Cybersecurity Financing Headwinds Cause M&A Market to Heat Up

During the first half of 2016, more than 70 venture capital financings were completed in the cybersecurity sector with more than $917 million invested. While this would be significant for most industries, it is well behind the pace of 2015 during which more than $3.3 billion of venture capital was invested during the calendar year. 

This decline in volume of early stage investments is not unique to the cybersecurity industry and extends to the broader technology sector. In general, these trends reflect heightened investor appetites for more certain outcomes and reduced investor risk tolerances.

While it appears that the irrational exuberance of 2015 has receded, a deeper look at transaction statistics reveals a clear shift in preference by investors towards larger and more sustainable companies and away from earlier stage businesses. The top 10 venture financings have accounted for approximately 60% of the more than $917 million invested year to date. Some notable examples include the following: 

• Darktrace’s $65 million raise from KKR, Samsung, Summit Partners and other investors
• Cylance’s $100 million raise at a valuation in excess of $1 billion from Capital One, Citi Ventures, Dell Ventures and other investors
• Tanium’s $262 million raise at a valuation of $3.5 billion
• Skybox’s $96 million growth equity raise from Providence Equity

For these companies, and others like them, strong balance sheets may enable them to bide their time in hopes of improving IPO market conditions. However, through Aug, 9, a grand total of just nine successful technology IPOs had been completed vs. 16 year-to-date last year and 32 year-to-date in 2014.

Fortunately, the void left by pensive venture capitalists and locked public markets, has been largely filled by a dramatic rise in mergers and acquisitions activity. Year-to-date, there have been more than 82 M&A transactions ranging in value from less than $1 million to more than $4.6 billion. With 82 completed transactions, the year-to-date number of deals exceeds the total volume in 2015. 

In response to market conditions, some companies have pivoted their attention towards potential acquirers and completed lucrative deals including: 

• CloudLock’s sale to Cisco for $293 million
• Vormetric’s sale to Thales for $417 million (approximately 7.9x revenues)
• Blue Coat’s sale to Symantec for $4.7 billion (approximately 7.8x revenue)
• PING Identity’s sale to Vista Equity for more than $600 million (approximately 6x revenue). (Note that by completing a sale to a private equity group, PING retains the option of pursuing an IPO in the future should public market conditions improve.)
• Carbon Black’s sale to Confer for $100 million in stock (approximately 4x revenue)

The cybersecurity finance story of the “have’s and have not’s” should continue to play out during the remainder of the year as equity financing remains readily available for the larger and more established companies and much less available for smaller emerging businesses. M&A activity should continue to accelerate as companies of all sizes take advantage of premium M&A valuations to gain shareholder liquidity and access to acquirer resources to achieve their market potential.

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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