Mergers and Acquisition Activity in Cybersecurity
Mergers and acquisition (M&A) activity in cybersecurity is expected to grow over the coming years. A strong cybersecurity posture should play a key role in M&A due diligence and integration phases, as well as post-merger operations.
Effective M&A due diligence is critical for both the target and the acquiring firm. A strong cybersecurity posture helps both sides negotiate a fair deal and facilitates a smooth transition.
Financial Sponsors
The cybersecurity market is growing and attracting investors who are willing to pay top-of-the-market valuations for a technology that helps companies protect against increasingly sophisticated cyberattacks. These investors may be private equity funds, hedge funds, or strategic buyers – all looking for ways to invest their capital and earn returns in the challenging macro environment.
Strategic buyers are pursuing add-on acquisitions to boost their revenue, capabilities and organizational infrastructure. These buyers can be publicly traded, financial sponsor-owned, or management or founder owned.
Larger buyers continue to focus on buying point solutions that help them offer a consolidated, bundled security offering. This is helping them stay competitive in the face of rising interest rates, predictions of recession, and mass tech layoffs. This trend is expected to continue as larger players look for ways to grow their revenues and profits. Nevertheless, the economic uncertainty is creating caution among dealmakers. The uncertainty is likely to dampen M&A activity, but it should not derail cybersecurity deals entirely.
Strategic Buyers
In addition to financial sponsors, strategic buyers — either technology-driven companies with existing cyber capabilities or other business-focused firms seeking to expand their security offerings — continue to be active players in cybersecurity M&A activity. These organizations can be publicly traded, financial sponsor- or management owned. In many cases, these firms are looking to grow through add-on acquisitions in order to accelerate growth, increase revenue and capacity and improve their competitive position.
While the uncertainty and turmoil surrounding the COVID-19 pandemic prompted some strategic and private equity buyers to pause their M&A activity, the strong value proposition offered by cybersecurity firms continues to attract them. Moreover, the demand for new protective technologies fueled by the growing threats against businesses will likely fuel M&A in the sector for years to come.
Add-On Acquisitions
The broader market may be cooling off, but the cybersecurity M&A space is heating up. Clint Bundy, Managing Director with Bundy Group recently joined Gary Cohen and Tyler Wall on the Industrial Cybersecurity Pulse podcast to talk about what’s driving this surge in M&A activity for cybersecurity companies.
M&A dealmakers are looking for ways to take advantage of the industry’s massive growth. The security solutions market is valued at $174 billion and expected to grow to $266 billion by 2027, according to Research and Markets.
For example, Hewlett Packard Enterprise recently acquired Axis Security in a move to add the company’s software-based security service edge (SASE) capabilities to its Aruba platform. Managed security services provider Zyston also recently acquired Complyify to add artificial intelligence technology. These types of add-on acquisitions can help consolidate and standardize cybersecurity technologies across an acquired company, or provide the acquiring company with new offerings that address an unmet customer need.
Post-Merger Integration
For businesses in the cybersecurity space looking to expand their product offerings, acquisitions can be a great way to achieve their growth goals. The first quarter of 2023 saw a variety of security-focused acquisition deals, ranging from combinations of large tool vendors to pick-ups of small but promising startups in the cyberdefense market.
Performing an in-depth review of the target firm’s information security procedures during the M&A process is crucial to ensuring that they align with those of the acquiring company. This can help to prevent costly and potentially damaging M&A mistakes that result in unforeseen data breaches after the acquisition.
Even though corporate deal activity has declined from the highs of 2021, it should continue to be robust in the cybersecurity space. Bundy Group’s Clint Bundy recently joined Gary Cohen and Tyler Wall on the Industrial Cybersecurity Pulse podcast to discuss the recent M&A and capital placement activity for cybersecurity firms and what business owners can do to prepare their companies for a sale or raise capital.