Internet Security Systems (Nasdaq: ISSX) has acquired privately held vCIS of Santa Clara, CA, a developer of what it calls “pre-emptive behavioral inspection technology”.

Patents are pending on the technology, ISS says. The technology prevents malicious code from executing and causing damage before it has an opportunity to interact with the enterprise network, ISS adds.

Acquiring such technology should help ISS move ahead of the competition as it develops new products, says analyst Israel Hernandez of Lehman Brothers.

“They believe that with this technology, they will be able to embed it into their architecture and improve their competitiveness,” Hernandez says of ISS. “With intrusion protection, they are becoming more of a proactive agent instead of being reactive. It should help them going forward.”

Under the terms of the agreement, total consideration will be approximately $20 million in either cash or ISS common stock. The board of directors of each company has approved the transaction, and voting agreements in favor of the transaction have been obtained from sellers representing a majority of the outstanding stock of vCIS. The transaction is subject to certain regulatory approvals and customary closing conditions and ISS currently anticipates that the transaction will close in the fourth quarter 2002.

Financial growth looking better

Shares of ISSX were up for the day after announcing the acquisition, which Hernandez says provides “some relief” from “stupid rumors” that sent the price down yesterday. It closed at $15.87, an increase of 39 cents over the previous day’s close of $15.48. The 52-week high for shares of ISSX is $41.49 and the low is significantly less at $8.35.

Hernandez noted that the acquisition of vCIS by ISS is solely a “technology acquisition,” with no revenue involved. The success of the move, he added, will be judged in six to 12 months.

“I think the outlook is very good,” Hernandez says. “They’re in the right segment. They have done a lot of nice things and have a lot of new technology and innovation, so they will kind of start to see results faster and see revenue growth.”

A better security solution?

With the vCIS acquisition, ISS says it will add another essential protection technology that its customers require to effectively implement an enterprise-wide “defense-in-depth” strategy to protect against continuously evolving “hybrid” threats.

“We view pre-emptive behavioral inspection as one of the deepest and most valuable layers to providing comprehensive protection,” Tom Noonan, president and chief executive officer of ISS, said in a statement. “The acquisition of this behavioral analysis technology will help our customers protect their infrastructures from unknown threats during their most vulnerable time between the discovery of a new threat and its resolution.”

The transaction is not expected to have any impact on ISS’ current guidance for the year ending December 31, 2002 of a $245 million to $252 million-revenue target and pro forma earnings of 45 cents to 50 cents per diluted share. Pro forma earnings exclude the after-tax effect of non-cash acquisition charges, consisting of amortization of intangibles and compensation charges for unvested stock options, as well as any in-process research and development charge related to the vCIS acquisition which may be a significant part of the acquisition cost.

“The joining of forces between vCIS and Internet Security Systems provides a solution that significantly enhances enterprise threat protection,” vCIS CEO Robert F. Mitro said in a statement. “With Internet Security Systems’ strong market leadership and established record, we look forward to accelerating a powerful solution to the marketplace and realizing our common strategy of being the most respected and trusted provider of threat protection solutions in the world.”

The vCIS protection technology will allow ISS to enhance the application protection feature in the recently announced RealSecure Desktop Protector solution, as well as its server protection offerings, ISS says. The integrated pre-emptive behavioral technology is expected to be available for the desktop in the first quarter of 2003.

Internet Security Systems: www.iss.net