Cybersecurity firms’ values soar as attacks increase
Strategic buyers snap up specialized cyber services and technology companies
Government contractors specializing in the most attractive niche segments of the market are experiencing much more rapid growth and, accordingly, enjoying much higher valuation multiples upon selling their businesses than their more generalist counterparts. This bifurcated valuation market, where buyers are keenly focused on the higher-end, specialized companies, versus more diversified, generalist government contractors, presents an outstanding opportunity for cybersecurity companies.
The cybersecurity market’s rapid growth is in response to the many attacks taking place on America’s critical information technology infrastructure on a daily basis as conflicts shift from the traditional battlefield to cyber space. These attacks are becoming more organized and more sophisticated. Sponsors of such attacks include nation states, terrorist groups and organized crime. Naturally, the defense and intelligence community is a prime target as nation states and terrorists seek to steal secrets such as those related to weapon systems technologies, as was the case with the intrusion into the F-35 Joint Strike Fighter Program recently. Additionally, the electrical grid, communication networks and air traffic control systems have been among the many targets. In the civilian sector, as the internet continues to increasingly serve as a medium of delivering government services, agency websites have become high priority targets as well. Furthermore, targets extend beyond government organizations and corporations to include executives of influential agencies and companies.
While many of the largest defense contractors have components of their organizations that seek to provide services and solutions to these problems, a number of smaller, entrepreneurially-owned and venture-backed companies have emerged to address this market. Companies in the cyber market are usually characterized as either services focused or technology focused. Both types of companies are highly sought after by prospective strategic buyers in the market. Services companies provide customers with highly customized services in areas such as information assurance; intrusion detection and intrusion response; test, evaluation and certification; and data management and warehousing. They often help clients seek out the best technologies available to integrate into their systems to achieve their missions. Valuations for companies such as these often exceed 10 times the last 12 months’ earnings before interest, tax, depreciation, and amortization or 1.5 to 2.5 times revenue. Examples of services deals include the sale of ArgoTek Inc. to Cobham plc, Seismic LLC to Applied Signal Technology Inc., SystemWare Inc. to CACI International Inc., Assured Decisions LLC to SafeNet Inc., Emerging Technologies Group Inc. to ManTech International Corp. and Crucial Security Inc. to Harris Corp.
Companies that have developed proprietary technology to deliver solutions to the cybersecurity market also are in high demand. The most successful transactions are those where companies possess a proprietary technology that is scalable, repeatable and has been effectively implemented and proven within a credible customer community. Valuation multiples paid for these companies are higher than those paid for services companies as technology tends to be more scalable and margins for such companies tend to be higher than in services companies. Thus, valuations are more often expressed in terms of multiples of revenue and often exceed 3.0 times revenue. Examples of technology transactions include the sale of eXMeritus Software Federal Systems Inc. and Narus Inc. to Boeing Co., SI Government Solutions to Raytheon Co., Cyveillance Inc. to QinetiQ North America and Cloudshield Technologies Inc. to Science Applications International Corp.
The larger companies in the federal market continue to seek to aggressively position themselves as leaders in the cyber market. Consequently, as companies specializing in cyber security enter the merger and acquisition market, the competition to acquire these businesses is fierce, which enables sellers with highly experienced advisors to secure the most attractive valuations and cultural fit on the most favorable terms and conditions.