Security State

Rainbow deal may be pot of gold at SafeNet

Maryland Businesses Fight Terror

November 02, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Nestled in a Baltimore County business complex is a small, relatively unknown technology company that works quietly every day protecting cell phone conversations, confidential data at major banking institutions and classified communications at federal agencies - security challenges that have gained relevance since Sept. 11, 2001.

The company is SafeNet Inc., and you may have never heard of it.

Few are likely to know that SafeNet calls White Marsh home, has 227 employees and has a client list that includes Texas Instruments, the Federal Reserve Bank and the Department of Homeland Security.

Or that it has bought smaller companies around the world over the past couple of years and recently announced a plan to buy one twice its size in California.

Although SafeNet is at the forefront of network security, it has little name recognition in the outside world.

"We're known very well by our customers," said Anthony A. Caputo, the Bronx-born, 62-year-old chairman and chief executive of SafeNet. "The fact is, we're the big untold story of Maryland."

Perhaps not for long.

Last week, The Daily Deal, a financial news magazine, listed SafeNet's announced purchase of Rainbow Technologies Inc., a California maker of security software, for $457 million in stock as the "Top in Tech" deal on its report of mergers and acquisitions.

Wall Street wasn't as optimistic, dropping SafeNet shares 25 percent the day after the deal was announced. SafeNet closed Friday at $33.28.

Caputo is speaking with investors on both coasts, appearing on CNBC and trying to assuage analysts who have doubts about SafeNet's cross-country merger. After the tech stock fallout of 2000-2001, business observers are more leery of small companies digesting large acquisitions.

"Our initial reaction is that we see some positives and negatives," said Todd C. Weller, a technology analyst at Legg Mason Wood Walker. "It does give SafeNet scale, and that is becoming more important. But Rainbow is not a growth company. It's less profitable than SafeNet and could dilute growth. You're also combining two companies that aren't well-known names."

Other deals have worked out for fast-growing SafeNet.

Analysts applauded SafeNet for its February acquisition of CyLink Corp. in California, a company that helps businesses protect their in-house communications between offices. SafeNet took a security software company that was not making money and turned it around by reducing costs and eliminating unrelated products.

"They are absolute experts at network security," Matthew S. Robison, a California technology analyst at Ferris Baker Watts Inc., said of SafeNet. "When companies like Cisco and Microsoft have vulnerabilities in their system, they'll go to a smaller company with a lot of expertise. That company is SafeNet."

The company isn't new.

Two former National Security Agency engineers started it as Information Resource Engineering 20 years ago to develop encryption technology to protect public and private computer networks. The work has become more vital as telecommunications, electronic commerce and other computer work proliferate.

To ensure that outsiders can't intercept or read sensitive information, companies encrypt, or scramble, data before sending it over the Internet. SafeNet creates an encrypted path, or tunnel, on the Internet, through which the data travel. Anyone wanting to read the data would have to decipher not only the company's encrypted communication but also the code behind SafeNet's mail chute through cyberspace.

"It's really within the last five years that the criticality of protecting data transmitted over communications networks, or cyber-technology, has been as important as it is now," said John C. Reece, former chief information officer at the Internal Revenue Service and now a consultant. "Increasingly, companies are turning to network-based systems because they need the ability to move their data anywhere, anyplace, anytime.

SafeNet's clients include titans of business and government: Lockheed Martin, Hewlett Packard, Citibank, Motorola, the IRS, the U.S. Postal Service, the FBI and the National Security Agency. The company's government work helped it through the sharp downturn in corporate technology spending a few years ago.

The SafeNet name might not be well-known, but its equipment is often embedded in common devices, from new Nokia cell phones to automated teller machines.

A year ago, SafeNet had 130 employees and revenue of about $32 million. This year, it expects to have doubled both. The company hasn't turned a profit in the past two years but now seeks to do so with the help of recent major deals with Texas Instruments and the Department of Homeland Security.

To handle new business and expand its test centers and research labs, SafeNet is planning to move this month to larger headquarters about 20 miles north, in Belcamp in Harford County.

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