Shares of Check Point Software ( CHKP) fell Friday after the Israeli security software firm called off its bid to acquire Sourcefire. Check Point stock dropped $1.02, or 4.85%, to $20 in recent trading. The companies announced they would pursue business partnerships instead. The planned $225 million deal had been under investigation by the Committee on Foreign Investment in the U.S., the same Treasury-supervised panel that approved the contentious Dubai ports deal. "We've decided to pursue alternative ways for Check Point and Sourcefire to partner in order to bring to market the most comprehensive security solutions," Check Point CEO Gil Shwed said in a statement. Check Point is best known for its firewall technology, while Sourcefire's expertise is in analyzing very high-speed network traffic, intrusion detection and identifying the types of systems using a network. One industry analyst says the deal's collapse could be blamed on politics. If the CFIUS had approved a deal with the Israeli company after the uproar over the Dubai ports deal, it would have looked like the U.S. was only opposed to Arab-run security businesses, says John Pescatore, an analyst with Gartner. Pescatore, who has no position in the stock, had previously estimated there was an 80% chance the deal would be approved. "If there had been no Dubai flap, I bet this one would have gotten approved," he says. "The security issues make no sense," says Pescatore, who noted that Sourcefire's Snort technology for intrusion detection and prevention is open source. If enhancements had been made to the technology for the U.S. intelligence community -- beyond the standard open-source version -- it could have been kept separate or sold off to a defense contractor. Several analysts said the canceled acquisition was bad news for Check Point, and downgraded the stock.
"We believe the company had made a major internal strategic bet with Sourcefire, including planning on putting Sourcefire people in key management roles," wrote Cowen & Co. analyst Walter Pritchard, who lowered his rating to neutral from outperform. "We believe it will take the company a couple of quarters to regroup following this event and as a result, the stock is cheap," with an enterprise value that is less than 10 times 2006 free cash flow, "but without a catalyst." Pritchard wrote that "protectionist politics" sunk the deal. Cowen & Co. makes a market in Check Point securities. Another analyst noted that the aborted deal could have implications for the company in the long run. "Although the stock seems cheap, if Check Point is unable to acquire any U.S. security companies, this puts it at a disadvantage relative to Cisco ( CSCO) and Juniper/Netscreen ( JNPR), and in the long run could ultimately affect the company's long term competitiveness," Wachovia senior analyst Christopher Russ wrote in a Friday note. He downgraded the stock to market perform. Wachovia does and seeks to do business with the companies covered in its research reports.