RSA Security said Monday it acquired privately held PassMark Security for $44.7 million in cash and stock, in a move to broaden its reach in the online banking authentication and fraud detection market.

said Monday it acquired privately held PassMark Security for $44.7 million in cash and stock, in a move to broaden its reach in the online banking authentication and fraud detection market.

RSA said the purchase price includes $9 million in cash and 2 million in shares. The deal was signed and closed Monday. Based in Menlo Park, California, PassMark makes software-based authentication systems for financial companies.

“The market for consumer authentication is growing at a rapid pace,” said Art Coviello, chief executive officer of RSA Security. “The rising rate of identity theft, with regulatory guidance calling for better protection of online identities, has created an enormous market opportunity that we are working to take full advantage of.”

Shares of RSA were down $0.25 to $19.30 in recent trading.

Formed in 2004, PassMark Security is best known for its two-factor authentication product that validates each user to a web site in a two-step process. Users can’t simply offer their password while logging in. They also must pick some visual images, or participate in a voice-based biometric system that assures only legitimate users are allowed access.

Using passwords alone has been dismissed as a relatively insecure system as passwords can be stolen or easily hacked into. Adding another layer, which is what PassMark specializes in, offers greater security.

PassMark was backed by Diamondhead Ventures and Menlo Ventures, and the startup had raised about $10 million. 

Analysts estimate there are about $50 million online banking users in America and there is a drive for stronger authentication for these customers. Currently, the consumer segment contributes less than 15 percent of RSA’s revenues.

Bedford, Massachusetts-based RSA said the acquisition will help extend its channels in the financial sector by adding depth to its distribution network, and bringing in more customers. The company said it believes the acquisition will also strengthen its move to establish itself as a strategic hub for financial companies by giving it the ability to authenticate and protect all aspects of online banking and e-commerce transactions.

RSA also announced the appointment of Bill Harris, co-founder of PassMark, to its board of directors.

A Good Fit

Analysts said the PassMark acquisition is a good fit for RSA.

“We believe it helps RSA cement its lead as the early leader in stronger consumer authentication,” said Walter Pritchard, an analyst with securities firm SG Cowen & Co. “While some product overlap needs to be sorted out and RSA takes on some slight dilution, we view the deal favorably.”

The PassMark acquisition is also expected to complement RSA’s buy of online security and antifraud company Cyota in December for $145 million.

“RSA for now has cornered the market on risk-based solutions,” said Charles Rice, principal and co-founder of investment banking firm East Peak Advisors. “This deal is big news given PassMark is the No. 2 behind Cyota and really the only other startup with a substantial offering and presence.”

By picking up PassMark and Cyota, RSA is also getting a leg up on competitors like VASCO, ActivCard, Aladdin and Entrust, and security stalwarts Symantec and McAfee, he said.

Symantec

PassMark is expected to bring $10 million to $15 million in revenue to RSA in 2007, analysts estimate.

“This would imply a 3.0x to 4.5x multiple off of forward revenue, which is significantly smaller than the multiple paid for Cyota,” he said.

RSA said it will set aside $2.7 million to fund employee retention plans and termination costs. It will also reserve about 80,000 shares related to the assumption of PassMark’s stock option plan. The company expects this transaction to add in the range of $4 million to $5 million in revenue over the remainder of 2006 and in the range of $10 million to $15 million in revenue in 2007.

RSA also updated its guidance for the second quarter of 2006. The company anticipates revenue for the period to be in the range of $89 million to $94 million, as compared to its previous guidance issued on April 17 of revenue in the range of $88 million to $92 million. Analysts are expecting $90.16 million.

The company expects earnings per share to be in the range of $0.13 to $0.15, as compared to its previous guidance of $0.14 to $0.16. Analysts are expecting $0.15 per share.