We want to be the next big security company.

For Gene Hodges president and CEO of Californian Internet security software company Websense Inc. (Nasdaq: WBSN), which acquired two months ago, the visit to Israel has dual significance. "I came to get to know the people here slightly better," he says of his visit to PortAuthority's R&D center in Raanana. "This is a short visit, but it's just our first one."

Short visit or not, Websense apparently has a lot more things to do in Israel. Hodges believes that Israel and the Far East have technological advantages in the security industry. "We recently also opened an R&D center in Beijing," he says. "They have a joke over there that when the 2008 Olympic Games begin, the competition won't be in sports, but in programming between the Israelis and Chinese. Israel and China have some of the world's leading security experts and we will build our security R&D teams outside the US, for the simple reason that you go where the talent is."

Websense's international R&D centers are a form of prelude to the grand aspirations that Hodges has for his company. "We want to be the next big security company," he explains. "Our strategy is to build a set of overall solutions to tomorrow's threats, rather than those from yesterday." To be more specific, 'yesterday' according to Hodges refers to peripheral network protection solutions (such as firewalls), and 'tomorrow' refers to infiltration through web-based applications.

"The last five years have seen the manner of attacks change from ones on companies computer infrastructure to ones on data, primarily data on customers," says Hodges. "We spend a lot of money on preventing a virus from getting into a company, but what about those that could get in via data coming out of the company? We see in the combination of Websense and PortAuthority a capacity to address the two main threats of the future, through solutions that we will develop ourselves and through further acquisitions." Hodges adds that Websense will launch the first product jointly developed with PortAuthority in the second half of the year.

Websense first began collaborating with PortAuthority last September. "A collaboration on product development is the best way to get to know a company," says Hodges. "After we identified its advantages, it became a matter of deciding whether or not we felt that the company was suited to us before someone else came along and grabbed it. Other companies were also interested in PortAuthority, and in both the short-term and long-term there would have been other buyers."

Websense eventually acquired PortAuthority in December for $90 million. This is a respectable figure but one whose return on investment for the venture capital funds is fairly low ($41 million), even when compared with the description of the competition that Hodges says they faced for the acquisition of PortAuthority. But apparently not everyone sees is that way. "You think the sum was low," laughs Hodges, "if that's the case, I like you. You're the first one to say so. Wall Street's first reaction was 'how could you pay so much for a company without any revenue?' I believe that we paid the market price. The venture capital funds weren't prepared to sell any cheaper and we weren't willing to pay any more."

The market was not excited about the acquisition. Merrill Lynch, for example, described the price as "ambitious" and said that Websense paid a multiple of 18 on sales (PortAuthority has had a few million dollars in sales) for a "promising, but as yet unproven opportunity." In response, Websense dropped has 9 percent in the last two months. "I think that within the next few months people will be saying that we got a good deal," predicts Hodges. "My answer is that we have a five-year business plan, and it is highly profitable for our investors."

From pornography site mapping to Web 2.0

Websense started out as reseller of Check Point Software Technologies Ltd. (Nasdaq: CHKP) products. During the mid-1990s, the company's management realized that a lot of customers were facing an uphill battle to block access by employees to pornography sites, and they leveraged this opportunity to build a filter for mapping such sites and began selling it to Check Point's customers. As the years progressed, Websense became a specialist in website mapping, focusing on gaming, violence or pornography sites. In recent years, it branched out into solutions for mapping dangerous web applications, or to be more specific, applications that surfers are exposed to while browsing web sites, media-intensive applications with built-in threats, such as MP3 files, RSS clouds, and others.

Hodges joined Websense at the beginning of 2006, and the company said in its announcement, that he would be responsible for "driving the company's future business strategies." Thus the acquisition of PortAuthority was no surprise in itself, although it was Websense's first. "This is not the first time that this management team has made an acquisition," claims Hodges, and mentions senior VP product development John McCormack, and VP marketing Leo J. Cole. Hodges joined Websense from McAfee Inc. (NYSE: MFE) where he served as president for the last five years, during which he claims to overseen a total of 46 mergers and acquisitions.

"Websense is an excellent platform on which to build a large company," says Hodges by way of explanation of the attractiveness of the company's current management team. "When I joined McAfee in 1995 it had revenue of $95 million, and by the time I left it had revenue of $1 billion. Those who have joined feel that Websense has reached a positive point in its development, with enough resources to beat the competitors, a sort of start-up on steroids. We can move fast, but we have several hundred million dollars to spend (the company has $330 million in cash, S.S.).

Despite the impressive capabilities that Hodges describes, the market that Websense is in appears to be changing fast. The most recent example of this was the announcement three months ago of the acquisition of email security solutions company IronPort Systems Inc. by Cisco Systems Inc. (Nasdaq: CSCO) for around $830 million in cash and stock. The acquisition is due to close in the third quarter of Cisco's fiscal year 2007. IronPort is not a direct competitor with Websense, although it is in the same field and is of a similar size to it.

Globes: Were you surprised by the IronPort acquisition?

Hodges: "I was surprised by how much Cisco was willing to pay for it."

Perhaps Websense should become an acquisition target too?

"Under US company law, every company should be willing to sell itself, if it gets a decent offer. In the Cisco-IronPort deal, they paid a multiple of 10 on revenue. If someone came to us tomorrow and made an offer at that ratio it would amount to $1.8 billion, an upside of 90 percent on the company's current value. I would most definitely recommend selling if that was the case. It would come as no surprise if someone were to walk through the door and say "I want to buy your company." I would be sad if this happens because I think that we can build a big company here, but no CEO is expected to say "no, we're not for sale," since everyone, save for Microsoft, is."

What are your plans for R&D activity in Israel? Do you intend to expand it, or perhaps make further acquisitions?

"Certainly. It makes sense for us to carry out further mergers and acquisitions with companies in the field to consolidate strengths. We have a number of options."

Does Websense have any collaboration arrangements with other Israeli companies?

"Let's just say that there are number of options and I'll think I'll stop here. Most of the opportunities that we're looking for are in parallel fields. The field that we need to invest in primarily is the one known as Web 2.0. such as AJAX-based sites. The people already doing this are not just kids, but real criminals."