Three small-cap 'internet cops' waging war on cybercrime

More and more organisations are becoming victims of computer hacking and cybercrime. Fighting the threat has become a lucrative growth industry. Tom Bulford examines three UK small-cap companies that specialise in new ways to fend off the hackers.

"It's not a brave new world, it's a bad new world." Sony boss, Howard Stringer, was fuming.

His company has just been hit again by a vicious cyber attack. Still reeling from an assault on its PlayStation and Qricity online gaming and video networks in April, Stringer now has to deal with a security breach at SonyPictures.com.

This is more than just an embarrassment to Sony. It's costing the Japanese giant plenty. Stringer had to shell out £100m to fix the first problem alone. And that doesn't get anywhere close to the damage to Sony's reputation, which is inestimable.

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We're under attack!

Suddenly, cybercrime is everywhere. The USA is accusing China of hacking in to the Gmail accounts of top Washington officials. Wikileaks has emerged and started creating havoc. The Stuxnet cyber worm disrupted the workings of an Iranian nuclear power plant. Cloud-based password management company, LastPass, has been forced to advise customers to change their passwords. And consumer electronics giant Best Buy has had to inform customers that their email addresses were stolen.

Everywhere you look, we're under attack from cyber criminals. There's money in stopping this, I reckon. And innovative penny shares are bound to play a part. The Penny Sleuth is on the case.

On the plane back from the USA in April, I found myself sitting next to a man who works in the internet security business. He summed up the problem succinctly. "We build the walls around the internet higher and higher. But the criminals just extend their ladder."

Cybercrime is already huge. Many fear that as cloud computing transfers data away from the secure corporate environment to remote networks, things will only get worse. Easily able to conceal their identity, the cyber criminals do not even attempt to dissemble.

Some penny share fans may remember a little UK company called Detica Group. It was a real stock market success story before it was acquired by British Aerospace in January. And it has estimated the cost of cybercrime to the UK economy.

"Across the world," it says, "we send 294 billion emails and 5 billion SMS messages each day. Over 93% of UK businesses and 73% of UK households have internet access.

"Our society is almost entirely dependent upon the continued availability, accuracy and confidentiality of its information and communications technology. We need it for our economic health, for the domestic machinery of government, for national defence and for our day-to-day social and cultural existence."

This dependence has left us vulnerable and Detica reckons that cybercrime is costing the UK £27bn per annum. The biggest loser is UK business and the main problems are the theft of intellectual property (IP), and industrial espionage. The types of IP most likely to be stolen are ideas, designs, methodologies and trade secrets which exist in tangible form and add considerable value to a competitor. No business sector is likely to be entirely immune.

"Without urgent measures to prevent the haemorrhaging of valuable intellectual property, the cost of cyber crime is likely to increase even further."

Three UK small-caps fighting the battle against cybercrime

It is against this background that AIM-listed Corero (CORO), headed by the same team responsible for the successful ICT provider Datatec (DTC), has bought Massachusetts-based Top Layer.

Top Layer specialises in safeguarding networks especially against denial of service' attacks. These are criminal attempts to make a computer unavailable to its intended users. And it also has a product that allows enterprises and government agencies to aggregate and distribute network traffic more efficiently.

Last week, I met Corero's chief operating officer executive, Andrew Miller. He told me that Top Layer has superior technology that has not been effectively marketed. And he reckons that by opening up sales channels and pushing the products outside the USA, Top Layer could double its $10m annual sales, taking it to profitability.

But Corero isn't stopping there. Top Layer is expected to be followed by other acquisitions and Miller wants to take advantage of one key trend. It's this.

At present, the majority of security spending is on firewalls which intercept packets of data that have come from a dodgy source. Increasingly though, there is a trend towards deep packet inspection' which, at ultra high speed, looks at the content of each data packet.

Leading security vendors such as Cisco, Checkpoint, McAfee and Fortinet are combining deep packet inspection capability into next generation firewalls.' Miller believes that traditional firewall providers will struggle to compete and this will lead to industry consolidation.

Other stock market plays in this area areDigital Barriers(DGB) and NCC Group (NCC). But it's Corero that I'll be watching. I'm really interested in how it will develop. It has a respected management team, who have committed £4.5m of their own cash into the venture. They're going to work hard to get this business working well. And there's no doubt that it is operating in a growth industry: fighting cybercrime.

Sadly, cybercrime is on the rise. But for investors in these internet cops, crime might just pay.

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This article was first published in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth .

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.