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SafeNet, the networking security firm, is scooping up rival Rainbow Technologies for $457 million (at today's prices) in new stock.

Post-merger, Rainbow shareholders will own approx. 43 per cent of the enlarged company.

Both companies have strong ties to the US government and military. Rainbow Technologies worked with the NSA in developing the latter's controversial Clipper chip proposal in the 1990s (before the idea was shelved because of industry and public opposition to the idea of building government back door access into communication networks). SafeNet was set up by former NSA spooks in the late 1980s.

These days, Rainbow specialises in authentication tokens and anti-piracy / DRM software, while SafeNet develops WAN and Virtual Private Network, encryption and security technologies.

Together, the companies aim to become the "premier network security provider for the government and large financial institutions, mid-sized firms, OEMs, and consumers".

The merger is subject to the approval from both sets of shareholders and is expected to close during Q1 2004.

Rainbow brings approximately $70 million in government business to SafeNet. SafeNet forecasts that the merger will be accretive to earnings in the first quarter after the deal concludes.

SafeNet yesterday reported revenues for the three months ended September 30 (Q3 2003) of approximately $17.6 million, double the $8.8 million it recorded in Q2 2002. SafeNet's net income for Q3 2003 pegged out at approximately $2.6 million.

The results reflect the effect of two full quarters from the operations of crypto outfit Cylink Corporation, which SafeNet acquired in February this year. Since then SafeNet has been on an acquisition roll.

First, it purchased certain assets from Raqia Networks, a developer of programmable systems-on-a-chip and co-processors designed for content inspection. Last week SafeNet signed an agreement to acquire the assets of the OEM Products Group of SSH Communications Security for approximately $14m in cash. And now it's snaffled up Rainbow.

The security industry hasn't seen the likes of this since Network Associates' acquisition spree in the heady days of the mid to late 1990s. ®

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