $145 million.

"Today, RSA Security is the leader in protecting online identities and digital assets," said RSA chief Art Coviello. "Through our combination with Cyota, RSA Security will become the leader in the protection of consumer identities and remote transactions."

But the $145 million price tag amounts to nearly half of the $303 million in cash RSA had on hand at the end of September.

The deal looks pricey in other ways, too. RSA said it expects Cyota to contribute between $22 million and $25 million to the top line in 2006. That gives the sale a multiple of roughly six times forward sales, well above the usual range of two or three times for acquisitions in the security sector, says analyst Daniel Ives of Friedman Billings Ramsey, which doesn't have a banking relationship with RSA.

The deal is a "very expensive (and dilutive) transaction in a still unproven segment of the authentication market," Ives says. "With the company doling out roughly half of its treasure chest for Cyota, we are disappointed and would have liked RSAS to pursue acquisitions in other areas of the authentication market with cheaper price tags."

The acquisition is expected to close in 30 days, pending regulatory approval.

RSA said the restructuring will result in a charge of $10 million to $14 million beginning in the current fourth quarter and continuing for a year. Even so, RSA stood by its current fourth-quarter guidance for a non-GAAP profit of 15 cents to 19 cents a diluted share on sales of $78 million to $82 million.
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