Cloudflare (NYSE: NET), an internet security and performance vendor, today announced that it is buying startup S2 Systems in a transaction valued at $39.2 million.

The deal, which already closed on Jan. 1, included a $21.9 million cash payment in addition to 948,501 (0.3% dilution) of Cloudflare common stock according to the recent SEC filing.

The buyout marked the company’s first acquisition since November 2017 when it bought out mobile app software company Neumob.

S2 Systems is an early-stage company that helps improve the everyday web browsing experience by making it faster and safer. The vendor has only been around since 2018 when it was founded by a group of former Microsoft employees.

Cloudflare CEO Matthew Prince stated, “The experienced team at S2 Systems has built an advanced technology that we believe surpasses other browser isolation technologies.

We can’t wait to integrate their stellar team within Cloudflare and utilize their remarkable technology in our platform as we continue to help build a better internet.”

Looking at comparable companies, Cloudflare is fairly valued in our opinion at the current trading price of $17.67/sh.

Cloudflare Valuation Relative to Peers

Source: YCharts, Grizzle Estimates

Addition of S2 Expands Cloudflare’s Enterprise Security Capabilities

Cloudflare provides solutions that protect and accelerate internet applications.

Its purchase of S2 will enable it to add S2’s advanced technology to its Cloudflare Gateway platform.

This is part of the Cloudflare for Teams offering, a security suite that protects corporate employees.

It will now be able to offer a product that is capable of deterring security threats from devices like smartphones and tablets without sacrificing performance.

S2’s patented technology can protect endpoints from zero-day vulnerabilities by executing internet browser code on cloud servers as opposed to the device itself.

Only rendering instructions are sent to the user’s browser.

Unlike other browser isolation tools on the market, this can be done while maintaining speed, website compatibility, and the overall user experience.


Speed and Lower Cost Appeal to Customers

According to a Cloudflare blog post, the remote S2 browser isolation service is based on the open-source Chromium engine that runs Google Chrome, Microsoft Edge, and 20 other popular web browsers.

S2 is also generally faster and requires less bandwidth than local browsing.

Furthermore, it has lower operating costs than competitor offerings which makes enterprise-wide deployment attractive to its customer base.

S2 Systems CEO David Harnett added, “Cloudflare’s team is nimble and mission-led, and we felt there were great synergies across our teams and alignment across our ambitions and goals.

Their ability to run code at the edge – the way it should be run – is unlike anything we’ve seen before, and we’re excited to join our technology with their existing platform.”

Cloudflare’s stock is down less than 1% today in reaction to the announcement but remains 18% above its IPO price.

Source: Grizzle Estimates, Y Charts

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