What's behind Apple's bid for security specialist AuthenTec?
By Adrian Drury, Practice Leader, Consumer Impact Technology & Integrated Media Team, Ovum.
Apple has made a bid to acquire AuthenTec, a mobile encryption and security specialist. This acquisition is notable not just because Apple finds it notoriously difficult to spend its growing cash pile, but also because AuthenTec inked a deal in July to provide its fingerprint authentication and VPN technology for Samsung Android devices destined for the enterprise.
While this deal will give Apple technology assets to reinforce its security credentials in the growing enterprise markets for iOS, this deal is not just about secure corporate data on smartphones. AuthenTec technology also has application for across Apple’s App Store, iTunes, and future mobile e-voucher and payment services. It adds up to an attractive portfolio of intellectual property, as well as a blocking move against Samsung.
This isn’t Apple’s first date with AuthenTec
An 8-K filing by publicly-traded AuthenTec revealed it had received a bid at 58% over its closing price on the day of the filing, July 26, 2012, for a total consideration of $356m. AuthenTec has an interesting customer base in the mobile handset market. In July it announced a partnership with Samsung that would enable Apple’s dominant rival in the smartphone market to bundle AuthenTec’s VPN technology with Samsung smartphones destined for enterprise use.
Also buried within the 8-K filing was information that, independent of its bid for ownership of the company, Apple has paid $20m for the rights to license technologies from AuthenTec and is allowed to license the patents for these technologies for up to $115m. Apple will also pay AuthenTec $7.5m for “non-recurring engineering services,” with any new research conducted by the company immediately belonging to Apple.
AuthenTec also counts Alcatel-Lucent, Cisco, Fujitsu, HP, Lenovo, LG, Motorola, Nokia, Orange, and Texas Instruments among its customers.
AuthenTec’s technology portfolio makes it a prime target
So why has AuthenTec suddenly become so attractive? As its name suggests, it specializes in device security and authentication technology. Its marquee product set is its TouchChip area fingerprint sensors and modules, which offer a reduced device footprint, cost and power overhead versus optical-based fingerprint solutions or secure log-on.
It also has a portfolio of related patents covering fingerprint pattern processing, protective coatings, and fluid on-screen finger-based cursor navigation. AuthenTec has also extended its expertise in encryption and authentication technology to deliver a complete portfolio of embedded and server-side DRM solutions used by multi-screen video service provider clients.
And finally it has pushed into the VPN market, enabled by its fingerprint-scanning technology, branded QuickSec, which Samsung has licensed for its Android devices. This can be implemented across many devices and not just mobile phones.
This makes AuthenTec an attractive package for Apple. Secure fingerprint authentication would create an alternative to PIN or user ID & password authentication on its iOS devices. This would have application for its authentication model for its own App Store and iTunes business, access methodology to iCloud services, or secure access to enterprise applications and data stored locally on an iOS device.
With Apple’s iOS6 launch approaching, and growing penetration of its iPhone and iPad products not just in consumer markets but also in enterprise markets, it needs to increase the embedded security firepower on its device, but without compromising its design principles and commitment to putting the consumer user experience first, not the service provider or the enterprise. AuthenTec’s fingerprint authentication technology could help it on its journey to that goal.
In addition, the market knows that Apple’s PassBook, Cupertino’s mobile e-voucher service, is also coming in iOS6, potentially accompanied by a further non-voucher-based mobile payments service. An ISO-compliant fingerprint scanning technology would be a smart authentication method and likely to help allay security concerns.
Share price performance signals that the market believes there will be a counterbid: your move Samsung?
With an offer price 58% over the closing price, equivalent to a multiple of 4.6× AuthenTec’s projected 2012 earnings, it is likely that Apple was bidding against a competitor. That party is most likely to be Samsung, and the jump in AuthenTec’s share price above Apple’s bid of $8 per share suggests that the market believes that there is a chance of a counter bid, or that lawsuits from shareholders wanting a higher price from Apple may pay dividends.
Samsung is incentivised to counter bid as it is unlikely to be pleased that it will be paying Apple directly for a technology license, although Samsung would have to navigate the challenge of the extant licensing agreement with Apple.