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Could Microsoft Join Cisco In Hunt For Security Firms?

The security software field is overcrowded and needs consolidation, says UBS. (Titima Ongkantong/Shutterstock.com)

A pickup in takeover activity in 2017 could revive computer security software stocks, says UBS, which says potential buyers include Cisco Systems (CSCO), Check Point Software Technologies (CHKP), Fortinet (FTNT) and Palo Alto Networks (PANW), as well as cloud-computing companies, telecom firms and defense contractors.

"Cybersecurity has a hangover; consolidation is the needed cure," said UBS in a research report Monday.

Besides the many publicly traded companies, UBS says the cybersecurity market has become overcrowded owing to the heavy venture-capital funding of startups.

"While the obvious names in the space are Check Point, Cisco, Fortinet and Palo Alto, who combined have net cash of about $45 billion, we aren't ruling out nontraditional suitors like defense contractors, industrial firms, and telcos who've made a foray in the space in the recent past," said the UBS report.

"With cloud security concerns only poised to intensify, we expect infrastructure vendors like Red Hat (RHT), VMware (VMW) and even Microsoft (MSFT) to also make greater inroads into security," UBS said.


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Cisco's security revenue in its fiscal Q1 ended Oct. 29 rose 11% from the year-earlier quarter to about $540 million. Cisco acquired security software maker Sourcefire for $2.7 billion in 2013. More recent purchases include OpenDNS, Lancope and CloudLock

IBD's 25-member Computer-Software Security group is ranked No. 165 out of 197 industry groups. The group rose in each of the first four trading days of 2017, after languishing in 2016, but slipped a small fraction in the stock market today. Check Point stock, down 4 cents Monday to 87.20, has formed a cup-with-handle pattern with a buy point of 85.95, and so it remains in a buy zone. Palo Alto stock fell 1% Monday and is below both its 50-day and 200-day support lines.

After a slew of high-profile data breaches in 2013-14, many companies rushed to upgrade firewalls that sit between private networks and the internet and invested in threat-detection technologies. That uptick in crisis spending drove security software stocks to fresh highs in mid-2015.

The shift of IT infrastructure to the cloud has many companies reassessing spending priorities, analysts say.

"Cybersecurity as an investment theme became strained in 2016 owing to signs of reduced 'binge buying,' mixed fundamentals, investor anxiety about end demand health, and fears about irrelevance of conventional approaches in an increasingly cloud-computing-led IT world," said the UBS report. "Extended sales cycles were another sore area for many vendors, which is not entirely surprising given the myriad vendors that have flooded the landscape in the last three years."

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