Cybersecurity Industry Accelerates Deal Making Amidst Improved Valuations

Despite several major attacks this year, cybersecurity industry stock prices are on the rise.

After a lull in public valuations and deal making activity during the first quarter of 2016, dealmakers have returned to the scene as cybersecurity industry stock prices have risen dramatically from their lows. 

Recent transaction announcements which exemplify the strength of today’s market conditions include:

  • Optiv’s filing for an initial public offering to raise $100 million and be listed on the New York Stock Exchange (planned ticker symbol “OPTV”) as the company’s private equity backers (Blackstone, Investcorp and Sverica) seek partial liquidity.  This IPO filing comes despite revenues being flat (sales decline of 7.3% for the 9 months ending September 2016 vs. the same period in 2015) and a lack of profitability (Net Loss of $5.7 million for the 9 months ending September 2016 vs. a Net Loss of $21.9 million for the 9 months ending September 2015).
  • Symantec’s signing of a definitive agreement to acquire LifeLock for $2.3 billion on the heels of Symantec’s acquisition in August of Blue Coat for $4.65 billion.  The transaction values LifeLock at approximately 3.6x LTM revenue of $650 million and 50x LTM EBITDA of $47.2 million.

These transactions belie continued strength in the market for cybersecurity products and services in government, corporate and individual consumer markets.  According to a recent report, global annual cybercrime costs will increase from $3 trillion in 2015 to $6 trillion by 2021, representing 12%-15% year over year growth. 

Global spending on cybersecurity products and services is expected to be total more than $1 trillion over the next 5 years. The unabated magnitude of the information security problem is illustrated by recent breaches which have crippled internet infrastructure and plagued high profile organizations: 

  • DDOS attack on Dyn, (a company which monitors and routes internet traffic), that took down the websites for well known companies such as Amazon, Twitter, Netflix and Etsy.  The attackers leveraged devices of the Internet of Things (IoT) that had been infected with malware.  Note that despite these problems, Oracle just announced the acquisition of Dyn for more than $600 million.
  • United States Navy’s admission to a data breach that exposed personal and sensitive information, including names and Social Security Numbers of 134,386 current and former sailors.

The ubiquitous nature of the cybersecurity problem and its impact on all of our lives is a fundamental thesis driving Symantec’s acquisition of LifeLock.  The deals will “form [the] World’s Largest Digital Safety Platform for Consumers and Families… In the last year, one third of Americans and more than 650 million people globally were the victims of cybercrime.  The total addressable market is estimated to be more than 80 million people.  ‘This acquisition marks the transformation of the consumer security industry from malware protection to the broader category of Digital Safety for consumers’.” 

Recent transaction activity parallels a dramatic rebound in cybersecurity industry stock prices. 

Since reaching a 52 week low of $13.92 in the first quarter of 2016, the cybersecurity ETF CIBR (Nasdaq:  CIBR) has rebounded by more than 47% to a recent 52 week high of $20.48. 

Similarly, the cybersecurity ETF HACK has climbed by more than 85% from a first quarter low of $18.29 to a recent high of $33.91.

Given the ubiquitous impact of cybersecurity, it’s remarkable that a recent IPVM survey of 100 security systems integrators revealed that “overall, cybersecurity is generally not very important for customer’s decision making process.”

This finding stands in stark contrast to the forecasts for continued market growth.  Security dealers need to be taking further steps to educate their customers about the very real nature of the information security problem and thereby increase their own top and bottom lines. 

Thomas McConnell is a director working out of the Denver office of investment banking services provider Headwaters. He can be reached at (303) 951-7125 or [email protected].

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