Collapse of Check Point/Sourcefire deal raises questions

Faced with resistance from the U.S. government’s Committee on Foreign Investment in the United States (CFIUS), Israeli software company Check Point Software Technologies put its $225 million offer to purchase IPS (intrusion prevention software) vendor Sourcefire on hold March 23, raising the specter of heightened government oversight of mergers and acquisitions.

In documents published on Check Point’s Web page, the company cited “complex technology, the complexity of the process, [and] the current scrutiny of CFIUS” as its reasons for withdrawing its offer. Questions from the Department of Defense and the FBI about the security implications of selling Sourcefire’s IPS technology to a non-U.S. company prompted the Committee to extend its review of the acquisition in February, according to published reports.

A source close to the deal said that the timing of the review may have played a role in the companies’ decision to withdraw their request. Shortly after initiating a longer review of the Check Point deal, CFIUS became the center of a political firestorm when the Committee approved the acquisition of P&O Ports North America, which operates a number of U.S. ports, by Dubai Ports World. Check Point and Sourcefire may have bowed to political reality in taking their merger off the table, said Ted Kassinger, a partner at the law firm of O’Melveny and Meyers and a former deputy secretary of commerce.

“The atmosphere created by the Dubai Ports World episode, I’m sure, caused the parties great pause,” Kassinger said, adding that the Check Point deal probably wouldn’t have passed CFIUS review anyway. “The troubling aspect of the transaction for U.S. agencies was that this was networking equipment used in the intelligence community. Even without Dubai Ports World, that might have been difficult.”

Executives at eEye Digital Security, a maker of vulnerability management software, followed the Check Point/Sourcefire story closely. Government contracts account for between 20 and 30 percent of eEye’s revenue, but company executives say they aren’t worried about CFIUS foiling their future plans.

“The government has no problem with foreign [ownership]; they have an issue with foreign control of projects,” said Ross Brown, eEye’s chief operating officer, adding that this is especially true when companies have modified their code specifically for the government.

But Mateo Millett, a research analyst at Avian Research, said that CFIUS reviews could pose a major obstacle to the ability of foreign companies such as Chinese networking gear maker Huawei Technologies to grow by acquiring U.S. companies.