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F5's Acquisition of Shape Security Could Boost Growth, But Weigh on Earnings

The deal represents a $4 billion market opportunity, but could dilute earnings over the next year.
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F5 Networks' $1 billion acquisition of Shape Security, a cloud security vender, could mean improved long-term prospects with some near-term risks. 

Shares of F5  (FFIV) - Get F5 Inc. Report Networks have fallen 3.2% since the deal, which was financed through cash on hand plus $400 million in investment, was announced on Dec. 19.

Shape Security provides fraud defense to banks, airlines, retailers and other organizations, and the acquisition opens up a $4 billion market opportunity as well as "an easy sell to its existing customer base," wrote CFRA Research Analyst Keith Snyder in a note on Tuesday. 

But that doesn't come cheap. Snyder noted that Shape Security's $60 million in revenue in the past 12 months and roughly 50% growth rate means that the $1 billion price tag looks a bit steep. And the means of financing the deal may drag down earnings.

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"The heavy use of cash for the deal will deplete reserves on the balance sheet and will be dilutive to EPS for the next year," Snyder wrote. The deal is expected to close in March 2020. 

The Shape Security deal is F5's second major acquisition this year. In March, it purchased Nginx Software for $670 million.

Shares of F5 have fallen 13% so far this year.