Will Cisco’s Cybersecurity Firm Buyout Hurt Sales to China?

Internet spying
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Networking giant Cisco Systems Inc. (NASDAQ: CSCO) announced this morning that it would acquire cybersecurity firm Sourcefire Inc. (NASDAQ: FIRE

) for $76 a share in cash, a premium of 29% to Sourcefire’s closing price last night. The total value of the deal is $2.7 billion and is expected to close in the second half of this year.

Cisco has been the recipient of some pretty nasty coverage in the Chinese media, which has declared that Cisco’s networking equipment poses a serious national security threat to China. The charges are a response to U.S. charges that one of China’s leading network equipment makers, Huawei, poses a threat to U.S. national security.

Cisco has been losing market share in China, where the company’s revenues total about $2 billion annually, or less than 5% of Cisco’s total revenues. The company’s market share at the end of the last year was 18%, down from a peak of 21%. Huawai’s share is more than double Cisco’s, and Chinese equipment maker ZTE now gets 29% of the country’s domestic sales.

Recent U.S. legislation prohibits federal agencies from buying information systems from Chinese companies without approval from the FBI and other federal investigative agencies. In the diplomatic world of tit-for-tat, it probably will not take long for China to retaliate with a similar ban on U.S. equipment, especially given the revelations from Edward Snowden regarding U.S. surveillance on China.

Acquiring Sourcefire steps up Cisco’s cybersecurity game: the acquisition helps “accelerate the realization of [Cisco’s] vision for a new model of security across the extended network.” That model includes a tighter integration of software with hardware, and while that may be a big selling point in the U.S., China is not likely to want to allow its sale in that country.

Sourcefire’s shares were up nearly $75.95 earlier this morning. The stock’s 52-week low is $39.50.

Cisco’s shares are down about 0.8%, at $25.51 in a 52-week range of $14.96 to $26.15.