Network Associates buys PGP

McAfee Associates Inc.—known officially, as of Sunday, as Network Associates Inc.—continued its buying spree Monday, announcing it will gobble up one of the best-known names in encryption.

Network Associates of Santa Clara, Calif., has signed a deal to buy Pretty Good Privacy Inc. for $35 million in cash. Just seven weeks ago, McAfee, known for its virus protection software, announced it was merging with Network General, a developer of network management and security tools, in a deal worth $1.3 billion.

PGP started as a freeware product built in the basement of company founder Phil Zimmerman, who posted his original algorithm on Internet bulletin boards and incurred the wrath of the U.S. Commerce Department, which considered the posting a violation of federal export laws.

McAfee, ironically, posted the PGP algorithm on its bulletin board site as well, but pulled it off when the government threatened prosecution. The criminal case against Zimmerman was dropped one year ago, and the company started building a suite of security applications for desktop and server encryption as well as user authentication.

But the products, based upon the now-public Diffie-Hellman public key algorithm, were slow to market, and the cash-starved PGP became an easy target for acquisition, according to Network Associates CEO Bill Larson.

"We're getting the benefit of the new product flow, which is just coming out this quarter," Larson said this afternoon in a conference call. He added that he expects "eight-digit" revenue out of the company by early next year. Zimmerman will continue as a "fellow" of Network Associates.

PGP is competing with RSA Data Security Inc.'s S/MIME (Secure Multipurpose Internet Mail Extension) to become a standard for E-mail encryption. So far, PGP appears to be winning the hearts of the IETF (Internet Engineering Task Force) because it is based upon the public Diffie-Hellman algorithm.

But RSA has clearly won the hearts of the E-mail vendor community, garnering support from Microsoft Corp., Lotus Development Corp., and others.

Network Associates will take a one-time $30 million charge for the acquisition of "in-process technology."

Larson said the company plans to embark on cost-cutting efforts in the coming months, with layoffs - to take place Jan. 1 -- kept to a minimum. Network Associates expects to hire 1,000 new employees next year if it meets its revenue goals, he said.