The $274-million acquisition of CipherTrust by Secure Computing came as no surprise to those who know Jay Chaudhry, the founder and chief executive of the six-year-old security company.
A seasoned entrepreneur, one of Mr. Chaudhry's earliest ventures, SecureIT, had been acquired by VeriSign. He also helped launch AirDefense, a wireless-LAN intrusion detection and prevention company that now has more than 500 clients.
VeriSignFor Alpharetta, Georgia-based CipherTrust, the exit couldn’t have been better. The company had raised $48 million in funding from investors including Battery Ventures, Greylock Partners, U.S. Venture Partners, Noro-Moseley Partners, and Silicon Valley Bank.
In an interview with RedHerring.com, Mr. Chaudhry, who will now be the vice chairman and chief strategy officer at Secure Computing, talked about why he decided to sell CipherTrust, and says despite the market's harsh reaction—Secure Computing’s shares fell by 37 percent after it warned it would miss earnings forecast—he still believes in the deal.
Q: There were rumors that CipherTrust wanted to go public and even retained the banking services of Goldman Sachs. Why did you change your mind and go the acquisition route?A: There are only two viable options available to any company: IPO or acquisition. You can't run a small security business forever. Every banker has been courting us to say “I will be the guy to take you public.” We talked to Goldman, Deutsche, among others, because we wanted to look at an IPO as a serious option. Our size is big, we hired a CFO last year with a public company background, and we have been working on our finances and processes. There are 800 security companies in the country, and some 90 percent of these have revenues of less than $15 million, so they are not viable.
I did look at the idea of being a consolidator and talked to my board about what businesses we could buy. We were looking for an acquisition that would help us increase our range, reach, customer base, and everything. Then I met with John [McNulty] at the RSA conference earlier this year. My casual dialogue with John got serious and we moved on to the acquisition track. Secure Computing was going through its own strategic plan. About 18 months ago they decided with the help of Warburg to build a dominant company. And we got talking. If we come together, my team will still be a significant part of the business. So essentially we are still going public through this route. Only there's no need for six months of road shows.
Q: Why did you pick Secure Computing?A: We think our products are totally complementary. The biggest thing holding us back is range and reach. Secure’s channel is looking for new products and we bring that, like secure instant messaging, anti-phishing, and compliance. All this makes us look very exciting. Also the senior management of CipherTrust would have an important role to play at Secure Computing. I will be the vice chairman and chief strategy officer, our CTO will be the CTO across the board, and our vice president of sales will head the combined marketing operations.
Q: Are you pleased with the valuation of the company?A: Yes. We did not go through an acquisition process and say “Let us go and talk to 10 companies.” This merger is happening by choice. It’s not out of desperation. We liked the price and that’s why we are doing the deal. It’s a combination of cash and some stock. It’s a win-win combination. What we are driving towards is the growth and we think there is tons of opportunity for the stock to go up.
Q: You say this despite the fact that Secure Computing’s stock has been hammered by the markets since the news of the acquisition.A: The stock took a beating because of the earnings miss and not as a reaction to the merger. Before we did the deal, both we and the board knew about their numbers and knew they would not be making it but we thought it isn't significant. We think we can add some exciting growth to the combined company and we believe in the Secure Computing channel and strategy.
Contact the writer:PGanapati@RedHerring.com