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F5 Networks Falls on Shape Security Acquisition but Analysts See Long-Term Potential

Analysts say that F5 Networks' $1 billion acquisition of Shape Security is a good strategic move but it will be costly in the near term.
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Analysts said Friday that F5 Networks' (FFIV) - Get F5 Inc. Report $1 billion cash acquisition of cybersecurity company Shape Security is a good strategic move but it will be costly in the near term.

Shares were falling 4.1% to $137.81.

The Seattle-based company announced the acquisition late Thursday and said it expects to close the transaction in the first quarter of 2020, funded by cash on hand and $400 million in financing.

The Santa Clara, California-based Shape Security was founded in 2010 .

F5 Networks said that privately-held Shape Security’s application protection platform evaluates the data flow from the user into the application and uses cloud-based analytics to discern good traffic from bad.

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Morgan Stanley analyst James Faucette said he was maintaining his equal-weight rating on F5 because while the transaction will be beneficial to growth and valuation potential it will have an impact on earnings power in the near term.  

"While the acquisition follows a strategy to monetize F5's platform and is beneficial to longer term valuation potential," he said in a note to investors, "we think the impact to earnings power is likely to prevent valuation benefit in the near term."

Faucette, who maintains a $130 price target on F5 Networks, said the profitability of the company's new services, particularly those it has acquired, "are not to date as profitable as existing businesses, challenging ability to grow earnings."

Analysts at Piper Jaffray said that while F5 Networks' stock is likely to trade down as a result of the earnings impact, they are positive about the strategic vision and the free cash flow accretion."

Jefferies analysts said that the acquisition makes strategic sense, but noted that the deal will require "many years of crisp execution in order to get a return on investment."