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.

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