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Analysts were quick to downgrade Check Point Software Technologies amid concerns over the growth void left by the failed acquisition of US technology rival Sourcefire.
"The absence of Sourcefire leaves a notable hole in Check Point's arsenal that raises legitimate concerns about topline growth", said Merrill Lynch analyst Edward Maguire, who downgraded his rating on the Ramat Gan-based company to "neutral" from "buy."
Over the weekend, Check Point abandoned plans to acquire Sourcefire for $225 million after failing to come to terms with security objections by the Bush administration.
"We are wondering if Checkpoint's ability to do meaningful security acquisitions could be somewhat limited given that the government is a heavy user of various security technologies," said broker Stifel Nicolaus in a note to investors.
There was consensus among analysts that Check Point's withdrawal from the transaction has cost the company the main growth driver the market had been anticipating.
Merrill Lynch said that results from other new products such as InterSpect and Connectra had been uneventful, which had put a lot of weight on the strategic importance of Sourcefire.
"We had regarded SourceFire as critical to regenerate momentum in the reseller base (and by extension the core business) hence the unfavorable resolution is a negative to Check Point's strategy," Merrill's Maguire wrote in his research note.
Sourcefire's intrusion prevention technology was key to accelerating Check Point's product range, chimed in Christopher Russ, senior analyst at Wachovia Securities, who downgraded the shares to "market perform" from "outperform."
J.P. Morgan, meanwhile, cut its investment rating to "neutral" from "overweight." "The market seems to be slowing and we see Check Point having a tough time driving the kind of stock performance needed, in particular as Cisco undercuts on pricing putting further pressure on revenues and share performance," the firm told clients.
Elsewhere, Oppenheimer & Co. lowered its revenue forecast for the full year to $620m. from $649m. and cut its earnings per share estimate to $1.41 from $1.43 but retained a "neutral" recommendation on the shares.
On a positive note, Oppenheimer & Co. said it expected additional acquisitions would be announced going forward but Merrill Lynch raised doubts over Check Point's potential to close a similar deal. "The unsuccessful completion of the Sourcefire transaction - coupled with a conservative management team - may also suggest similar deals could be difficult to consummate."
If Checkpoint is unable to buy any US security company, Wachovia's Russ warned it would put the company at a disadvantage relative to Cisco and Juniper, which could ultimately affect the company's long-term competitiveness.
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