NEW YORK (CNN/Money) -
Wall Street can't seem to get enough of the taste of spam...the e-mail kind.
Two weeks ago, software developer Tumbleweed Communications (TMWD: Research, Estimates) announced it was buying privately held Corvigo, which sells a Linux-based anti-spam filter. Shares of Tumbleweed, which already had other anti-spam products, are up nearly 500 percent during the past 12 months.
And last week, private anti-spam software company Brightmail filed to go public. As unwanted e-mail continues to be a huge problem for corporations and consumers, analysts expect both more mergers in the sector and more companies looking to go public.
"There's absolutely going to be a bunch of euphoria, people trying to benefit from the tailwind of spam," said Scott Petry, founder and vice president of products and engineering for Postini, which manages companies' e-mail networks to stop spam before it arrives, and which is considering a public offering.
But is there enough spam fighting business to go around to justify a wave of IPOs? Some analysts that follow the sector don't think so, which could mean that anti-spam is the next candidate for a tech bubble in the making.
Spam shakeout is needed
Attracting a lot of IPO buzz these days are Postini and rivals on the managed services side of spam-blocking, FrontBridge Technologies and MessageLabs. Other companies in the anti-spam area with software and hardware solutions include MailFrontier, IronPort, and CipherTrust.
Petry said that Postini is not currently profitable but that it has had profitable quarters in the past. He would not disclose exact sales figures but said Postini was "not that far off from Brightmail." Brightmail's sales more than doubled last year, to $26 million.
Michael Osterman, president of Osterman Research, a research and consulting firm focusing on messaging, estimates that there already about 150 anti-spam vendors. He adds that more people, lured by the potential riches, will likely enter the market in the near future.
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"There are very few barriers to entry. Anyone with a good idea and knowledge of programming could write a decent spam filter," Osterman said.
Petry concedes that differentiation could be a problem if more anti-spam companies follow in the steps of Brightmail.
"Everybody and his brother are doing a spam block. Anybody can go public," Petry said.
That's why more mergers, as opposed to more IPOs, are probably needed to weed out the weak in this fragmented industry, said Michael Rasmussen, an analyst who follows information security for Forrester Research.
Rasmussen said he's not sure if being a pure-play message security company is a viable business since larger public rivals are increasing their presence in this area.
For example, anti-virus software firms like Symantec (SYMC: Research, Estimates), Network Associates (NET: Research, Estimates) and Trend Micro (TMIC: Research, Estimates) are bulking up their anti-spam efforts.
And network security is becoming a bigger area of focus for networking equipment companies such as Cisco Systems (CSCO: Research, Estimates) and Juniper Networks (JNPR: Research, Estimates), which agreed to acquire firewall security firm NetScreen Technologies (NSCN: Research, Estimates) last month.
"Security is becoming integrated into a lot of operating systems and network infrastructure," said Rasmussen.
Room for a handful, not a hundred, spam fighters
In addition, the anti-spam companies will all need to adapt since spam may not be as big of a problem in the next few years as it is now.
"Spam is not a stand-alone business. It's an important component within an e-mail security solution but it's maybe a little overhyped right now," said Jos White, president of MessageLabs's Americas division.
White said MessageLabs may seek an IPO within the next 12 to 18 months. He added that the company is currently cash-flow positive and has an annual revenue run rate of about $45 million.
Last year, the U.S. enacted a law, known as the CAN-SPAM Act, that outlaws unsolicited bulk e-mailing. While this law is not expected to put a complete stop to spam, it may diminish it. White added that increased attention by Microsoft to the problem should also put a dent in spam.
Alan Weinfeld, a security software analyst with Fulcrum Global Partners, thinks that a bigger e-mail problem will be what is known as "phishing." That's when someone sends an e-mail that appears to be from a reputable source (i.e. a bank or e-commerce site) and asks for valuable information such as social security or credit card numbers.
Tumbleweed released a new product last week that is designed to verify the source of e-mails.
Weinfeld said that there's probably room for about only four or five major public anti-spam companies. He thinks Tumbleweed, Brightmail, Postini and CipherTrust have the best chances of remaining independent.
Brightmail reported a net profit of $1.2 million in its latest fiscal year. The company also holds three patents and has significant investor backing: venture capital firm Accel Partners owns about 20 percent of the company and Symantec owns 13 percent.
"If you don't have patents or profits, there is no way to survive," said Weinfeld. "The rest of the anti-spam companies are going to have to join up with bigger companies or go out of business."
So investors will need to be wary of many of the companies that are seeking to cash in on the anti-spam trend.
Analysts quoted in this story do not own companies mentioned in this piece and their firms do not have investment banking relationships with any of them.