Cybersecurity Market Update – December 2022

Heightened Corporate Vulnerability Drives Merger and Acquisition Activity

Capstone Partners released its December 2022 Cybersecurity Market Update, reporting that the Cybersecurity sector has continued to demonstrate defensibility amid volatile markets, providing mission-critical software and services to defend against increasing cyber-attacks and data breaches. Over the last twelve months, the HACK ETF, comprised of public software and services cybersecurity players, has outpaced the S&P 500 index on a revenue multiple basis. Although demand has remained strong across the sector, the Software segment has been at the forefront of innovation to combat increasingly complex cybersecurity threats, with leading players realizing significant revenues. Of note, eXtended detection and response (XDR) providers, who arm information technology (IT) security teams with a real-time overview of cloud network traffic, have been recognized as the next pillar of cybersecurity.

Merger and acquisition (M&A) volume in the Cybersecurity sector has surged year-to-date (YTD), nearly matching 2021’s full year volume and outpacing YTD 2021 levels by 13.1%. Although the broader M&A market has softened through Q3 2022, elevated sector deal activity has been driven by robust buyer appetite from sponsors and strategics. Cybersecurity’s mission-critical function has also insulated sector M&A activity from current economic turmoil as corporations, manufacturers, and individuals continue to face complex cyber threats. Private equity firms have increasingly targeted sector participants in an effort to verticalize portfolios and capitalize on sector tailwinds. Capstone expects private equity add-on transactions to continue to rise through year end and into 2023 following multiple multi-billion-dollar platform acquisitions announced by private equity firms Thoma Bravo and Vista Equity Partners in 2022. At the top end of the Cybersecurity M&A market, there have been 12 deals announced or completed YTD with respective valuations exceeding $1 billion in enterprise value, demonstrating buyers’ willingness to consolidate leading players. However, the middle market (less than $500 million enterprise value) has continued to comprise an overwhelming majority of sector deal activity, accounting for 84.6% of disclosed transactions to-date, an increase of 6.5% year-over-year (YOY).

Also included in this report:

• How rising cyber-attacks and incurred monetary damages have impacted demand in the sector.
• A breakdown of Thoma Bravo’s Cybersecurity portfolio activity, including recently announced M&A and equity financing deals in the space.
• An analysis of notable large-scale and middle market M&A deals in the sector.
• How a high interest rate environment has impacted sector financing activity, with venture capital firms chasing smaller deals.