IT Security

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IT Security

The Acquisition Boom

Ash Sethi / MergerTech Winter 2016


IT THREATS ON A GLOBAL SCALE

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.

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

products.

These slides examine the current

state of the IT security market and

why 2016 will be THE year for M&A

activity in the space.

АШ САЙТИ

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ASH SETHI, MERGERTECH

2


MARKET DRIVERS

THREAT ASSESSMENT

INCREASE IN CYBERCRIME SINCE 2010: 296%

GLOBAL IT SECURITY SPENDING

THE IT SECURITY MARKET IS RAPIDLY RESPONDING TO

THE PROLIFERATION OF CYBER THREATS.

ATTACKS BY NATIONS AGAINST COMPANIES: ↑80%

$150B

$145B

INCIDENTS AT POWER & UTILITY SITES: ↑527%

$120B

$120B

INCREASE IN MOBILE THREATS FROM 2014: 59%

ANNUAL GLOBAL DAMAGE FROM CYBERATTACKS: $445B

AVERAGE COST OF A SINGLE DATA BREACH: $3.5M

$90B

$60B

$51B

$64B

$97B

CYBERSTALKING EVENTS PER DAY: +600,000

$30B

$0B

2014 2015E 2016E 2017E 2018E

ASH SETHI, MERGERTECH

3


THREAT VECTORS

ORGANIZED CYBERTHEFT AND HACKING OF PERSONAL AND

CORPORATE DATA BY FOREIGN MILITARY AND

INTELLIGENCE SERVICES IS SURPASSING LEVELS SEEN

DURING THE COLD WAR.

EFFECTIVE COMMERCIAL AND PUBLIC IT SECURITY IS NOW

AN INTEGRAL PART OF A NATION’S OVERALL DEFENSE

READINESS POSTURE.

DNS POISONING

TROJANS

WORMS

VIRUSES

PHISHING

MALWARE

TCP/IP HIJACKING

CYBERSTALKING

DDoS ATTACK

14x

INCREASE IN US

BUDGET ALLOCATION

TO IT SECURITY

SINCE 2000

22%

5 YEAR CAGR IN IT

SECURITY SPENDING

$145B

ANNUAL DAMAGE TO US ECONOMY

RESULTING FROM DATA BREACHES

TUNNELLING

NETWORK SNIFFING

RANSOMWARE

BOTNETS

ASH SETHI, MERGERTECH

4


ENTERPRISE AND CONSUMER SECURITY CHALLENGES

MOBILE

OPPORTUNITIES

FACILITATES ACCESS TO DATA

ANYWHERE, ANYTIME

CHALLENGES

BYOD BLURS DATA OWNERSHIP; RISK OF

LOST OR STOLEN DEVICES

CLOUD

INCREASED TEAM COLLABORATION AND

BUSINESS AGILITY

INCREASED THREAT OF UNAUTHORIZED

ACCESS TO DATA

BI

IDENTIFIES PATTERNS NOT EASILY SEEN;

PROVIDES ACTIONABLE INTELLIGENCE

EXISTENCE OF DATA MAKES

ORGANIZATIONS VULNERABLE TO ATTACK

FINTECH

CAN ACCESS ACCOUNTS AND PRODUCTS

ANYWHERE, ANYTIME

TEMPTING TARGET FOR CYBERCRIMINALS

DIGITAL MEDIA

PROVIDES ABILITY TO CONSUME A

MULTITUDE OF MEDIA, ANYWHERE

CAN BE A VEHICLE FOR VIRUSES AND

BACKDOOR ATTACKS

ASH SETHI, MERGERTECH

5


COMING EXPLOSION IN SMB SECURITY GROWTH

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%

DO NOT USE WEB

BASED

SECURITY

77%

LACK FORMAL IT

SECURITY

POLICY

40%

OF ATTACKS

ARE ON

COMPANIES

WITH


THE NEW PARADIGM

AS NEW TYPES OF ATTACKS DEVELOP, THE MOST EFFECTIVE

DEFENSES ARE EMERGING FROM “NEW GUARD” PLAYERS

WHO INCUBATE INNOVATIVE, EFFECTIVE SOLUTIONS.

TRADITIONAL IT CONSULTING COMPANIES AND LARGE

SYSTEMS INTEGRATORS ARE LOOKING TO ACQUIRE THESE

FIRMS TO GET A STRATEGIC EDGE OVER COMPETITORS.

$70B

$53B

$35B

$18B

$0B

GLOBAL MILITARY IT SPEND

$67.9B $69.3B

$64.1B

$60.5B

$55.8B

$49.5B

$52.4B

$46.9B

$43.7B

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

*INCLUDES NON-SECURITY SPENDING

PROMINENT HACKING INCIDENTS

WHITE HOUSE

STATE DEPARTMENT

USPS

OFFICE OF PERSONNEL MANAGEMENT

GENERAL ACCOUNTING OFFICE

HEALTHCARE.GOV

NUCLEAR REGULATORY COMMISSION

ARMY CORPS OF ENGINEERS

ENVIRONMENTAL PROTECTION AGENCY

IRS

ADOBE

EBAY

JP MORGAN

TARGET

ANTHEM

UBISOFT

HOME DEPOT

EVERNOTE

LIVING SOCIAL

SONY

ASHLEY MADISON

NEIMAN MARCUS

YAHOO

MICHAELS

AT&T

PF CHANGS

UPS

BOEING

GOOGLE

GOODWILL INDUSTRIES

CITIGROUP

DAIRY QUEEN

ALBERTSONS

COMMUNITY HEALTH SYSTEMS

LIVING SOCIAL

KMART

STAPLES

BEBE

SNAPCHAT

PAYPAL

ASH SETHI, MERGERTECH

7


DIVERSE ACQUISITION ECOSYSTEM

“THE BIG FOUR”

IM GLOBAL, QUBERA, VIGILANT, URGENTIS, HSC, QUBIT, P3 CONSULTING, TRUSTEQ, FIRST POINT

GLOBAL, NORSE, MTS ALLSTREAM, ASECURE, KEY IT GROUP, MPC, SEEKER, INTEGRC, MYCROFT

DEFENSE

CONTRACTORS

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

CLOUDSHIELD, SIGNACERT, CYVEILLANCE, OAKLEY NETWORKS

PRIVATE EQUITY

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

TIBCO SOFTWARE, ARCSERVE, FIREMON, GALAXYTECH, ACCUVANT

IT SERVICES

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

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

IT SECURITY

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

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

ASH SETHI, MERGERTECH 8


MARKET RESPONSE

INVESTMENT TRENDS

GLOBAL IT SECURITY VC INVESTMENTS

>MAJOR SHIFT FROM A PURE PERIMETER-FOCUSED

SECURITY PARADIGM TO A MULTI-LAYERED

DEFENSE APPROACH THAT INTEGRATES DATA

ANALYTICS, REAL-TIME INTELLIGENCE, AND THREAT

RESPONSE

320

240

240

302

$3,410M

$4,000M

$3,000M

201

$2,540M

>SIGNIFICANT INVESTMENT IN STARTUPS FOCUSING

ON SECURITY CHALLENGES RELATIVELY NEW TO THE

MODERN ENTERPRISE: WIRELESS ACCESS, BYOD,

CLOUD STORAGE AND VIRTUALIZATION

DEALS

160

108

120

156

$1,220M

$1,710M

$2,000M

INVESTMENTS

>PROLIFERATION OF MOBILE COMMERCE AND

BANKING, GREATER USE OF DIGITAL CASH, AND

GROWTH IN NEW PAYMENT MODELS FUELING

INVESTMENT IN FINTECH RELATED SECURITY—16%

OF ALL ATTACKS ARE ON FINANCIAL SERVICES

FIRMS/PLATFORMS

80

0

$800M

$815M

2010 2011 2012 2013 2014 2015E

$1,000M

$0M

ASH SETHI, MERGERTECH

9


MAJOR VC INVESTORS AND GROWTH VERTICALS

AORATO, COREOS, FORGEROCK, ILLUMIO, LOOKOUT, NETSKOPE,

SENTINEL ONE, SIMILITY, VECTRA NETWORKS

BYOD 6

STEALTH TECH

8

THREAT INTELLIGENCE

14

BLUEBOX, CIPHER CLOUD, ILLUMIO, OKTA, LOOKOUT, SIGNALFX,

SOOKASA

AGARI, BLOCKSCORE, COHESITY, GUARDICORE, LIGHTCYBER,

KEYME, RISKIQ, SCALYR, VERADOCS, ZERTO

DUO SECURITY, IONIC SECURITY, MAPR, SHAPE SECURITY,

SYNACK, TEAM8, THREAT STREAM

AWAKE NETWORKS, GUARDICORE, OKTA, SKY-HIGH NETWORKS,

SUMO LOGIC, ZERTO

AREA1 SECURITY, BIT9, COREOS, ENDGAME, ICONIC SECURITY,

SHAPE SECURITY, SYNACK

DATA SECURITY

15

ENDPOINT SECURITY

16

APPLICATION SECURITY

18

IAM

26

CLOUD SECURITY

29

2015 US VC INVESTMENTS BY SECTOR

ADALLOM, BIT9, COHESITY, COREOS, FORTER, KEEN.IO, OKTA,

SAFEBREACH, SUMO LOGIC

NETWORK SECURITY

36

ASH SETHI, MERGERTECH

10


PUBLIC MARKETS LANDSCAPE

VALUATION OBSERVATIONS

>MEDIAN VALUATIONS FOR IT SECURITY COMPANIES

HAVE BEEN STRONG AND STEADY OVER THE LAST

THREE YEARS, BETWEEN THE 4-5x LTM REVENUE

RANGE

PUBLICLY TRADED IT SECURITY FIRMS

COMPANY MARKET CAP TEV/LTM REV

PALO ALTO NETWORKS $16.4B 16.2x

SYMANTEC $13.5B 2.0x

FORTINET $6.0B 5.9x

>GIVEN THE EVOLUTIONARY NATURE OF

CYBERATTACKS, MERGERTECH FORECASTS THAT IT

SECURITY WILL BE ONE OF THE LARGEST

TECHNOLOGY GROWTH VERTICALS GLOBALLY OVER

THE NEXT 3-5 YEARS

>LARGEST VENDORS: IBM, SYMANTEC, INTEL, TREND

MICRO, EMC/DELL

TREND MICRO $5.7B 5.2x

FIREEYE $3.4B 6.3x

IMPERVA $2.3B 10.1x

QUALYS $1.3B 7.9x

AVG TECHNOLOGY $1.0B 2.6x

BARACUDA NETWORKS $987M 2.7x

A10 NETWORKS $470M 2.0x

MOBILEIRON $332M 2.0x

ASH SETHI, MERGERTECH

11


MARKET CONSOLIDATION

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

INTEGRATORS

SECURITY VENDORS

IT CONSULTING

FIRMS

SOFTWARE

VENDORS

THE BIG 4

MDM

THREAT RESPONSE

DATA LOSS

PREVENTION

TRANSACTION

SECURITY

CRITICAL

INFRASTRUCTURE SEC

IT ADVISORY

ANTI-VIRUS

MANAGED

SECURITY

ENDPOINT

SECURITY

FRAUD DETECTION

DATA ENCRYPTION

APPLICATION

SECURITY

BIOMETRICS RFID BI

CLOUD

INFRASTRUCTURE

ATP

NETWORK

VISIBILITY

ASH SETHI, MERGERTECH

12


M&A MARKET LANDSCAPE

>M&A ACTIVITY HAS BEEN BOLSTERED BY CONSTANT

EMERGENCE OF NEW TYPES OF THREATS TO A

CONTINUAL STREAM OF NEW WORKPLACE

TECHNOLOGIES

>MEDIAN 2014 ANNOUNCED M&A DEAL VALUE WAS $42M

Mean M&A TEV/Rev (x)

SECURITY M&A DEALS & VALUATION

4.5

3.4

2.3

1.1

0.0

4.1x

3.6x

3.1x 3.2x

126

108

86

71

2012 2013 2014 2015E

175

140

105

70

35

0

Total Security Deals

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

RELATIVELY SMALL CYBERSECURITY

MARKET, INDIA IS POISED TO

DOUBLE ITS SECURITY MARKET

FROM $500M TO $1B IN LESS THAN

2 YEARS.

THE RAND CORPORATION RELEASED A STUDY CITING

THE EXISTENCE OF ~1,000 A-LEVEL CYBERSECURITY

EXPERTS GLOBALLY, VS A NEED FOR 10,000 TO 30,000.

ASH SETHI, MERGERTECH

13


BUYER LANDSCAPE

TOTAL ACQUISITIONS SINCE 2010

MAJOR DEALS SINCE 2013

IBM

CISCO

42

55

CISCO

SOURCEFIRE

$2,500M

ORACLE

35

BAIN CAPITAL

BLUECOAT

$2,400M

EMC

VMWARE

29

34

VMWARE

AIRWATCH

$1,550M

DELL

INTEL

27

26

FIREYE

MANDIANT

$989M

HP

22

VISTA EQUITY

WEBSENSE

$902M

CA

17

TIBCO

12

IBM

TRUSTEER

$900M

SYMANTEC

JUNIPER

9

11

GEMALTO

SAFENET

$890M

AKAMAI 8

*INCLUDES NON-SECURITY DEALS

SINGTEL TRUSTWAVE $810M

ASH SETHI, MERGERTECH

14


HOT SECTORS

WHY MOBILE & CLOUD ARE HOT

1.BELIEF THAT IT SECURITY IS LIKE AN “ARMS-RACE”

BETWEEN THE PUBLIC AND CYBERHACKERS

2.RECENT TORRENT OF ATTACKS MAKE THE PUBLIC

FEEL IT IS NOT ADEQUATELY PROTECTED AGAINST

BREACHES

MOST DEAL ACTIVITY

IDENTITY & ACCESS

MANAGEMENT

M&A SUBSECTOR RANKINGS

HIGHEST MULTIPLES

ANTI-MALWARE/ANTI-

FRAUD

HIGHEST Y-O-Y

GROWTH

MOBILE SECURITY

NETWORK SERVICES MOBILE SECURITY MANAGED SECURITY

3.SECURITY AROUND NEW TECHNOLOGIES ALWAYS

LAG BEHIND CYBERHACKERS; ORGANIZATIONS PAY

PREMIUMS TO RAPIDLY CATCH UP

MDM

17 EXITS LAST YEAR,

WITH OVER 200% Y-O-Y

ACQUISITION GROWTH

MANAGED SECURITY NETWORK SECURITY CLOUD SECURITY

MANY OF THE HOT VERTICALS WITHIN IT SECURITY

PERTAIN TO TECHNOLOGIES THAT ARE RELATIVELY

NEW IN THE ENTERPRISE (EG MOBILE, CLOUD)

ASH SETHI, MERGERTECH

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

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