Internet filtering company N2H2 Inc., whose software reportedly is used by more than 25,000 schools nationwide, is being acquired by web security firm Secure Computing Corp. Industry experts say the merger could be the first of many in the K-12 filtering space, now that the market has reached near saturation.

Secure Computing “purchased our company because they liked our technology, but also because they liked our market share,” said Philip Welt, president and chief executive officer of N2H2. “They wanted our market share, our presence in the education marketplace.”

With 73 employees and a reported $13 million in annual revenue, N2H2 serves some 2,000 customers–of which 1,800 are education customers–with its Bess and Sentian product lines. Secure Computing, a larger company, has 400 employees and $70 million in annual revenue.

“N2H2 is an excellent fit with Secure,” said Tim McGurran, president and chief operating officer of Secure Computing, which makes the SmartFilter internet content filter, as well as other web security tools. “This acquisition increases our market share and critical mass in the internet content filtering marketplace and adds an impressive base of over 2,000 new customers.”

In an all-stock transaction that will be finalized this fall, Secure Computing will acquire approximately $19.9 million of N2H2’s outstanding stock. Under the merger agreement, Secure will issue 0.0841 shares of Secure Computing common stock for each outstanding share of N2H2 common stock, or approximately 1.861 million shares.

N2H2’s existing school customers will have nothing to fear from the merger, executives from the two companies said. In fact, they claimed, the deal stands to benefit each company’s respective customer base.

“By combining the strengths and complementary aspects of both companies, we will be able to offer customers more features, a wider range of web filtering platforms, and extended URL list capabilities,” McGurran said.

“I think it is a very good thing for [our] customers, and we’ve been getting a good reaction,” Welt added. N2H2’s education customers can feel more confident knowing the company’s products will be maintained with the financial backing and support that Secure Computing can offer, he said.

Some N2H2 customers who spoke with eSchool News weren’t so sure.

“We had a great relationship with N2H2,” said Alan Whitworth, executive director of information technology for the Jefferson County School District in Kentucky. “With new owners, will they give us the same service?”

He continued: “In the private sector, when a larger business swallows a smaller business, … the customer service typically suffers. Will that be the case here? I hope not.

“We’re always concerned when one company we’re doing business with gets acquired by another. I’m optimistic that if Secure Computing is good, they’ll be able to maintain a good thing. Unfortunately some companies don’t get it. But I’m optimistic.”

Owing in large part to the Children’s Internet Protection Act (CIPA), which requires schools and libraries seeking federal technology funding to have internet filters in place, the vast majority of schools already use filters now. That means filtering companies don’t have many new business opportunities in the K-12 marketplace.

As a result, the acquisition of N2H2 may signal the start of a trend, said Matt Stein, K-12 analyst at Eduventures Inc., an education-focused market research firm.

“There’s a bunch of [filtering] companies, and a lot of them are duplicating the work of going out and collecting restricted web sites,” he explained. “It is a pretty fragmented market, and there may be room for more consolidation.”

He added: “When you look at these types of companies, they are the kind of companies that need to sell a lot of product,” because their investment in building and maintaining their solutions is so high.

N2H2 announced the merger agreement July 29.

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N2H2 Inc.

Secure Computing Corp.

Eduventures Inc.