One of the great things about Twitter and iChat is their ability to fuel the rumor mill. The back-office chatter for the last couple months, both within and outside Securosis, has been about rumors of HP buying Fortify Software. So we weren’t surprised when HP announced this morning that they are acquiring Fortify Software for an “undisclosed sum.” Well, not publicly disclosed anyway. In our best KGB voice, “Ve have vays of making dem talk.” And talk they did.

If you are not up to speed on Fortify, the core of their offering is “white box” application testing software. This basically means they automate several aspects of code scanning. But their business model is built on both products and services for secure software development processes as a whole – not only to help detect defects, but also helping modify processes to prevent poor coding practices, with tool integration to track development. Recently they have announced products for cloud deployments (who hasn’t?), with their Fortify360 and Fortify on Demand products designed to address potential weaknesses in network addressing and platform trust. New businesses aside, the white box testing products and services account for the bulk of their revenue.

Fortify was one of the early players in this market, and focused on the high end of the large enterprise market. This means Fortify was subject to the vagaries of large value enterprise sales cycles, which tend to make revenues somewhat lumpy and unpredictable, and we heard sales were down a bit over the last couple quarters. Of course we can’t publicly substantiate this for a private company, but we believe it. To be clear, this is not an indicator of product quality issues or lack of a viable market – variations in Fortify’s numbers have more to do with their sales process than the market’s perceived value for white box testing or their products. Gary McGraw’s timely post on the Software Security Market reinforces this, and is a fair indication of the growing need for security testing software and services. Regardless of individual vendor numbers (which are less than precise), the market as a whole is trending upwards, but probably not at the rate we’d all like to see given the critical importance of developing secure software.

The criticisms I most often hear about Fortify focus on their pricing and recommended development methodology – completely geared towards large enterprises, they introduce unneeded complexity for normal organizations. From an analyst perspective my criticisms of Fortify have also been that their enterprise focus made their offerings a non-starter for mid-market companies, which develop many web applications and have an even more pressing need for white box testing. Fortify’s recommended processes and methodologies may appeal to enterprises, but their maturity model and development lifecycles just don’t resonate outside the Fortune 500. The analysts who will not be named have placed Fortify’s product offering far in the lead for both innovation and effectiveness, but in my experience Fortify faces stiffer competition than those analysts would have you believe. Depending on market segment and the problem to be solved, there are equally compelling alternative products.

But that’s all much less relevant under HP’s stewardship. Over the past few years HP has made significant investments to build a full suite of application security solutions, and now has the ability to package the needed application scanning pieces along with the rest of the tools and product integration features that enterprise clients demand. Fortify’s static analysis, assessment, and processes are far more compelling coupled with HP’s black box and back office testing, problem tracking, and application delivery (Mercury). And HP’s sales force is in a much better position to close the large enterprises where Fortify’s product excels. Yes, that means Fortify is a very good fit for HP, further solidifying its secure code strategy.

So what does this mean to existing Fortify customers? In the short term I don’t think there will be many changes to the product. The “Hybrid 2.0” vision spelled out in February 2010 is a good indicator that for the first couple quarters the security product suites will merge without significant functionality changes. The changes will show up as necessary to compete with IBM and its recent acquisition of Ounce Labs – tighter integration with problem tracking systems and some features tuned for IBM development platforms. This means that the pricing model will be cleaned up, and aggressive discounts will be provided. This will also introduce some short-term disruptions to service and training as responsibilities are shuffled.

But both IBM and HP will remain focused on large enterprise clients, which is good for those customers who demand a fully-integrated process-driven software testing suite. It’s natural to mesh the security testing features into existing QA and development tools, with IBM and HP uniquely positioned to take advantage of their existing platforms. Their push to dominate the high end of the market leaves huge opportunities for the entire mid-market, which has been prolific in its adoption of web application technologies. The good news is there is plenty of room for Veracode, Coverity, Klocwork, and Parasoft to gear their products to these customers and increase sales. The bad news is that if they don’t already have dynamic testing capabilities, they will need to add them quickly, continue to innovate their way out of HP and IBM’s shadow, and address platform support and ease-of-use issues that remain hurdles for the mid-market. You just cannot get very far if your software requires significant investment in professional services to be effective.

As far as acquisition price goes, the rumor mill had the purchase price anywhere from $200 million on the low end to $270 million on the high end. With Fortify’s revenue widely thought to be in the $35-$50M range, that’s a pretty healthy multiple, especially in a buyer’s market. Despite the volatility of Fortify’s revenues, an established presence in enterprise sales makes a strong case that a higher multiple is warranted. Moreover, the sales teams were already collaborating heavily, which likely helped convince HP they couldn’t afford to lose this deal to someone else.