SafeNet

SafeNet just pre-announced an earnings miss after the market closed today. Worst case (as they pre-announce anyway) they'll be off by 10% on the top line. This will still be about 5% year over year growth.

But, that's not the interesting aspect of the announcement. SafeNet has thrown the CFO under the bus. He's out immediately. They also mention additional costs of $800k for Sarbanes-Oxley and $600k for the nCipher deal will cause an undetermined earnings miss as well.

So, this guy couldn't get Sarbanes under control and couldn't close the nCipher deal, so he's gone. And as he leaves, it seems the CEO is making a thinly veiled personal attack. Get a load of this, pulled directly from the release:

"SafeNet's Chairman and CEO commented, "SafeNet has, for many years, been a company that has been marked by consistent execution of its business plans highlighted by strong growth in revenue and profit, good cash flow and careful accounting and reporting. We are making these changes in our leadership structure so that we can better focus appropriate skills on critical business areas. We will run the business with passion, focus and discipline and concentrate on improving accounting and financial reporting, accelerating sales growth and streamlined business operations."

What is that about? This seems to be pretty strange behavior. I'm not a big fan of this kind of hand waving. If you are the CEO, first of all - at least have the decency to put your name in the release. It's nowhere to be found. Secondly, accept responsibility. Ultimately, whatever happened from a sales standpoint and an accounting standpoint has been under your watch, no? If the company has had a lack of "passion, focus and discipline," whose fault is that?

From the perspective of a guy who's been shown to the door more than once (what can I say? My former bosses either loved me or ... not so much), show the guy some respect on the way out. Unless there is some type of malfeasance, keep your dirty laundry inside. No one wants to see it. Maybe I'm overreacting to this, but something about the way the release was worded rubs me the wrong way. It reads like a mob execution - vindictive and with no class.

If you are a SafeNet customer, do you worry? Probably not, though as with Websense and Entrust - if they miss again next quarter, it's a problem. But more importantly, if you are nCipher, is this the kind of partner you want? Guess that's something their Board of Directors will need to figure out.

UPDATE: Per this release, SafeNet has killed the nCipher deal. Claiming the additional UK regulatory review will take too much time and cost too much money. So, I guess nCipher is single again and the regulators can hang the head of another dead deal in their great room.

U.K. Government Refers Potential SafeNet Inc. Acquisition of nCipher for Further Review

Read the release here: http://www2.safenet-inc.com/news/viewstory.asp?ID=461

Investment bankers around the world are probably shaking right now. It seems that the proposed Safenet/nCipher deal is on the rocks due to UK regulatory interference. Obviously it's premature to think there is something politically sinister behind this delay, but the writing seems to be on the wall.

Cross-border security deals are going to become hard to get done. That's a shame and is bad for everyone. If governments try to co-opt security technology, it's not going to go too well. The world is global. Security needs to be global as well.

Stay tuned, I'll be watching this situation closely.

SafeNet Announces Plans to Acquire nCipher for Cash

Consolidation continues as SafeNet offers $150 million ($83M net of nCipher cash) for nCipher. This is a market share grab for SafeNet, which has a heritage in encryption. It's hard to remember companies like Cylink and Rainbow Technologies, but these were encryption vendors acquired by what has become SafeNet. By acquiring nCipher, they both add to their arsenal with some key management and data encryption capabilities and take another potential competitor out of play. This also gives SafeNet an entry into the Identity Management space (through nCipher's acquisition of Abridean), but they'll need to do a lot more to become a player in IDM.

I don't really have an opinion on the $150 million price, since financial analysis isn't really my bag, but from a marketplace perspective, this is further evidence that smaller companies cannot make it on their own and if you aren't big (> $100 million revenue), you are not a predator - you're prey. Over time, the winners will be a handful of multi-billion dollar companies, most likely NOT security pure-plays.

As with every deal, nCipher customers should be asking some tough questions to their reps, like what happens to the product lines and deciding whether it makes sense to consider alternatives (though there aren't really that many left).