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Why Mission-Critical Cybersecurity Is Driving High Valuations

Spending continues to increase dramatically with the federal government expanding its annual cybersecurity budget by more than 35% in 2017.

Cybersecurity has become mission critical for both the public and private sectors with annual cybercrime damages forecast to reach $6 trillion by 2021. Spending continues to increase dramatically with the federal government expanding its annual cybersecurity budget by more than 35% to approximately $19 billion in 2017. Additionally, many private sector companies are spending in excess of 20% of their IT budgets in this area.

As unprecedented interconnectivity increasingly defines every aspect of our public and private lives, the economic well-being of the nation hinges on the success of our cyber defenses. The resulting growth in demand for cybersecurity industry products and services is driving record high volumes and valuations in mergers, acquisitions, growth capital financings and recapitalizations.

Robust M&A Activity

Overall, cybersecurity M&A activity has been robust with strong valuation metrics luring sellers into the marketplace. Cyber companies have sold for an average of 9.4x revenue and 55.4x EBITDA this year. Transaction volume for the first half of 2017 has increased 93% with 122 transactions year-to-date, compared to 63 for the first half of 2016.

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Aggregate transaction value includes only those transactions in which purchase price was publicly disclosed. *Includes the acquisition of Mobileye by Intel Corp. for $14.2 billion on March 13.

Strategic acquirers have accounted for the majority of deals this year as they seek to build out more robust offerings. Notable transactions include Symantec’s acquisition of LifeLock for $2.5 billion and Cisco’s $4 billion acquisition of AppDynamics. Other deals include:

  • CA’s acquisition of Vercode for $614 million
  • Intel’s acquisition of MobileEye for $15 billion (107.5x EBITDA and 36.7x revenue)
  • Cisco’s acquisition of MindMeld for $125 million
  • IBM Security’s acquisition of Agile 3 Solutions, which provides software to enable executives to better visualize, understand and manage information security.
  • Palo Alto Networks’ acquisition of LightCyber, developer of award-winning, highly automated and accurate behavioral analytics technology, for $105 million in cash.
  • Symantec’s acquisition of Portugal-based Watchful Software, a provider of data security and loss prevention solutions for businesses.

Accelerating market growth and industry fragmentation continue to attract an abundance of capital providers with more than 108 financings so far this year from venture capital and private equity groups.  These institutional investors continue to chase exceptional returns when their portfolio companies are acquired or go public.

Public Markets Push Upward

Cybersecurity stocks, as represented by the ETF HACK, are up approximately 13.5%, outperforming the broader S&P 500 which is up approximately 8.6% year to date. Public cyber companies are trading at an average of 21.3x EBITDA (EV/EBITDA) and 3.4x revenue.

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Drivers of Industry Consolidation

A clear need exists for corporations to better rationalize cyber security spending while more effectively managing cyber defenses to reduce operational complexity.  Simplification, accountability, alignment with business goals and return on investment are goals sought by Board of Directors.  Outsourcing to managed security services providers (MSSPs) and focusing on key vendors can help support these goals.

Consequently, industry consolidators (e.g. IBM, Cisco, Symantec, Microsoft, Accenture) should continue to enjoy economies of scale and realize meaningful synergies from acquisitions.  In turn, selling shareholders can benefit from these expected synergies via higher purchase price multiples.

Thomas McConnell is Managing Director of investment banking services firm Headwaters | MB. He can be reached at (303) 951-7125 or [email protected]

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