Fueling Strong Cybersecurity M&A Activity

Strong Cybersecurity M&A Activity

A favorable capital market environment and sector demand have fueled strong cybersecurity m&a activity. Well-capitalized strategic buyers and private equity firms are in a flight to quality, seeking targets with innovative technologies and a solid track record of financial performance.

During a transaction, sensitive information can shift between business units, exposing potential vulnerabilities, risky practices, and legal liabilities. Our cyber due diligence services help you identify and mitigate M&A risk.

Acquisitions

The cybersecurity M&A market has been active in recent years, fueled by sector demand for innovative technology and a lack of IPO options for many startups. Private equity firms and well-capitalized strategic buyers have spearheaded a flight to quality, targeting companies with strong security platforms and robust financial performance.

A company going through a merger or acquisition will require a thorough and comprehensive assessment of its information security policies and practices to minimize risk. It is also important to assess the target firm’s culture, which will determine how receptive it will be to remediating vulnerabilities that may be discovered during due diligence.

In addition to traditional IT due diligence, Unit 42’s Cyber Due Diligence Framework and Cortex XDR/Xpanse allow M&A deal teams to conduct an independent assessment in accordance with a tight timeline. This reduces the risk of unforeseen cybersecurity risks arising from M&A activity and allows for more efficient post-deal integration. Investing in Cyber Due Diligence helps to avoid costly M&A mistakes and accelerates returns.

Mergers

In the cybersecurity market, a combination of factors is fueling M&A activity. Increasing end-user demand for comprehensive solutions, early stage equity investor caution, lender conservatism and insatiable corporate acquirer appetites are all creating an environment that has the potential to propel M&A activity.

Effective cybersecurity due diligence during M&A requires more than just penetration testing and surveys. It also includes evaluating the target company’s security posture, including how well its policies and procedures align with those of the acquiring firm.

While M&A deals often involve the consolidation of information systems and operational practices, the acquisition process can also introduce unwanted risks. For example, the combining of disparate security systems can create opportunities for malicious actors to exploit undiscovered vulnerabilities and weaknesses. A comprehensive M&A cybersecurity risk assessment will help mitigate these threats and ensure a smooth integration post-merger.

Restructuring

Cybersecurity is an area where large-scale M&A activity has been robust in recent years. While deals have decreased in number and value compared to 2021, Clint expects the space to experience a resurgence as more larger middle market and corporate-sized acquisitions occur.

The M&A market for cybersecurity companies is complex. Firms seeking to sell can be public, private or financial sponsor-owned. Financial sponsors typically look for platform acquisitions in an industry with the intention of growing their investment through add-on acquisitions and then selling the entire company at a premium valuation.

M&A activity requires thorough cybersecurity due diligence. Finding even one undisclosed data breach during the M&A process can be enough to kill a deal, especially for larger companies. The acquiring firm must be able to verify the target company’s information security procedures, including penetration testing and surveys. In addition, they must be able to assess the target company’s culture of cybersecurity, as most data breaches are human errors.

Valuation

Despite the recent drop in overall technology sector deal volume, cybersecurity dealmaking continues to thrive. With IPO activity yet to rebound, venture capital firms are looking for quicker exits which has led to some larger cybersecurity companies being available at reasonable valuations.

YTD 2023 saw a significant increase in the number of add-on acquisitions for both private and strategic buyers in the sector. These acquisitions provide a lower risk strategy for growth and may allow buyers to immediately leverage new technologies, services or clients.

Investor caution, lender conservatism, and insatiable corporate acquirer appetites create a combustible mix that should continue to drive M&A activity for the cybersecurity space. By establishing a robust risk governance process, companies can demonstrate their value to potential acquirers and investors. Learn best practices for conducting effective cybersecurity due diligence and preparing for post-merger cybersecurity integration to ensure a seamless transition. Download this white paper to learn more about addressing and mitigating cyber risks during M&A activities.

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