TrendEmphasis shifts to analytical tools rather than building sturdier walls

Published 30 January 2008

The $169 million PayPal paid for Israeli on-line security specialist Fraud Sciences is part of a larger trend in security: “Security is less a matter of keeping everyone outside the outer wall and more one of detecting them sneaking through the premises,” as one analyst put it

On-line auctioneer eBay on Monday said subsidiary PayPal agreed to acquire Fraud Sciences, an Israel-based on-line credit card fraud detection firm, for $169 million. The acquisition is the latest in a growing list of purchases of venture-backed computer security companies. Red Herring’s Cassimir Medford writes that it is also the highest price paid for a VC-backed security firm since Cisco announced it had snagged IronPort Systems for $830 million a year ago.

Tel Aviv-based Fraud Sciences markets an on-line transaction verification service that uses analytical tools to confirm that the customer attempting to make a credit card purchase is indeed the authorized owner of the credit card.
Six-year-old Fraud Sciences raised about $15 million from BRM Capital and Redpoint Ventures among others. The Fraud Sciences purchase comes on the heels of Sun’s announcement in November that it planned to acquire Vaau, a Torrance-based identity management and compliance firm, for an undisclosed sum. In 2007 a total of 25 VC-backed firms were acquired at an overall price of $1.28 billion, according to data from Thomson Financial and the National Venture Capital Association. Two Cisco acquisitions, IronPort, which carried a price tag of $830 million, and Reactivity at $135 million, were the most expensive acquisitions of VC-backed firms in 2007. ScriptLogic, which was acquired in June by Quest Software for $90 million, and Cloakware, which was acquired by Dutch firm Irdeto in December for $72.5 million, were next value.

Jupiter Research analyst Geoffrey Turner believes that latest wave of acquisitions is significant in part because the firms being acquired are primarily analytical rather than the fortress-like technology firms of the recent past. “It is starting to dawn on everyone that security is less a matter of keeping everyone outside the outer wall and more one of detecting them sneaking through the premises,” he said. Analytical firms look for fraudulent activity based on the patterns of the transactions, and the technology continues to identify perpetrators as they create harder-to-detect schemes. “This way companies are able to evolve their defenses along with the evolving modes of attack by fraudsters,” Turner said. eBay, which made its offer in cash, expects the acquisition of Fraud Sciences to close within thirty days.