DSL Provider Scoops up Netscreen Firewall Goldmine

Event Summary

In a $905million exchange of stock, Efficient Networks (Nasdaq: EFNT) acquired firewall appliance vendor Netscreen Technologies, a privately held company based in Santa Clara, California. Efficient Networks is a developer and supplier of Digital Subscriber Line (DSL) equipment and technology. Incorporated in Dallas, Texas, Efficient Networks first issued an IPO last July.

Netscreen, with annual revenue of $22million, is the developer and manufacturer of the Netscreen ASIC based line of appliance firewalls. Appliance firewalls, which operate at wire-speed, are among the fastest of the firewall technology architectures on the market.

Market Impact

On news of the acquisition, Efficient Networks' stock dropped below the Nasdaq average and the S&P 500. (see Figure 1) Typically, since acquisitions for stock mean that the acquiring company needs to unload some of its stock, it is not uncommon for the acquiring company to see a drop in its share price. Since Efficient Networks has been trading considerably higher than the Nasdaq average and S&P 500 over the last two months, there is a good chance that their stock will recover in a near term. In the last few months, DSL technology has received a lot of publicity about its security vulnerabilities. Addressing that problem, Efficient Networks noticed an exceptional technology opportunity and acted on it. Though the Nokia/Checkpoint firewall appliance dominates the firewall appliance industry, the Netscreen is a smart new product that is moving in the right direction from a technology and market perspective. As Proxy firewalls fall out of favor, and appliance firewalls begin to dominate the market, the Netscreen is perhaps the most viable challenger of the Nokia/Checkpoint market leader.

Figure 1. Efficient Networks' Response to Acquisition Announcement

Figure 2. Efficient Networks' Share Value Life History

User Recommendations

When SOHOs (Small Office Home Office) and small businesses sign up for DSL service, Efficient Networks will now have a response when users express concerns about security. Enabling users to obtain a high-speed Internet connect and a cutting-edge security solution with one-stop-shopping will bode well for Efficient Networks.

Netscreen has four firewall appliance products: the Netscreen-5, the Netscreen-10, the Netscreen-100, and the Netscreen-1000.

The Netscreen-5 is targeted for remote fields offices or SOHOs. The Netscreen-10 is targeted to mid-sized companies. The Netscreen-100 is targeted to e-commerce sites and large enterprises. Boasting up to 500,000 maximum simultaneous connections, the Netscreen-1000 is ideal for ISPs and ASPs.

Netscreen's appliance firewalls exceed the Checkpoint/Nokia Firewall-1 appliance firewalls in possible number of simultaneous connections by a staggering amount. Where the high-end Nokia IP650 has limitations of a little over 2000 maximum simultaneous connections per firewall, the Netscreen-100 exceeds that capability by nearly 60 times that amount - an astounding increase.

Efficient Networks made a brilliant acquisition. The Netscreen line of firewalls are the only firewalls on the market that are positioned to give firewall market leader Checkpoint a run for their money. With streaming video and high-bandwidth multi-media support ramping up, Efficient Networks and Netscreen can provide much more than an "efficient" bandwidth and security solution. With their ability to get mid-sized companies up and running on the Internet easily and quickly, Efficient has bought itself into a major market opportunity.