Cybersecurity Market Update – January 2024

Bifurcated Cybersecurity Market Offers Healthy Outlook for M&A

Capstone’s latest Cybersecurity Market Update reports that robust cash flow generation among legacy technology companies in the Cybersecurity sector, coupled with the introduction of artificial intelligence (AI)-driven services, has fostered favorable projections for the sector’s merger and acquisition (M&A) market in 2024. Additionally, a strict regulatory environment has helped to boost demand and engagement with cybersecurity initiatives among boardroom executives, benefitting third-party services providers and sector participants.

Healthy demand for products and services in the Cybersecurity sector has led to a bifurcation of the market, with individual consumers supporting legacy anti-virus and threat detection companies, and venture capital-backed AI-driven companies bolstering sector growth through technology innovation. Continued demand on both sides of the market has led to favorable projections for Cybersecurity M&A growth into 2024, as buyers look to capitalize on well-performing assets with recurring revenues while also expanding innovative services and product offerings. Increasing engagement with cybersecurity in the boardroom has also helped to drive demand for sector services. Regulatory pressures, coupled with mounting costs from cybersecurity breaches, have prompted elevated investment from corporate boards of directors and C-suite executives with cybersecurity initiatives. A spate of new U.S. Securities and Exchange Commission (SEC) regulations regarding cybersecurity incident reporting and progression have bolstered the connection between boardroom governance and corporate cybersecurity, favorably positioning sector players. Companies with high cyber maturity, including both robust cyber planning and effective board engagement on cyber-related issues, have tended to use more third-party service providers in key operating areas

M&A volume in the Cybersecurity sector has softened through year-end 2023 with 363 transactions announced or completed, compared to 447 in the prior year period. However, the mission-critical nature of cybersecurity products and services has bolstered average disclosed deal value in the middle market. Enterprise values for lower middle market ($10-$100 million) deals have averaged $21.9 million, a 3.4% increase year-over-year (YOY). Average deal value in the core middle market ($100-$250 million) kept pace with the prior year period, declining only 0.5% YOY. Strategic buyers drove the majority (57.3%) of transaction activity to-date. Both private and public strategic buyers were active in the M&A market in 2023, with private strategics accounting for 30.0% of total transactions and public strategics accounting for 27.3% of total transactions. Despite elevated debt financing costs limiting large scale buyouts across the broader M&A markets, private equity firms have continued to invest in the Cybersecurity sector through their portfolio companies.

Also included in this report:

• Why Chief Information Security Officers (CISOs) have begun to proactively bolster their company’s cybersecurity capabilities to mitigate impacts from disclosure.
• The performance of the HACK ETF compared to the S&P 500 index.
• How AI-driven cybersecurity products have expanded end markets for sector players.

Capstone Partners’ ADGS Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the Cybersecurity sector. Our team partners with leading mid-to-large sized industrials and manufacturing businesses that serve growing end-markets.

For more information on the Cybersecurity Market Update featured in this report or to speak with one of our ADGS M&A Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today to start a conversation.