by Brenon Daly
Having gotten a little richer in its mid-March IPO, Zscaler is now looking to get a little smarter with some M&A. In its first-ever acquisition, the cloud security vendor has reached for TrustPath, a startup that Zscaler plans to use to help speed and sharpen its analysis of the billions of transactions that flow over its platform each day. Not much is known about TrustPath, which is still operating in stealth mode.
Zscaler’s inaugural print continues the trend of information security (infosec) providers emerging as some of the busiest buyers of machine learning (ML) startups, a market that itself is pretty busy. In fact, for the past two years, tech investment bankers we have surveyed have forecast ML to be the single biggest driver for M&A in each of the coming years, ahead of other notable themes such as the Internet of Things and cloud computing.
More importantly, that sentiment is coming through in the actual deal flow. According to 451 Research’s M&A KnowledgeBase, the number of overall ML transactions is on pace to top 120 deals in 2018, three times the number announced just in 2015. Infosec is playing a key role in the record number of ML transactions, with Zscaler joining Amazon Web Services, Splunk and even PayPal in the parade of recent security-focused ML acquirers.
Collectively, infosec buyers are punching well above their weight in the emerging field of ML M&A. Look at it this way: Infosec accounts for roughly 15% of total ML deals in the M&A KnowledgeBase, despite security acquisitions making up less than 5% of all tech transactions we record in any given year.
The main reason for infosec’s outsized role in the ML market is that there’s actually business to be done there. In fact, in a recent survey by 451 Research’s Voice of the Enterprise: AI & Machine Learning, Adoption, Drivers and Stakeholders 2018, infosec emerged as the second-highest rated use case for ML, trailing only ‘business analytics.’ Importantly, the rankings in our survey came from folks who actually have ML technology up and running or are nearly there. With that kind of demand from customers, it’s no wonder infosec suppliers are leading the charge in snapping up smarts.
by Brenon Daly
Playing defense can be a lucrative strategy. Along with the record deal volume in the information security (infosec) market this year, valuations across the fast-growing sector have surged to their highest level. Already in 2018, 451 Research’s M&A KnowledgeBase lists eight transactions that have gone off at price-to-sales multiples of more than 10x, based on disclosed or estimated terms.
These double-digit valuations have helped to push the multiple across the entire infosec market to new heights, twice as rich as virtually all other major IT sectors. According to the M&A KnowledgeBase, acquirers have been paying 8.1x trailing sales for the infosec companies they have picked up so far this year.
For comparison, the next-richest segment (infrastructure software) checks in at 6.6x trailing sales. One sign of how inflated that market has become is the surprisingly rich valuation of infrastructure software titan CA Technologies. Broadcom is paying the highest price for CA shares since the internet bubble collapsed. The deal values CA at 4.5x sales, roughly a turn higher than other large software vendors that aren’t really growing. Additionally, Salesforce paid more than 20x trailing sales for MuleSoft in March.
More broadly, valuations in the 10 other IT sectors we track in the M&A KnowledgeBase are all less than half the median valuation in infosec. For instance, application software transactions this year are going off at 3.4x trailing sales, which is roughly consistent with the two previous years.
Of course, as in any small market, a few richly valued deals can skew the overall valuation for the sector. (The number of infosec prints each year is only about one-tenth the number of application software transactions in any given year.) And the infosec market has seen an unusually large number of big prices paid for very early-stage startups. Deals such as Palo Alto Networks-Evident.io and Splunk-Phantom Cyber are certainly pushing the median multiple higher. But even outside those outliers, acquirers are having to reach deeper than ever before to secure the security providers they want to buy.
For more real-time information on tech M&A, follow us on Twitter @451TechMnA.
BY Brenon Daly
At Black Hat last year, we half-cleverly noted how information security (infosec) vendors should feel right at home in Mandalay Bay, since exits were hard to find in both the infosec industry and the casino itself. Now, as the annual security conference gets set to open this weekend, it’s a much different picture. The exit door has been thrown wide open, with an unprecedented level of both IPOs and M&A in the cybersecurity market.
Start with IPOs. At this point last year, only one cybersecurity provider had made it public (Okta). As the conference gets set to open this weekend, three infosec startups have already debuted on Wall Street this year (Zscaler, Carbon Black and Tenable). Collectively, this year’s trio of new listings has created $9bn of market value, more than 10 times the amount of venture backing they raised altogether.
More significantly, the long-expected wave of consolidation in the overpopulated infosec market is beginning to take shape. For instance, 451 Research’s M&A KnowledgeBase lists 18 infosec acquisitions in July, which matches the highest-ever monthly total for the sector. Last month’s acceleration continues the already-strong dealmaking activity posted earlier this year, putting 2018 on track for the most infosec transactions in any year in history. This year’s unprecedented rate of M&A activity is being driven by an ever-increasing number of buyers that have been attracted to the fast-growing market.
Subscribers to 451 Research can look for a full report on the exit environment for infosec companies on our site early next week.
Contact: Brenon Daly
Private equity (PE) firm Blackstone Group has picked up a majority stake in TITUS, marking an unconventional bootstrapped-to-buyout exit for the 12-year-old data classification startup. Terms weren’t revealed. With the acquisition, PE shops have now purchased more cybersecurity vendors in 2017 than any year in history, according to 451 Research’s M&A KnowledgeBase (see graphic below).
The transaction comes two years after Microsoft made a similar data security move, reaching for Israel-based startup Secure Islands. (Although the price of that deal wasn’t disclosed, subscribers to the M&A KnowledgeBase can see our proprietary estimate on terms.) However, Secure Islands was a much smaller company than TITUS, both in terms of revenue and technology. Secure Islands focused primarily on extending security for Microsoft technology, specifically Office 365 and SharePoint, while TITUS has a broader technology platform. Also, according to our understanding, profitable TITUS generates more than four times the sales that Secure Islands did at the time it was acquired.
For Blackstone (in this case, through its Tactical Opportunities team), the purchase of TITUS represents a return to the information security (infosec) market, with a platform that lends itself to additional bolt-on acquisitions. (The firm used the buy-and-build strategy with infosec reseller/service provider Optiv before selling it to Kohlberg Kravis Roberts a year ago.) Once TITUS is in the portfolio, which should come before the end of the year, Blackstone could help cover the costs of buying into markets where TITUS currently partners. Specifically, markets such as data-loss prevention and archiving would be logical adjacent sectors for Blackstone-backed TITUS to look to shop in.
Contact: Brenon Daly
The holiday shopping season kicked off last week, and for one tech sector, it was a particularly bountiful time for picking up some companies. Information security (infosec) acquirers announced an unprecedented seven transactions during the week that started on Cyber Monday. The pace represented a dramatic acceleration from the year-to-date average of just two deals announced each week.
With last week’s flurry, the number of infosec acquisitions in 2017 has already eclipsed last year’s total, even as overall tech M&A volume this year is heading for a mid-teens percentage drop from last year, according to 451 Research’s M&A KnowledgeBase. (This year already ranks as the second-busiest year for infosec, with deal volume tracking to roughly 50% higher than the start of the decade.) Probably more important than the sheer number of transactions was who was doing the dealing:
-McAfee announced its first purchase since throwing off the shackles of full ownership of Intel last year. By all accounts, McAfee’s step back into the M&A realm with cloud security startup Skyhigh Networks came at a sky-high price.
-An infrequent acquirer, Trend Micro reached for a small application security startup based in Montreal, IMMUNIO. It is only the third acquisition the Japan-based company has done since 2011.
-Thoma Bravo continued this year’s record level of infosec M&A by private equity (PE) firms, taking Barracuda Networks private for $1.6bn. The M&A KnowledgeBase indicates that 2017 is on pace for more PE purchases in this market than any year in history, likely to come in about quadruple the number of sponsor-backed infosec deals in 2012.
Expanding the timeframe beyond just last week, we see a number of other trends this year that have contributed to strong infosec deal volume in 2017, which should continue in 2018. For starters, the industry’s largest stand-alone vendor has stepped back into the market in a big way. Symantec has inked five transactions so far in 2017, more than it has done, collectively, in the previous half-decade. Meanwhile, other infosec providers have either reemerged as buyers (Juniper acquiring Cyphort after a four-year infosec M&A hiatus) or started their own acquisition program (Qualys has announced two deals in the past four months, after printing just one transaction since the company’s founding in 1999).