Is ArcSight Buyout Bait?

Security software maker ArcSight (ARST) is for sale, according to theWall Street Journal. Its valuation could reach $1.5 billion, or $40 per share. Currently, the company's stock price is at $38.

The tech M&A market has suddenly heated up. It helps that the tech giants have huge amounts of cash and, with the cost of capital at essentially zero, the hurdle rate for an acquisition is fairly low.

One of the hottest targets is security, as seen with Intel's (INTC) $7.68 billion deal for McAfee (MFE). As a result, the sector has seen a nice valuation bump, which bodes well for an ArcSight deal.

Growing at a Rapid Clip

ArcSight develops sophisticated threat- and risk-management solutions to protect businesses and governments from cyber-theft, cyber-fraud and even cyber-warfare. The tech company collects and analyzes huge amounts of data across networks, data centers and applications -- providing real-time feedback.

The Cupertina, Calif.-based company has more than 1,000 customers. As a sign of the high-level nature of its technology, its customers include the Defense Information Systems Agency, the U.S. Dept. of Treasury, the Federal Reserve and the Securities & Exchange Commission.

ArcSight has been growing at a rapid clip. In the latest quarter, revenues jumped from $39.3 million to $55.2 million, with net cash generated at $11. 9 million. For the full-year, ArcSight expects to see revenues increase by 20% or more and non-GAAP operating margins are forecasted at 17% to 18%.

What's Next?

As with any deal, things can break down. But it looks like the transaction is in the later stages and there should be lots of interest for ArcSight. Huge tech companies -- like Oracle (ORCL), CA (CA) and IBM (IBM) -- realize security is a must-have category and want to bolster their offerings in the area.

In fact, it's possible that there will be a bidding war. After all, ArcSight has unique technology and a strong customer footprint.
And, as seen in the current bidding war between Hewlett-Packard (HPQ) and Dell (DELL) over 3Par (PAR), valuations can soar into the stratosphere. So, in the case of ArcSight, a deal could conceivably go north of $40 per share.