In that regard, it doesn’t appear as if Check Point’s management cares a heck of a whole lot about this very possibility. But eventually, this chicken will come home to roost, as it did for International Business Machines Corp. (NYSE:IBM) a decade ago. And Check Point’s management would serve the interests of investors by sacrificing some cash today for a better future tomorrow.
Check Point should buy its way into growth
There are always at least two ways to meet the competition head on, either through investments in research and development or via an acquisition. In both areas, Check Point has been passive. Conversely, Cisco has been on an M&A shopping spree while spending over $1.4 billion in R&D for Q1. Meanwhile, Dell Inc. (NASDAQ:DELL) recently spent $1.2 billion for enterprise security giant SonicWall.
Whether or not it was the right move remains to be seen. But for Dell, it is hard to argue against the justification. The security industry is growing rapidly and the leaders are beginning to level off. For this reason, I think Check Point should look at Palo Alto as an acquisition target. Granted, Palo Alto is young, and expensive for that matter. But this is a company with impressive growth.
Then again, growth is only one attractive aspect. Palo Alto also has pioneered what is considered next-generation security along with one of the most innovative platforms in the industry. Not to mention the company ended its recent quarter with zero debt while posting cash and equivalents of $322 million. Better still, Palo Alto is expanding its customer base, which now stands at over 10,000.
Check Point can’t continue to sit idle and get picked off by Fortinet and Cisco while ignoring these synergies with Palo Alto. And considering Palo Alto’s enterprise value of $3.3 billion, it would only cost Check Point $4.5 billion to close this deal. This is money that Check Point can easily raise considering the company ended the year with $3.3 billion in cash and assets that grew 18% year over year. Plus with Check Point’s strong cash flow of $202 million, this is a deal it can’t pass up. Its future depends on it.
The article Why Check Point Should Pick Off Palo Alto Networks originally appeared on Fool.com and is written by Richard Saintvilus.
Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool recommends Check Point Software (NASDAQ:CHKP) Technologies and Cisco Systems (NASDAQ:CSCO). The Motley Fool owns shares of Check Point Software Technologies and International Business Machines (NYSE:IBM).
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