Bush checks Check Point

The Sourcefire acquisition will ultimately be referred to the US president, spoiling the numbers.

Most of the time, dealing with government authorities - American or Israeli - is not exactly a pleasant stroll in the park. Acquisitions of US companies by Israel ones form an outstanding example. Israeli companies often find themselves producing yet another permit, and yet another professional opinion, and still, months pass, and the final approval is not forthcoming. Ask Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA ; TASE: TEVA). The final straight of the $8.6 billion acquisition of Miami-based Ivax was more drawn-out than in the case of other acquisitions.

Check Point's (Nasdaq: CHKP) acquisition of Columbia, Maryland-based Sourcefire Network Security is no different. The deal was supposed to close by the end of the first quarter of 2006, but it is now feared that it may be delayed. Internet security giant Check Point has obtained approval from the US Federal Trade Commission, which is usually the final obstacle, for the $225 million acquisition. Sourcefire provides solutions that prevent unwelcome intrusion into networks in real-time.

However, the need for another approval is delaying the deal. Yesterday, the company announced that it had been notified by the Committee on Foreign Investment in the United States (CFIUS) that the deal had "moved into the investigative stage." CFIUS is a federal body made up of representatives of the cabinet and of government departments such as Justice, Treasury, Commerce, and Homeland Security. It is meant to examine whether the acquisition of a US company by a non-US one poses a threat to US national security. The committee operates under what is known as the Exon-Florio legislation.

CFIUS has 30 days in which to examine an acquisition. It can extend that period by 45 days for the purposes of investigation. This is exactly what has happened to Check Point. What's more, once the status of an examination becomes "investigative", the acquisition comes under the purview of none other than US President George W. Bush. At the end of the 45 days, CFIUS submits a report to the president, who must announce his decision within 15 days.

All in all then, taking into account the initial 30 day period, the 45 day investigation period, and the 15 days for the presidential decision, it can take 90 days from the initial examination of the application until the president informs Congress whether he chooses to block the deal or not. For Check Point, only the first 30 days have gone by, so that, theoretically, closure of the deal could be put back to the second quarter, which is not in line with the projections.

The possible delay will have a direct impact on Check Point's guidance. Two weeks ago, Check Point management said the deal would take place towards the end of the first quarter, (that is, by the end of March), and that annual projections included a contribution from Sourcefire. Annual revenue will be $661 million, allowing for a 5% margin of error either way, and earnings per share will be $1.4-1.47 ($348-365.4 million net profit). These numbers discount acquisition costs.

In the first quarter, Check Point expects revenue of $145-155 million and earnings per share of $0.32-0.34 ($79.5-84.5 million net profit). Several analysts have already factored Sourcefire's numbers into their models. Now, there is a considerable element of uncertainty.

CFIUS has played an active role in several acquisitions in the past few years. A recent example is the sale of IBM's portable computer business to Chinese company Lenovo for $1.25 billion. In that instance too, fears arose about the possible threat to US national security if the Chinese government were to exploit the sensitive installations Lenovo was buying in the US for espionage purposes.

In the case of Check Point and Sourcefire, it is still not clear what the cause pf CFIUS's concern is. It is a fairly rare occurrence for it to choose to investigate such a low-value deal.

Published by Globes [online], Israel business news - www.globes.co.il - on February 14, 2006

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006

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