Flux in today's HotWired/Packet

[declan@well.com (Declan McCullagh)]

http://www.packet.com/flux/


The recently concluded merger of

Security Dynamics Technologies Inc. with

RSA Data Security Inc. may have offered

us one of our last opportunities for

insight into the bizarre and byzantine

business world of commercial

cryptography in America today. And one

of the chief insights we've gleaned from

Security Dynamics' filings with the

Securities and Exchange Commission about

the merger is that the company may have

bought not only a lemon, but a lemon

that, when swallowed, could make

Security Dynamics double over with food

poisoning. Why did Security Dynamics pay

nearly US$300 million for RSA, a company

which had less than $1 million in profit

last year on revenue of some $11

million? Furthermore, its encryption

patents will expire in four years, which

means that all RSA really owns is its

relationships with customers such as

Netscape and Hewlett-Packard. Even

worse, those patents are under attack at

the moment through a lawsuit filed

against RSA by Cylink Corporation, an

RSA competitor holding similar patents

that was a one-time partner in a failed

joint venture with RSA. Another lawsuit

pending against RSA, Security Dynamics,

and Cylink was brought by Roger

Schlafly, a cryptographic researcher who

is attempting to invalidate any and all

patents that might attempt to monopolize

public key cryptography.




Indeed, in a worst case scenario, what

Security Dynamics may have purchased is

a huge summary judgment (against itself)

should Cylink actually prevail in its

suits. According to Security Dynamics'

recent S-4 filing with the SEC, "RSA has

been advised that, in a letter to SDI

following the announcement of the

proposed merger, Cylink's general

counsel asserted that Cylink's

compensatory damages, conservatively

estimated, would exceed $75,000,000 but

provided no basis for such estimate."

That's the kind of negative return on

investment from an acquisition that

we've come to expect from America Online

(remember BookLink and WAIS Inc.?)!