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FireEye Falls After Cisco Slaps Down Buyout Rumors

CEO John Chambers broke his own rule to publicly state that the company's not for sale.

Wednesday wasn’t the first time that rumors have swirled that the computer security company FireEye was the target of a buyout offer by networking giant Cisco Systems. And it probably won’t be the last.

But this time, the rumor had enough traction not only to goose FireEye shares by about 5 percent, topping out at $43.68, but also to prompt a rare public response by Cisco CEO John Chambers while he was speaking on a conference call.

While admitting that he was “breaking my own rule” against responding to market rumors, he did exactly that. “I wouldn’t bet on the one you heard about today,” he added, clearly referring to FireEye.

FireEye shares promptly gave back most of the day’s gains in after-hours trading, and the shares have fallen by more than 3 percent as of midday today.

But there’s another reason that a deal with Cisco — or anyone else — isn’t coming. FireEye is not for sale. According to sources familiar with the company’s management, it is unwilling to entertain buyout offers before it reaches $1 billion in annual revenue.

It posted nearly $426 million last year, and according to analysts is expected to reach about $630 million this year, and about $865 million in 2016. If FireEye management sticks to its guns, that means it will be fending off offers, or at least rumors of offers, until at least 2017.

Even so, FireEye would make a tempting target for several potential suitors, including Cisco, Hewlett-Packard and IBM, all of which play in different aspects of the security business. Its current market capitalization is about $6.6 billion.

FireEye specializes in a real-time filtering technology that protects corporate networks. It secret sauce is a virtual machine (software that acts like a physical computer) which is installed on the customer’s network that checks all incoming traffic for malware.

That virtual machine acts as a sort of mail room / air lock where every package gets opened before it gets delivered to its recipient. If an email comes in with an attachment containing a virus, it will first be opened and launched there, where it can’t hurt anything. If it contains malware, the incident gets reported back to FireEye’s cloud-based command center, which monitors some 50 billion such incidents every day. If it’s harmless, it goes on to its recipient.

FireEye emerged as an up-and-coming powerhouse in computer security early last year, when weeks after its 2013 IPO it spent $1 billion to acquire Mandiant, which specializes in incident response — helping investigate and clean up the mess after a major security breach. Its most famous case was the attack by North Korean hackers against Sony Pictures Entertainment.

There’s another reason that might give potential FireEye suitors pause: It loses money, and not just a little. In 2014 it posted a loss of nearly $444 million. And in its first quarter it reported a $134 million loss on $125 million in revenue, up from $101 million in the year-ago period. It’s easy to argue that a large company like Cisco or HP could boost FireEye’s scale and reach and get it running in a profitable manner within a year or two. Even so, no one wants to explain to irritable shareholders why buying a company that’s booking nearly half a billion in annual losses is a good idea.

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