Technology analysts consider that troubled Baltimore Technologies was wise to reject the approach from Chantilly Corporation.
They believe the UK unlisted encryption firm, which suggested an all paper takeover transaction, would add little to Baltimore's image or coffers.
However the reaction of investors was swift and negative with the stock plunging more than 18 per cent in London on confirmation it had spurned overtures from Chantilly.
"I think the [rejection] shows some sense of wisdom," Merrion stockbrokers technology analyst Mr John Coolican said. "What Baltimore needs is a large company with stability and a strong brand that will give their potential customers a sense of reassurance and will allow the tentative sales that must be in the pipeline to become real deals."
Mr Coolican estimated the takeout value of Baltimore somewhere between £160£260 million sterling based on a multiple of present enterprise value (market capitalisation minus cash), against an estimated potential sales stream of around £100 million. "It would be an optimistic scenario to get the top end of that range," he said.
The stock, which was trading at 273/4 pence sterling yesterday, is down more than 90 per cent since early last year and has underperformed the FTSE All Share Software and Computers index by around 80 per cent since January.
The cash-strapped firm's stock gained almost 10 per cent on Monday despite its denial of a report in a Sunday newspaper that it was in "advanced" takeover discussions with US firm, Computer Associates. A Computer Associates spokeswoman declined to comment.
Chantilley, which announced its approach to Baltimore last Friday, indicated an interest in marrying Baltimore's key management technology with its own advanced encryption skills.
This type of deal would do little to bolster Baltimore's ailing coffers and defray its sizeable cash needs.
Last quarter the company had a "burn rate" of around £20£25 million sterling and while this included some one-off elements, its quarterly expenses remain close to this figure despite recent staff layoffs.
Baltimore needs to cultivate the sense that it is going to stay the course and be around to support its Internet security products, the most notable of which is its Public Key Infrastructure (PKI) package.
Baltimore's founder and chief executive Mr Fran Rooney resigned under a cloud last week sparking debate that his sudden exit was not voluntary. However its was felt his departure opened the door for potential takeover bids by companies wishing to get a bargain basement entry to the Internet security market.
Meanwhile Baltimore's share price has taken a hammering. The stock pushed its head briefly above a dollar on Nasdaq, as the news of a possible takeover escalated last week. It jumped 40 per cent to close at $1.20 on Monday but fell back to 85 cents yesterday.
Baltimore needs to maintain its share price above a dollar to retain its listing on Nasdaq. The stock's performance was not helped by news that US investor Capital Group Companies, which last year owned 9.10 per cent of Baltimore, had cut its holding to 3.71 per cent.
Baltimore needs a serious cash injection and credibility if it is to continue.
