IT Security

The Acquisition Boom

Ash Sethi / MergerTech Winter 2016

 I T T HR E AT S O N A GLO B A L SC A LE
It’s 1:50pm, and there have
already been more than 14,000
cyber attacks today. Really.
Hacking—ranging from the lone
cybercriminal, to systematic
industrial IT espionage
targeting enterprise R&D, IP,
customer data, internal
communications, financial data,
even employee information,
costs the American economy
over $200 billion a year.
And IT threats are only
proliferating, and growing more
sophisticated and ambitious in
both scale and design.
One of the consequences of
this dangerous new paradigm is
a growing appetite for IT
security acquisitions.
A S H S E T HI , ME R G E R T E C H
IT security assets are attracting
investments from large strategic
buyers, private equity houses,
consulting firms, even defense
contractors.
Surveys indicate that
cybersecurity is now the chief IT
priority for the government sector,
which has stoked public IT
contractors to shift their
development focus on IT security
related consulting and software АШ САЙТИ
products. 10100011010
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These slides examine the current
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state of the IT security market and
why 2016 will be THE year for M&A 00101010011
activity in the space. 10100010101
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MA R KE T D R I V E R S

THREAT ASSESSMENT GLO BAL I T SE CURI T Y SPE NDI NG

THE IT SECURITY MARKET IS RAPIDLY RESPONDING TO
THE PROLIFERATION OF CYBER THREATS.
INCREASE IN CYBERCRIME SINCE 2010: 296%

ATTACKS BY NATIONS AGAINST COMPANIES: ↑80% $150B $145B

INCIDENTS AT POWER & UTILITY SITES: ↑527% $120B

$120B

INCREASE IN MOBILE THREATS FROM 2014: 59% $97B

$90B
ANNUAL GLOBAL DAMAGE FROM CYBERATTACKS: $445B
$64B
AVERAGE COST OF A SINGLE DATA BREACH: $3.5M $60B $51B

CYBERSTALKING EVENTS PER DAY: +600,000 $30B

$0B
2014 2015E 2016E 2017E 2018E

A S H S E T HI , ME R G E R T E C H 3
THRE AT VECTORS

ORGANIZED CYBERTHEFT AND HACKING OF PERSONAL AND DNS POISONING

CORPORATE DATA BY FOREIGN MILITARY AND
INTELLIGENCE SERVICES IS SURPASSING LEVELS SEEN TROJANS
DURING THE COLD WAR.
WORMS
VIRUSES
EFFECTIVE COMMERCIAL AND PUBLIC IT SECURITY IS NOW
AN INTEGRAL PART OF A NATION’S OVERALL DEFENSE PHISHING
READINESS POSTURE.
MALWARE
TCP/IP HIJACKING
CYBERSTALKING
DDoS ATTACK
TUNNELLING

14x
INCREASE IN US
22%
5 YEAR CAGR IN IT
$145B
ANNUAL DAMAGE TO US ECONOMY
NETWORK SNIFFING
RANSOMWARE
BUDGET ALLOCATION
TO IT SECURITY
SECURITY SPENDING RESULTING FROM DATA BREACHES
BOTNETS
SINCE 2000

A S H S E T HI , ME R G E R T E C H 4
E NT E R PR I SE A ND C O NSU ME R SE C U R I T Y C HA LLE NGE S

OPPORTUNITIES CHALLENGES
FACILITATES ACCESS TO DATA BYOD BLURS DATA OWNERSHIP; RISK OF
MOBILE ANYWHERE, ANYTIME LOST OR STOLEN DEVICES

INCREASED TEAM COLLABORATION AND INCREASED THREAT OF UNAUTHORIZED

CLOUD BUSINESS AGILITY ACCESS TO DATA

IDENTIFIES PATTERNS NOT EASILY SEEN; EXISTENCE OF DATA MAKES

BI PROVIDES ACTIONABLE INTELLIGENCE ORGANIZATIONS VULNERABLE TO ATTACK

CAN ACCESS ACCOUNTS AND PRODUCTS

FINTECH ANYWHERE, ANYTIME
TEMPTING TARGET FOR CYBERCRIMINALS

PROVIDES ABILITY TO CONSUME A CAN BE A VEHICLE FOR VIRUSES AND

DIGITAL MEDIA MULTITUDE OF MEDIA, ANYWHERE BACKDOOR ATTACKS

A S H S E T HI , ME R G E R T E C H 5
COMING EXPLOSION IN SMB SECURIT Y G ROWTH

AN UNMINED YET POTENTIALLY LARGE SOURCE OF GROWTH IS THE SHEER NUMBER OF SMBs BOTH IN NORTH
AMERICA AND OVERSEAS THAT LACK ANY TANGIBLE SECURITY MEASURES AROUND THEIR IT OPERATIONS.
SOME FACTS AROUND SMBs:

67% 77% 40% 72% 67%

OF ATTACKS OF ATTACKS DO NOT HAVE
DO NOT USE WEB LACK FORMAL IT
ARE ON ARE ON ANY SECURITY
BASED SECURITY
COMPANIES COMPANIES FOR THEIR
SECURITY POLICY
WITH <500 WITH <100 CLOUD DATA

WHERE SECURITY IS LAX, HACKERS HAVE HELPED THEMSELVES TO BILLIONS IN FRAUDULENT CREDIT CARD
TRANSACTIONS, COMPANY DATA AND PROPRIETARY INFORMATION, BANK ACCOUNT DETAILS, AND EMPLOYEE
INFORMATION.

A S H S E T HI , ME R G E R T E C H 6
 THE NEW PARADIGM

AS NEW TYPES OF ATTACKS DEVELOP, THE MOST EFFECTIVE GLO BAL MI LI TARY I T SPE ND
DEFENSES ARE EMERGING FROM “NEW GUARD” PLAYERS
$69.3B
WHO INCUBATE INNOVATIVE, EFFECTIVE SOLUTIONS. $70B $64.1B
$67.9B
$60.5B
$55.8B
$52.4B
$53B $46.9B $49.5B
$43.7B

TRADITIONAL IT CONSULTING COMPANIES AND LARGE $35B

SYSTEMS INTEGRATORS ARE LOOKING TO ACQUIRE THESE $18B

FIRMS TO GET A STRATEGIC EDGE OVER COMPETITORS.
$0B
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
*I NCLUD E S NO N-SE CUR I T Y SPE ND I NG

PRO MI NE NT HACKI NG I NCI DE NTS

WHITE HOUSE ADOBE ASHLEY MADISON CITIGROUP

STATE DEPARTMENT EBAY NEIMAN MARCUS DAIRY QUEEN
USPS JP MORGAN YAHOO ALBERTSONS
OFFICE OF PERSONNEL MANAGEMENT TARGET MICHAELS COMMUNITY HEALTH SYSTEMS
GENERAL ACCOUNTING OFFICE ANTHEM AT&T LIVING SOCIAL
HEALTHCARE.GOV UBISOFT PF CHANGS KMART
NUCLEAR REGULATORY COMMISSION HOME DEPOT UPS STAPLES
ARMY CORPS OF ENGINEERS EVERNOTE BOEING BEBE
ENVIRONMENTAL PROTECTION AGENCY LIVING SOCIAL GOOGLE SNAPCHAT
IRS SONY GOODWILL INDUSTRIES PAYPAL

A S H S E T HI , ME R G E R T E C H 7
DIVERSE ACQUISITION ECOSYSTEM

IM GLOBAL, QUBERA, VIGILANT, URGENTIS, HSC, QUBIT, P3 CONSULTING, TRUSTEQ, FIRST POINT
“THE BIG FOUR” GLOBAL, NORSE, MTS ALLSTREAM, ASECURE, KEY IT GROUP, MPC, SEEKER, INTEGRC, MYCROFT

DEFENSE WEBSENSE, SILVERSKY, INDUSTRIAL DEFENDER, SENSAGE, FIDELIS, HB GARY, NARUS,

CONTRACTORS CLOUDSHIELD, SIGNACERT, CYVEILLANCE, OAKLEY NETWORKS

FIDELIS, BLUECOAT, BEYONDTRUST, BAY31, IMMEDIATE INSIGHT, SAILPOINT, GOOD TECHNOLOGY,

PRIVATE EQUITY TIBCO SOFTWARE, ARCSERVE, FIREMON, GALAXYTECH, ACCUVANT

EMERGING THREATS, XCEEDIUM, ADALLOM, GOODLOCK, CASPIDA, VOLTAGE SECURITY, CIRRO

IT SERVICES SECURE, OPENDNS, XEROCOLE, HYPERWISE, INTELLINX, TRIPWIRE, PASSWORDBOX, AORATO

NARUS, RANDOMSTORM, NORMAN SAFEGROUND, LOCATION LABS, NITRODESK, RISK IDS,

IT SECURITY DEFENSE.NET, NPULSE, METAFORIC, CYVERA, CENZIC, STOPTHEHACKER, CARBON BLACK

A S H S E T HI , ME R G E R T E C H 8
MA R KE T R E SPO NSE

I NV E ST ME NT T R E ND S GLO BAL I T SE CURI T Y VC I NVE STME NTS

>MAJOR SHIFT FROM A PURE PERIMETER-FOCUSED 320 $4,000M
302
SECURITY PARADIGM TO A MULTI-LAYERED
DEFENSE APPROACH THAT INTEGRATES DATA $3,410M
ANALYTICS, REAL-TIME INTELLIGENCE, AND THREAT 240
RESPONSE 240 $3,000M

201 $2,540M

INVESTMENTS
>SIGNIFICANT INVESTMENT IN STARTUPS FOCUSING

DEALS
156
ON SECURITY CHALLENGES RELATIVELY NEW TO THE 160 $2,000M
$1,710M
MODERN ENTERPRISE: WIRELESS ACCESS, BYOD, 120
108
CLOUD STORAGE AND VIRTUALIZATION $1,220M

80 $1,000M
$800M $815M
>PROLIFERATION OF MOBILE COMMERCE AND
BANKING, GREATER USE OF DIGITAL CASH, AND
GROWTH IN NEW PAYMENT MODELS FUELING 0 $0M
INVESTMENT IN FINTECH RELATED SECURITY—16% 2010 2011 2012 2013 2014 2015E
OF ALL ATTACKS ARE ON FINANCIAL SERVICES
FIRMS/PLATFORMS

A S H S E T HI , ME R G E R T E C H 9
MA J O R V C I NV E ST O R S A ND GR O WT H V E R T I C A LS
BYOD 6
A O R AT O, C O R E O S, F O R G E R O C K , I L LU MI O, LO O KO U T, NE T S KO P E , STE ALTH TE CH
8
SE NTI NE L O NE , SI MI LI T Y, VE CTR A NE TWO R KS
THREAT INTELLIG ENCE
14

B LU E B OX , C I P HE R C LO U D, I L LU MI O, O K TA , LO O KO U T, S I G NA L F X , D ATA S E C U R I T Y

2015 US VC INVESTMENTS BY SECTOR

SO O KASA 15

E ND PO I NT SE C U R I T Y
16
A G A R I , B LO C KS C O R E , C O HE S I T Y, G U A R D I C O R E , L I G HT C Y B E R ,
KE YME , R I SKI Q, SCALYR , VE R ADO CS, ZE R TO
A P P L I C AT I O N S E C U R I T Y
18

D U O S E C U R I T Y, I O NI C S E C U R I T Y, MA P R , S HA P E S E C U R I T Y,
SYNACK, TE AM8, THR EAT ST REA M IAM
26

AWA K E NE T W O R KS, G U A R D I C O R E , O K TA , S K Y- HI G H NE T W O R KS,

SUMO LO GI C, ZE R TO
CLOUD SECURIT Y
29
A R E A 1 S E C U R I T Y, B I T 9, C O R E O S, E ND G A ME , I C O NI C S E C U R I T Y,
SHAPE SE CUR I T Y, SYNACK

A D A L LO M, B I T 9, C O HE S I T Y, C O R E O S, F O R T E R , K E E N.I O, O K TA ,
SAFE BR E ACH, SUMO LO GI C NE T WO R K SE C U R I T Y
36

A S H S E T HI , ME R G E R T E C H 10
PUBLI C MARKE TS L ANDSCAPE

VA LU AT I O N O B SE R VAT I O NS PUBLICLY TRADED IT SECURITY FIRMS

COMPANY MARKET CAP TEV/LTM REV
>MEDIAN VALUATIONS FOR IT SECURITY COMPANIES
HAVE BEEN STRONG AND STEADY OVER THE LAST PALO ALTO NETWORKS $16.4B 16.2x
THREE YEARS, BETWEEN THE 4-5x LTM REVENUE
RANGE SYMANTEC $13.5B 2.0x

FORTINET $6.0B 5.9x

>GIVEN THE EVOLUTIONARY NATURE OF TREND MICRO $5.7B 5.2x

CYBERATTACKS, MERGERTECH FORECASTS THAT IT
FIREEYE $3.4B 6.3x
SECURITY WILL BE ONE OF THE LARGEST
TECHNOLOGY GROWTH VERTICALS GLOBALLY OVER IMPERVA $2.3B 10.1x
THE NEXT 3-5 YEARS
QUALYS $1.3B 7.9x

AVG TECHNOLOGY $1.0B 2.6x

>LARGEST VENDORS: IBM, SYMANTEC, INTEL, TREND
MICRO, EMC/DELL BARACUDA NETWORKS $987M 2.7x

A10 NETWORKS $470M 2.0x

MOBILEIRON $332M 2.0x

A S H S E T HI , ME R G E R T E C H 11
MA R KE T C O NSO LI D AT I O N

LARGE IT FIRMS ARE NATURAL BUYERS OF SECURITY TECHNOLOGY, AS THEY HAVE AN EXISTING PORTFOLIO
OF GLOBAL CLIENTS IN INDUSTRIAL VERTICALS THEY CAN EASILY CROSS-SELL NEW SOLUTIONS INTO.

SYSTEM SECURITY VENDORS

INTEGRATORS
IT CONSULTING SOFTWARE
THE BIG 4
FIRMS VENDORS

DATA LOSS TRANSACTION CRITICAL

MDM THREAT RESPONSE INFRASTRUCTURE SEC
IT ADVISORY
PREVENTION SECURITY
MANAGED ENDPOINT APPLICATION
ANTI-VIRUS FRAUD DETECTION DATA ENCRYPTION
SECURITY SECURITY SECURITY
CLOUD NETWORK
BIOMETRICS RFID BI ATP
INFRASTRUCTURE VISIBILITY

A S H S E T HI , ME R G E R T E C H 12
M& A MA R KE T L A ND SC A PE

SE CUR I T Y M& A DE ALS & VALUATI O N

>M&A ACTIVITY HAS BEEN BOLSTERED BY CONSTANT
EMERGENCE OF NEW TYPES OF THREATS TO A 4.1x
4.5 175

Mean M&A TEV/Rev (x)

CONTINUAL STREAM OF NEW WORKPLACE

Total Security Deals

3.6x
TECHNOLOGIES 3.4 3.1x 3.2x 126 140
108
105
2.3 86
71
70
>MEDIAN 2014 ANNOUNCED M&A DEAL VALUE WAS $42M 1.1 35

0.0 0
2012 2013 2014 2015E

THE RAND CORPORATION RELEASED A STUDY CITING

ISRAEL
THE ISRAELI CYBERSECURITY
SECTOR IS A VERY LARGE AND VERY
DYNAMIC SECTOR, WITH HIGHLY
ADVANCED R&D AND SIGNIFICANT
M&A ACTIVITY INVOLVING CROSS-
BORDER BUYERS.
INDIA
WITH A +1B POPULATION AND A
THE EXISTENCE OF ~1,000 A-LEVEL CYBERSECURITY
EXPERTS GLOBALLY, VS A NEED FOR 10,000 TO 30,000.
RELATIVELY SMALL CYBERSECURITY
MARKET, INDIA IS POISED TO
DOUBLE ITS SECURITY MARKET
FROM $500M TO $1B IN LESS THAN
2 YEARS.

A S H S E T HI , ME R G E R T E C H 13
B U Y E R L A ND S C A P E

TOTAL AC QUISITIONS SINC E 2010 MA J O R D E A LS SI NC E 20 1 3

IBM 55
CISCO SOURCEFIRE $2,500M
CISCO 42
ORACLE 35 BAIN CAPITAL BLUECOAT $2,400M

EMC 34
VMWARE AIRWATCH $1,550M
VMWARE 29
DELL 27
FIREYE MANDIANT $989M
INTEL 26
HP 22 VISTA EQUITY WEBSENSE $902M

CA 17
12 IBM TRUSTEER $900M
TIBCO

SYMANTEC 11
GEMALTO SAFENET $890M
JUNIPER 9

AKAMAI 8 SINGTEL TRUSTWAVE $810M

*I NCLUD E S NO N-SE CUR I T Y D E A LS

A S H S E T HI , ME R G E R T E C H 14
HO T SE C T O R S

WHY MO BI LE & CLO UD AR E HO T

1.BELIEF THAT IT SECURITY IS LIKE AN “ARMS-RACE” M&A SUBSECTOR RANKINGS
BETWEEN THE PUBLIC AND CYBERHACKERS
HIGHEST Y-O-Y
MOST DEAL ACTIVITY HIGHEST MULTIPLES
GROWTH

2.RECENT TORRENT OF ATTACKS MAKE THE PUBLIC IDENTITY & ACCESS ANTI-MALWARE/ANTI-
MOBILE SECURITY
MANAGEMENT FRAUD
FEEL IT IS NOT ADEQUATELY PROTECTED AGAINST
BREACHES NETWORK SERVICES MOBILE SECURITY MANAGED SECURITY

MANAGED SECURITY NETWORK SECURITY CLOUD SECURITY

3.SECURITY AROUND NEW TECHNOLOGIES ALWAYS
LAG BEHIND CYBERHACKERS; ORGANIZATIONS PAY
PREMIUMS TO RAPIDLY CATCH UP
MANY OF THE HOT VERTICALS WITHIN IT SECURITY
PERTAIN TO TECHNOLOGIES THAT ARE RELATIVELY

MDM
NEW IN THE ENTERPRISE (EG MOBILE, CLOUD)

17 EXITS LAST YEAR,

WITH OVER 200% Y-O-Y
ACQUISITION GROWTH

A S H S E T HI , ME R G E R T E C H 15
 Im @techfinanceash
Ash Sethi / Associate / MergerTech

If you’re interested in chatting about IT Security or

tech, please get in touch with me at:

www.mergertech.com asethi@mergertech.com