Despite Recession Jitters, M&A Dominates a Robust Cybersecurity Market

The cybersecurity industry continues to remain largely unaffected by the uncertainty surrounding the rest of the economy.

Though funding activity this year is somewhat slower than in 2021 and market valuations of cybersecurity firms have taken a hit, mergers and acquisitions activity has remained strong through the year, as has investor interest in the sector.

So far in the third quarter, there have been multiple major transactions that, according to analysts, highlight the overall robustness of the sector amid broadening concerns of a recession.

Robust M&A Activity

Two of the biggest involved previously announced deals: In September, Google completed its planned acquisition of incident response firm Mandiant for $5.4 billion, and in August, private equity firm Thoma Bravo closed it $6.9 billion purchase of identity management vendor SailPoint.

That same month, Thoma Bravo announced plans to acquire Ping Identity for $2.8 billion in cash. The $28.50 per share that the private equity firm offered for Ping represented a 63% premium over the identity management vendor's closing share price on Aug. 2. Thoma Bravo will take Ping private once the deal is completed in the fourth quarter. 

Other examples of M&A activity in the third quarter include Devo's purchase of SOAR vendor LogicHub for an undisclosed amount, Volaris Group's acquisition of Hitachi ID Systems in September, Cerberus Sentinel's purchase of application security vendor CyberViking, and CrowdStrike's acquisition of Reposify last week.

M&A activity in the third quarter is consistent with activity in the previous two quarters. Data from Momentum Cyber shows there were a total of 148 cybersecurity M&A deals during the first half of 2022. Total M&A volume over the period was nearly $103 billion. Momentum Cyber identified eight M&A transactions during the first half of 2022 that topped $1 billion, including the SailPoint and Mandiant deals, and private equity firm KKR's $4 billion acquisition of Barracuda.

The most obvious trend of late has been the move by larger vendors to buy into the attack surface management (ASM) space, and more specifically external attack surface management (EASM), says Rik Turner, an analyst with Omdia.

"This has, of course, been underway for a while," he says, pointing to Palo Alto's purchase of Expanse in November 2020 and Microsoft picking up RiskIQ in July 2021. "But there has been something of an intensification of this tendency of late, with Tenable acquiring Bit Discovery in April, IBM buying Randori in June, and CrowdStrike picking up Reposify last week," Turner says.

There are numerous other EASM vendors, so there will be no shortage of acquisition targets for any other big players that want to get into this market, he says.

Multiple Market Drivers

Turner says one of the other trends driving the M&A activity is growing interest in proactive security technologies, as opposed to the focus on reactive detection and response of the past few years.

"The proactive wave posits not a replacement technology for the reactive ones, but rather complementary ones that seek to reduce a customer's overall attack surface before threat actors have even launched an attack," Turner says. "Unlike the extended detection and response (XDR) spectrum, proactive security doesn't have a single acronym or initialism yet that can capture the imagination of the market, though Omdia is tentatively proposing security posture management, or SPM." 

Examples of products that fall into this category include cloud-specific proactive technologies such as cloud security posture management (CSPM), SaaS security posture management (SSPM), and cloud permissions management (CPM). Breach and attack simulation technologies are other examples as are vulnerability management and patch management, Turner says.

Chris Stafford, a partner in West Monroe's M&A practice, sees another set of factors driving the financial activity in the cybersecurity space. According to Stafford, the big ones are accelerated cloud adoption, the shift to remote work, and the continuing talent shortage. 

 "Fundamentally, cybersecurity is a really durable sector from a growth and revenue perspective," Stafford says. "All companies across all sectors require cybersecurity tools and services. That is what is fundamentally driving growth in the industry."

Funding & VC Interest Slow but Remain Healthy

While M&A activity has maintained a robust pace through the year, funding activity has been somewhat lower than last year, as noted earlier. Data from analyst firm IT-Harvest shows that through Sept. 1, some 220 vendors received a total of $12.3 billion in direct funding from investors. 

"That is half of 2021's record $24 billion, but more than the previous year's $10 billion," says Richard Stiennon, chief research scientist at IT-Harvest, adding that just 33 companies received more than $100 million so far this year, compared with 69 in 2021. "I expect to see the industry finish the year at $15 billion total invested," Stiennon says.

Omdia's Turner says while venture capital funding overall appears to have dipped somewhat, there is still plenty of money available for projects that VC's find especially interesting. "I think they have gotten somewhat choosier than they were in 2021," Turner says.

IT-Harvest's analysis of funding activity so far this year showed that investors are pouring more money into the security analytics space — $2.6 billion — than any other segment. Stiennon points to the more than $500 million in total that Devo has raised so far and the massive $1-plus billion funding round that Securonix received in February as examples of investor interest in this segment.

Identity and network security were the next two most active categories, with $1.4 billion in funding in each. There is also a trend of investing in cloud analytics and general security operations center tools like XDR, and a resurgence in vulnerability management startups that are getting funding, Stiennon notes.

"In short, funding is extremely healthy. No surprise to me because venture funding is not like the stock market, where you invest on expectations of next quarter's results," he says. "Most VCs have a five-year horizon, and they can count on cybersecurity to still be a growing sector through an economic downturn."