Cybersecurity firm Applied Signal Technology Inc
The company, whose products are used by U.S. defense and homeland security agencies to intercept cellphone, microwave and military communication signals, hired Bank of America Merrill Lynch to run the auction, the sources said.
Shares of Applied Signal rose as much as 9 percent to $30.15 in early Nasdaq trading on Friday, their highest level since Feb. 2005 and valuing the firm at more than $400 million. Shares have since retreated to $29.75.
Applied Signal is likely to seek initial offers for the company sometime in November, one of the sources said.
Most big defense firms, including Cobham Plc, Northrop Grumman, Lockheed Martin, Boeing and L-3 Communications are expected to look at Applied Signal as they seek to get deeper into the fast-growing world of cybersecurity and intelligence, the sources said.
Applied Signal did not respond to a request for comment. Bank of America Merrill Lynch declined to comment, and representatives for BAE, Cobham, Raytheon, Northrop, Boeing, L-3 and Lockheed were not immediately available for comment.
The auction comes months after Boeing bought Applied Signal's bigger rival, Argon ST, for $775 million -- a price that represented 14 times Argon's forward earnings before interest, taxes, depreciation and amortization (EBITDA), above the average deal multiple of 7 to 9 in the sector.
Applied Signal had a market capitalization of $360 million as of Thursday's market close, valuing the firm at more than 10 times its forward EBITDA, according to estimates from Thomson Reuters I/B/E/S.
Bankers expect Applied Signal to fetch a similar rich multiple of at least 14 times, indicate a sale price of about $460 million, based on estimated forward EBITDA of $33 million by Thomson Reuters I/B/E/S.
"Applied Signal being the last one standing with the scale in the signal intelligence area ... that really gives them some level of scarcity value that may not be reflected in public markets," one of the sources said, asking not to be identified because he was not authorized to speak with the media.
Sunnyvale, California-based Applied Signal collects, analyzes and intercepts communication and electromagnetic signals. Its cybersecurity expertise also includes network monitoring, intrusion detection, and processing information to detect abnormalities increase situational awareness.
Top weapons suppliers are looking to acquire smaller rivals in high-demand technologies such as cybersecurity, intelligence, reconnaissance and surveillance as they brace for tightening budgets on traditional arms platforms.
Deal activity is expected to heat up, given low valuations, ample cash and shifting priorities under the Obama administration to move funding from weapons platforms to areas of unmanned war, bankers said.
(Reporting by Soyoung Kim; editing by John Wallace and Derek Caney)