ServGate Acquired in Fire Sale

Another security startup has foundered and seen its assets acquired by a healthier competitor.

According to documents filed with the Securities and Exchange Commission, Cirond Corp. has bought the intellectual property of startup ServGate and a sizeable chunk of its workforce as part of a foreclosure sale.

The documents, filed earlier this month, reveal that half of ServGate's 100-plus workforce will be retained by Cirond, which focuses on wired and wireless security. (See Cirond, Network Utilities Team.)

The deal is also the second in a matter of weeks where ambition has outpaced cash reserves in the security sector. Fortinet confirmed earlier this week that it had acquired the remaining assets of CoSine Communications, first reported last Friday by Dark Reading. (See Fortinet Scoops Up CoSine IP .)

ServGate's flagship offering is the EdgeForce Unified Threat Management (UTM) platform, a sort of all-in-one security device combining firewall, VPN, intrusion protection, spam filtering, and virus screening. (See ServGate Launches M Series, ServGate Adds Intrusion Prevention, and ServGate & SurfControl Secure Web.)

The SEC filing does not reveal exactly what happened at ServGate, which seemed to be gaining solid traction amongst users, even at the expense of big-name vendors such as Cisco. (See Dalton Goes for ServGate Security.) The Milpitas, Calif.-based startup also clinched a reseller deal with Dell, and had made a major push into the lucrative Asian market. (See ServGate Strikes Dell Deal, ServGate Launches M Series, ServGate Secures Dashang, ServGate, Rikei Partner, and China ISP SINA Picks ServGate .)

But a source close to the company, who asked not to be named, told Dark Reading that ServGate may have overreached and run out of money. "From what I heard, it was due to their expansion into China," he says.

According to the filing, Cirond will assume $6,100,000 of ServGate's liabilities from venture capitalist Sand Hill and BSGL LLC, which had been holding the assets as collateral on existing ServGate loans that were in default. Cirond also issued 9 million shares of its own common stock to BSGL as part of the agreement, which does not include ServGate's distributor and importer deals, or the startup's sales force.

ServGate's most recent funding announcement was an $18 million mezzanine round led by ComVentures in early 2004, and the startup is said to have racked up around $30 million in total funding.

Jeff Wilson, principal analyst for VPNs and security at Infonetics Research, confirmed that ServGate had been struggling. "They just haven't sold enough stuff," he says, contrasting the startup's fortunes with those of Fortinet, another vendor of all-in-one security devices. (See Fortinet, LR Tags Top IPO Candidates, and Fortinet's Money Machine Rolls On.) "If they are not doing $15 million to $20 million a quarter, they are not going to be able to hang in there," he adds.

Wilson was not surprised by Cirond's acquisition. "It makes sense that someone would try and pick up their property and doing something with it," he explains. "There are a lot of asset sales going on right now,: he said, pointing to Fortinet's recent acquisition. (See Fortinet Buys CoSine IP.)

A ServGate customer, who asked not to be named, said he was also not surprised by Cirond's move. "It's the nature of the business, it happens all the time," he says, pointing to other recent M&A activity in security. (See Firewall Vendor Hopes to Lasso CDP, Citrix Picks Up Teros, and Juniper Gets Into $122M Funk.)

The exec is not even particularly worried about future support, explaining that his ServGate boxes are extremely low maintenance. "It's a solid product, it's a stable platform and we have zero downtime with them," he explains.

ServGate did not return calls today, and Cirond was unavailable for comment.

— James Rogers, Senior Editor, Byte and Switch. Special to Dark Reading.

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