Apple Inc. (AAPL - Free Report) recently announced its intention to acquire Melbourne, Florida-based mobile and network security provider AuthenTec Inc. for approximately $356.0 million in cash. According to the 8K filing, Apple is paying $8 per share, a 58% premium over Authentec’s closing price of $5.07 on July 26, 2012.
Under the terms of the agreement, Apple will pay another $20.0 million to acquire certain non-exclusive licenses of AuthenTec. The iPhone maker also has the option to pay around $115.0 million for certain patent licenses within the next nine months. In addition to these, Apple will pay $7.5 million to develop a 2D fingerprint sensor compatible with its products going forward.
AuthenTec develops fingerprint and area sensors, software for identity management and e-commerce solutions, and embedded security solutions for network and mobile security systems. The company has a long list of clients,including the likes of Dell Inc. , Hewlett-Packard (HP - Free Report) , Lenovo, Asus, Cisco (CSCO - Free Report) , Nokia (NOK - Free Report) and Texas Instruments (TXN - Free Report) . AuthenTec earned $69.8 million in fiscal 2011.
We believe that the acquisition is consistent with Apple’s strategy of acquiring small start-ups, which have historically been essential to its business growth. The acquisition will help Apple to offer a more secure mobile commerce platform built on near-field communication (“NFC”) technology. AuthenTec recently introduced its first smart sensor for the NFC mobile commerce market.
We believe that the acquisition will provide Apple a significant competitive edge over Google’s Android and Microsoft’s (MSFT - Free Report) Windows Mobile operating systems, which have been susceptible to security threats owing to the weaknesses in NFC technology. Moreover, the improved security features will also help iPhone to take enterprise market share particularly from Research In Motion’s BlackBerry smartphone.
Following the news of the takeover, AuthenTec shares jumped 66% to close at $8.42 on July 27, fueling expectations for a higher bid, particularly from Samsung, which recently entered into an agreement with AuthenTec to use its VPN technology for its devices.
We believe that a hostile bid from Samsung is possible given the fact that the Korean handset maker is focused on enhancing the security features of its product lines in order to maintain its lead over Apple.
According to IDC, Samsung maintained its #1 position in the smartphone market in the second quarter of 2012. The company shipped 50.2 million smartphones in the quarter compared to Apple’s 26.0 million. Moreover, the companies are fighting each other in court over design and software patents. We believe that a bid for AuthenTec will further increase hostility between the two companies going forward.
Apple has been a leader in the technology space and has always wooed its investors with its innovative product line. However, stiff competition, the overcrowding in its major markets and increasing legal complexities are the main concerns going forward.
Currently, Apple has a Zacks #3 Rank, which implies a Hold rating over the short term.