Check Point, an Israeli company best known for its firewall technology that defends networks against Internet attacks, announced in October that it had signed a deal to buy Sourcefire, which makes security appliances for protecting a corporation's internal networks. The deal had been under scrutiny since February by the Committee on Foreign Investment in the United States, or CFIUS, a panel made up of representatives from a dozen government agencies tasked with investigating foreign investments in U.S. companies that could affect national security.

Check Point had committed to an all out effort to lobby the committee for approval, but the process fell afoul of international politics following the public outcry over the failure of CFIUS to further investigate a proposed deal that would have given a Middle Eastern company control over six major U.S. ports. Only one member of the committee needs to veto a proposed merger to scuttle the deal.

"Check Point and Sourcefire have worked for many months with the Committee on Foreign Investment in the United States (CFIUS)," Check Point said in a statement. "Given the complex technology, the complexity of the process, the current scrutiny of CFIUS, we have come to the conclusion that that it may be simpler and better to pursue other partnership alternatives or take more time to work with the government."

The scuttled deal underscores that the Bush Administration's War on Terror, and the politics surrounding the U.S. government effort, can both benefit and adversely impact industries that are considered paramount to national security.

The proposed Check Point acquisition was under initial review by the U.S. Treasury-led CFIUS, when the Associated Press broke the news that United Arab Emirates-based Dubai World Ports planned to close a deal which would have given the company responsibility for security at six major U.S. ports. The further investigation by CFIUS into Check Point's proposed purchase of Sourcefire was announced the following day.

The Dubai World Ports deal eventually fell to political pressure, and last week, the company set a timetable to sell its stake in remaining U.S. ports to American companies.

Congress established CFIUS under the U.S. Treasury Department in 1988, when fears of growing Japanese ownership of U.S. companies caused legislators to pass the Exon-Florio Act. The panel has vetted more than 1,500 transaction since being established, decided to further investigate 25 deals, and only approved 11 transactions, according to a report on the committee published by the Congressional Research Service.

Check Point joined the exclusive club of 25 other foreign companies on February 13, when it announced that CFIUS had decided to further investigate its acquisition. The panel has 30 days to consider further investigation of any acquisition, and once it announced its intent for more in-depth review, has 45 days in which to issue its judgment. The decision on Check Point's acquisition of Sourcefire would have been due by March 30.

The $225 million proposed deal was considered a major win for both Sourcefire, which was founded only five years ago by the creator of the open-source intrusion-detection system Snort, and Check Point, which looked to grow its line of internal network security products with the acquisition. Check Point would have paid the price in cash and stock and agreed to abide by Sourcefire's option plan. The deal was scheduled to close by the end of next week.

Check Point's decision to pull out of the process is considered a common acknowledgment that CFIUS had been ready to deny approval for the deal, said Peter Kuper, senior security software analyst for investment-research firm MorganStanley. A source familiar with the details of the process confirmed that the companies believed that CFIUS would deny permission for the acquisition. The U.S. Treasury Department would not comment on the issue except to say that CFIUS agreed to the withdrawal of the proposed purchase.

Companies commonly pull out of a pending acquisition before the CFIUS renders its judgment. Of the 14 cases that have not gotten approval after further investigation, only one had actually been denied. The 13 other deals were withdrawn by the companies that had proposed the merger, according to the report published Congressional Research Service.

The scuttled deal hurts Check Point more than Sourcefire, MorganStanley's Kuper said. Check Point is in the process of revamping its business from a company well known for its product defending the corporate network perimeter to offering product for internal network controls as well, he said.

"Sourcefire's business is more about where the dollars are going, and Check Point has been more focused on where the dollars have been," Kuper said.

Sourcefire has maintained profitability, including strong results last quarter, and having the U.S. government rule that its technology is considered a national-security asset does not hurt, he said.

"This wasn't about selling because they had too, it was about them selling because they had the opportunity," Kuper said.

Check Point's stock price dropped $1.01, to $20.01 by mid-day on Friday. The company had announced its pullout from the deal on Thursday night after the market had closed. Symantec, a competitor to Check Point in the network-security industry, is the owner of SecurityFocus.