Cybersecurity an Increasingly Hot Sector for Tech M&A

Cybersecurity an Increasingly Hot Sector for Tech M&A

Cybersecurity has led an M&A bonanza in tech for several years, but 2021 brought a new bonanza in this hot sector. 451 research reports that during the first three quarters, there were 151 cybersecurity deals. The figure for 2020 was 94, with 88 in 2019 and 80 in 2018. While other technology sectors also saw increases in deals, few rivaled the increase in cybersecurity, where deal volumes jumped by more than 11%, with increases of 19.3% in cybersecurity software.

The massive changes the pandemic wrought, as well as increased awareness of cyberattacks, are fueling this change. Industry analysts generally think the changes are here to stay, at least for the foreseeable future.

The pandemic increased consumer adoption of a host of digital technologies, with an acceleration in enterprise digitization, too. Companies now must expand beyond protecting their own networks, and think about protecting home networks of employees, too.

Large scale attacks this year undermined supply chains. While this is bad news for consumers and the government, it’s bad news that will only strengthen the cybersecurity industry.

Valuations are extraordinarily high, with an average acquisition payment of 11.3 times trailing sales. And while some industries are witnessing a soon-to-burst bubble, the high prices of 2021 may be reasonable given the increased demand.

Cybersecurity has historically been a major cost driver, with companies hoping to pay as little as possible. But as new attacks gain publicity and damage enterprises, the sector will grow, and companies may be willing to pay more to protect their data.

A decade or two ago, enterprises failed to understand the critical role of cybersecurity. The pandemic has moved us past that. It’s a huge growth area now. And the increased investments in cybersecurity still fall far short of what many companies actually need to do to protect themselves. So in the coming years, as companies realize that their investments are still inadequate, we may see M&A activity accelerate, as more companies invest in cybersecurity.

As with the rest of the sector, the companies that reap the greatest rewards will be those with clean books, recurring revenues, and low risk. Cybersecurity businesses that hope to cash out in the coming years can improve their prospects by getting the right team in place, reducing owner dependence, and consulting with an M&A team about strategies for increasing value and reducing risk. Preparing to sell is a process that takes time, but those wiling to invest in it can earn massive profits.