Barracuda buying Sourcefire? When Hell(FIRE) freezes over!

Yesterday the folks from Barracuda announced an unsolicited takeover attempt of Sourcefire. They are proposing a 13% premium and think they can "fix" some of the execution problems that have plauged FIRE since they went public.

I'm sure the fish aren't laughing, but everyone else in the industry is. This deal isn't going to happen, not in it's current form anyway. Here are a couple of points that create serious headwind for the deal:

1. Crappy premium - Barracuda is bottom fishing here. Yes, FIRE has had issues and there is a ton of uncertainty about their strategy and the CEO transition. But only a 13% premium. For that type of premium, large shareholders are better off just dumping their shares, rather than risk deal closure issues. Of course, I'm not investor, but 13% seems a bit weak.
2. Deal financing - Barracuda is offering a cash deal and says it "doesn't expect any financing contingencies." Really? I guess they could raise some money, but for a private company to raise what would need to be over $200 million isn't something you see everyday and in this kind of debt environment wouldn't seem to be that easy.
3. Distribution mismatch - Sourcefire makes their money from selling network security infrastructure to large enterprise and government institutions. Barracuda sells anti-spam boxes to everyone else. There really isn't a lot of leverage between the two models and if Barracuda wanted to get into the UTM business, there are a lot cheaper ways to go.
4. Trend = Red Herring - Another big reason specified by Barracuda is that they can more effectively fight off litigation from Trend Micro over the AV gateway patent. Has Barracuda won their case yet? Oh yeah, not so much. So this is a Red Herring and just meant to sow more seeds of doubt about FIRE's existing management team.
5. What about the main line of business? - Barracuda also says they can "fix" Sourcefire's issues. Really? How do they plan to do that, especially for only a 13% premium? This is not a credible statement. It would help to understand more about Barracuda's business for them to be able to justify that kind of statement. It's a cash deal - so they don't have to - but they should.
   
   I'm no fan of Sourcefire's strategy (or lack thereof), but unless I see something more compelling than buying a bunch of cheap boxes and putting Snort on them - I don't believe Drako and Co. would be any more successful at "fixing" Sourcefire than anyone else.

So Sourcefire was correct in rejecting the deal and not even sitting down. If Barracuda was serious, they would have proposed a much higher premium and had a more effectively communicated strategy for the combined entity. The could have taken a page from Microsoft (62% permium for Yahoo) and IBM (huge premium for Lotus back in the day) and proposed a number that would be hard to walk away from. They didn't.

But let's be clear - that's not what this deal was about.

This is another example of why Barracuda may be the most effectively marketed security company out there. For the cost of a press release and some legal fees, they are going to be the talk of the town, even if Howie Mandel is just saying "No Deal!" You have to figure that Barracuda is angling for a public offering in the near term (once the markets right themselves) and this is a great way to get some visibility with the investors that are likely to invest in their IPO.

A 13% premium is a joke. But as a PR and investor relations strategy, it's brilliant.