Encryption software Symantec buys PGP and GuardianEdgeBecause of the frothy valuations of some software companies, security software heavyweight Symantec (SYMC) has been hesitant about making acquisitions. But to maintain its competitive edge in the industry, the company does need to add new capabilities.

To that end, Symantec has moved to enter the encryption market with the purchase of two companies: PGP and GuardianEdge Technologies. In all, the transactions come to $370 million in cash.

The deals will provide Symantec with an opportunity to benefit from a fast-growing market, which IDC forecasts to reach $1.7 billion in annual sales by 2013. At the same time, Symantec's shopping spree is a response to similar purchases by rivals such as McAfee (MFE), Check Point (CHKP) and Sophos.

Hitting a Double

Back in the early 1990s, Philip Zimmermann created an extremely effective encryption software package called Pretty Good Privacy, or PGP. At first, he gave the software away for free, because (among other reasons) he wanted to help human-rights activists secure their communications. But of course, the technology also became an helpful tool for corporations to protect their communications -- such as email.

Because of the technology's importance, Network Associates (which is now McAfee) purchased Zimmerman's company, PGP Inc., in late 1997. But a new company created by Zimmerman later, PGP Corp., bought the rights back from Network Associates in 2002. Now, that company is a large player in the security market: More than 110,000 enterprises have used PGP software, including 87% of the Fortune 100.

GuardianEdge was a spin-off of security-software provider PC Guardian. Its software helps with endpoint data protection on laptops, desktops, smartphones and so on.

The Rationale

Taken together, PGP and GuardianEdge are a powerful combination. With the acquisitions, Symantec will get a comprehensive suite of encryption technologies as well as a massive installed base, and a stronger footprint in the federal government.

The PGP and GuardianEdge assets will also help Symantec adapt to the rapidly growing trends of cloud computing and virtualization, both of which increase the risks of data exposure and will require robust encryption solutions.

Based on estimates, the valuations of these deals come to roughly four times trailing earnings -- reasonable in light of the potential growth opportunities. In the short run, though, there will be a drag: Earnings dilution is expected at 2 cents per share for fiscal year 2011 on a non-GAAP basis.

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