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ISS Adds to Security Products with Network ICE

Atlanta-based Internet Security Systems (ISS) late Monday night moved to boost its current portfolio of offerings with the purchase of privately-held Network ICE Corp. for $195 million in stock.

ISS bought the San Mateo, Calif. manufacturer of desktop intrusion protection technology for approximately 4.3 million common shares, valued at approximately $195 million based on the closing price of ISSX stock on Friday, April 27. Approximately 300,000 shares of ISS common stock will be reserved for future exercise of stock options outstanding under the Network ICE stock option plan assumed in the transaction.

Ignoring the bear market for most things Internet, ISS made the purchase to complement its existing network and server-based security management software and service solutions; ISS will now be able to safeguard mobile, remote and corporate desktops.

Tom Noonan, president and chief executive officer for ISS, said the play would accelerate his company's solution and services strategy.

"With an expanded software and managed security services solution set focused on protecting the corporate desktop, ISS will continue on its path of serving a broader customer base and setting new standards in information protection," Noonan said.

ISS also sealed the deal concurrently with its fiscal 2001 earnings per share announcement. Following the merger ISS currently expects, for fiscal 2001, revenues in the range of $295 million to $300 million and earnings of 65 cents to 70 cents per diluted share.

Analysts' earnings estimates for the year range from 63 to 69 cents per share, with a mean of 66 cents per share, according to research firm Thomson Financial/First Call.

ISS said it currently expects additional revenues in the second half of 2001 of $10 million to $15 million and expects the transaction will be non-dilutive to previous guidance for earnings per diluted share. The assumption for EPS excludes the impact from this acquisition of expense from amortization of goodwill and intangible assets and non-cash compensation charge due to unvested options.

And ISS has actually been profitable. On April 19, the firm reported net income of $6.5 million, or 15 cents a share, for the three months that ended March 31, an increase of 110 percent over the same period last year. This was in line with analysts expectations.

Security is a potentially lucrative sector in a bear market for firms who approach it right. For example, as Web sites become more detail-oriented and make use of evolving technologies, the need for new security applications increases. More and more companies are using the Net for e-commerce, where credit card numbers and all types of personal identification are housed. Naturally, the threat of data theft and other similar compromises rises, paving the way for firms with security know-how to step in to sell their products.

ISS' Noonan said his company noticed a drop in corporate spending in November. To make up for it, the company focused on its best customers, a move Noonan said paid off handsomely. Also, some companies looked to outsource security when the economy's belt tightened, and ISS was able to capitalize on that.

The Yankee Group said in a recently published report that the need to secure intellectual property as well as technology's lag in its ability to securely deliver content via the Internet have resulted in the emergence of a new industry for secure content delivery products and services.

The research firm said the market for security products amounted to $45 million in 1999 and will exceed $2 billion by 2005.

"There has been a growth in businesses' requirements to securely exchange information with each other. The Internet is entering a hyper-growth phase with regard to the types and amount of content that is becoming digitized and being made available via the Web," said Matt Kovar, director of the Yankee Group's Security Solutions & Services Planning Service. "The adoption of secure content delivery technologies will only help accelerate this growth while at the same time creating new value chains and extending the economic life of digital assets."

As for the Network ICE buy, the company and its approximate 100 employees will become part of ISS' Enterprise Solutions business headed by Ken Walters, president and general manager. Network ICE Founder Greg Gilliom and the other founders each will have significant positions in Enterprise Solutions which comprises ISS' software, consulting and educational services.

The transaction is subject to certain regulatory approvals and customary closing conditions. ISS currently anticipates that the transaction will close in June 2001.