Cyber chess: Check Point's $490 million Perimeter 81 deal and market dynamics

It's not an everyday occurrence for Check Point to acquire a company for half a billion dollars. Until last Thursday's announcement of its $490 million purchase of Israel's Perimeter 81, such an acquisition had happened only once before, in 2007, when it paid a slightly higher sum for the American company Pointesc. Check Point, which is currently celebrating its 30th anniversary, is known for its reluctance toward large acquisitions, with its typical cap not exceeding $100 million. It has taken this stance despite having a substantial cash reserve for years that could have allowed the company to be more aggressive.

As such, the acquisition of Perimeter 81 can be described as a momentous event, particularly for Gil Shwed, one of the three founders of Check Point, who has been at the helm since its inception. On a broader perspective, this acquisition is advantageous for both parties involved. It enables Check Point to firmly establish itself in the Secure Access Service Edge (SASE) market, which has gained considerable traction due to the widespread transition to remote work.

Check Point CEO Gil Shwed (right) and Perimeter 81 co-founders Sagi Gidali and Amit Bareket.

A tale of transformation: Old meets new

This acquisition signifies the convergence of a well-established company, which boasts a significant market presence in numerous global organizations but failed to identify the revolution in real time, and a newer company that capitalized on being in the right place at the right time but struggled to leverage its technology for business success. The fact that this is Check Point's sixth straight acquisition of an Israeli company should smooth out the integration process.

A majority of Perimeter 81's 200 employees, founded in 2018 by Sagi Gidali and Amit Bareket, will join Check Point's Harmony products division. This division, already comprising 400 employees, primarily originating from the acquisition of Avanan two years prior for $300 million, specializes in safeguarding the assets of remotely-operating organizations. This area has gained heightened importance in the wake of the Covid-19 pandemic, emerging as a pivotal and dynamic segment within the cyber market.

Addressing remote work realities

Even as there is a trend towards returning to office-based work, recent data from the U.S. indicates that 12.7% of employees continue to work entirely remotely, with 28.2% adopting a hybrid approach. This translates to hundreds of millions of daily remote connections to organizational networks, presenting a substantial attack surface for potential hackers. While this scenario aligns with Check Point's historical emphasis on secure connections, the organizational shift to cloud-based infrastructures in recent years has somewhat diminished the luster of the traditional Check Point firewall.

Optimizing timing: The past, present, and future

Although the current acquisition is promising, a retrospective view suggests that an even more favorable outcome could have been attained had Check Point acquired Perimeter 81 three or four years earlier, during its nascent stage when it was smaller and more cost-effective. Paradoxically, the company which pioneered the very SASE market that Perimeter 81 operates in is none other than Cato Networks, co-founded by Gur Shatz and Shlomo Kramer – a long-time associate of Gil Shwed and one of the co-founders of Check Point.

In an interview last year with Calcalist, Kramer stated, "What we envisioned for Cato in 2015 was fully adopted by Gartner, the esteemed technology research company, as the SASE definition. This is unprecedented in my career. For instance, Gartner initially pursued a distinct firewall concept, whereas Gil (Shwed) and I advocated a different approach, which was initially considered unconventional but eventually became the norm."

Presently, Gartner forecasts that the market value of SASE will surpass $20 billion within the next two years. Over the past three years since the pandemic's onset, numerous cybersecurity companies have recognized the exigency and importance of offering quality SASE solutions to customers and many entered the sector. However, Check Point was not one of them. Instead, prominent players in the field are American entities like Zscaler, which debuted on Wall Street in 2018 with a cloud-centric cyber vision, and Palo Alto, Check Point's enduring rival, founded by Nir Zuk – one of Check Point's earliest employees who left amid controversy and has since outperformed Gil Shwed on several fronts.

Zscaler represents a "Cloud Native" archetype and has consistently discredited both Check Point and Palo Alto's traditional firewall models. Palo Alto responded to these challenges earnestly, investing a substantial $4 billion in 17 acquisitions to establish its presence in the SASE market. Notably, the acquisition of CloudGenix for $420 million in 2020 helped elevate Palo Alto's value to approximately $70 billion. Zscaler, while having receded from its peak, still retains a $20 billion valuation. Comparatively, Check Point, currently valued at around $16 billion, lags behind.

Unveiling missed opportunities

Perimeter 81, with its high-quality technological solution, has been right under Check Point's nose the entire time. In August 2020, when the need for SASE solutions was increasingly evident, Perimeter 81 initiated a fundraising round at a $200 million valuation. Interestingly, at the same time, Check Point opted to acquire Odo for $30 million. Established in 2017, Odo's didn't initially focus on the SASE arena. However, it transitioned into it as part of a common high-tech industry tactic known as a "pivot," employed when initial technology fails to meet expectations.

Curiously, Check Point's acquisition of Odo appears to have had little impact within the burgeoning SASE field. Perimeter 81 experienced growth during this period and boasts 3,000 customers among small and medium-sized enterprises. Nevertheless, promoting its products in an already saturated market will be more challenging for Check Point than it would have been just a couple of years ago.

Maximizing potential amid market dynamics

Check Point took advantage of the fact that the shareholders of Perimeter 81, recognizing current market dynamics, are willing to sell at half the valuation achieved in their previous fundraising round merely a year ago. Nonetheless, the question arises – should Check Point have seized this moment for a truly audacious move? If acquiring Perimeter 81 at a discounted rate is feasible, perhaps Check Point can also negotiate a reduced multiplier in an acquisition of Cato Networks, the very pioneers of the SASE market. Equipped with $3.5 billion in cash and the ability to utilize its stock for acquisitions, Check Point possesses the resources to potentially secure the finest solution available. This approach would mirror that of Palo Alto, which often pays a premium for what it perceives as the best technology.

Strengthening the deal: Benefits for all

In the context of Perimeter 81, the acquisition presents a compelling case, ultimately beneficial for all stakeholders. For a five-year-old company to be sold for half a billion dollars in cash is a considerable feat. After raising $165 million over its lifetime, the fact Perimeter 81 has just $50 million remaining in its cofferse suggests a relatively high cash burn rate and the impending need for a cash infusion.

Despite the drop in valuation, the acquisition will still yield positive outcomes for nearly all involved parties. Even those who joined Perimeter 81 after the last funding round transformed it into a unicorn can expect future returns in the form of Check Point stock. It's likely that Insight Partners and Entrée Capital, who joined in the last fundraising round at double the present valuation, incorporated preference clauses in their agreements that guarantee them a return of two to three times their investment prior to other investors. Spring Ventures, a company trading on the Tel Aviv Stock Exchange, reported to the stock exchange that its initial investment of $3 million in Perimeter 81 in 2019 and 2020 is now set to yield $25.5 million.

Signaling shifts in the high-tech landscape

Beyond the specifics of this deal, its implications extend to the broader high-tech market. The prevalence of unicorns – companies valued at over a billion dollars – experiencing value drops below this threshold is poised to become a more frequent occurrence in the near future, accompanied by an increase in transactions of similar nature. Evidence in the market over the past month reveals a collective acknowledgment of this situation. Buyers understand that private technology companies' valuations have reached a nadir and are poised to rebound soon. Notably, the Nasdaq index, a barometer of the public market, has demonstrated substantial recovery since the beginning of the year. Meanwhile, among sellers, including entrepreneurs and investment funds, there is a realization that not all companies can sustain independent growth and retain their peak valuations from more prosperous times. Consequently, it may be more prudent to sell now, rather than operate as "zombie companies" when the industry's significant recovery commences.