nCipher Buys NeoScale

nCipher, a publicly held maker of encryption and security software and hardware based in the U.K., has bought the remaining assets of NeoScale Systems for $1.95 million in cash. nCipher's buying "intellectual property, stock of finished goods, production equipment, and CRM information" from Hercules Technology II LP, a subsidiary of NeoScale's main secured lender and chief creditor, Hercules Technology Growth Capital.

As previously reported here, NeoScale, whose venture funding topped $40 million, closed shop late in November, while management maintained silence to partners, press, and customers. nCipher had confirmed its interest in the remaining assets, following rumors of interest from larger firms like Dell, EMC, HP, and Oracle.

nCipher announced the deal this morning. The company plans to incorporate NeoScale's CryptoStor and KeyVault products into its own roster of data protection wares, though how that will play out isn't clear right now.

"We will continue the NeoScale CryptoStor tape product as a separate line, but we may not maintain KeyVault as a product. We haven't decided... KeyVault can help our own key management," said nCipher VP of marketing Richard Moulds, referring to nCipher's KeyAuthority product.

nCipher will not take on NeoScale's disk encryption products. "The value proposition of disk isn't as great as that of tape," says Moulds.nCipher, which has roughly 180 employees and averages $50 million in annual sales, already gets half of its revenues from North American sales and has a Boston headquarters. But the addition of the NeoScale assets should help nCipher push farther into the market that NeoScale formerly shared chiefly with NetApp's Decru.

We are delighted to add NeoScale’s in-line encryption appliance to our product portfolio to provide both new revenue opportunities and to extend the reach and scope of nCipher’s keyAuthority key management system," said nCipher CEO Geoffrey Finlay, in a prepared statement. "We intend to engage with NeoScale’s existing customers and channel partners as we seize this opportunity to further strengthen our position in the encryption market and expand our customer base... particularly in North America.”

nCipher will also try to engage NeoScale's roster of approximately 300 customers and reseller partners. It could be a challenge: Some parties may have been won over by Decru's advances in the wake of NeoScale's three months of industry hide-and-seek.

Moulds isn't worried. "The channel partners we've spoken to had already made their decision against Decru... They won't be rushing into Decru's arms... And if any do, we will simply have to convince them that we've got the better value proposition."

According to Moulds, nCipher's differentiator against Decru is its breadth of encryption wares, which encompass application and data protection, identity management, and encryption hardware as well as storage tape encryption -- all of which put it more in competition with EMC's RSA.Key management is the centerpiece of nCipher's strategy, and Moulds acknowledges that NeoScale's work on implementing the still-nascent IEEE P1619.3 specifications for key management sweetened the deal for nCipher.

Notably, while not assuming any of NeoScale's debts, nCipher is nonetheless taking on a couple of about 10 "key members of the NeoScale team" and will continue operations in NeoScale's old Milpitas, Calif., offices, which could serve as a new West Coast base of operations for nCipher.

According to Moulds, nCipher isn't interested in NeoScale's executive team, but instead wants the handful of support and salespeople capable of maintaining NeoScale's tape encryption line. Though nCipher is discussing possible contracts with one or two who remain unidentified, ex-CEO Barbara Nelson is not included in the talks.

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