In The News
Information Security, Data Center Sectors Enjoy Strong Exits, Solid Funding
Mass High Tech
by Maria Lewis Kussmaul
Saturday, December 23, 2006 - Whether it is a consumer selecting mutual funds or venture capitalists pursuing startups, nothing better attracts investment dollars than attractive returns — which helps explain why funding continues to pour into the information security and data center sectors. These IT segments have enjoyed robust M&A activity in recent years. The factors fueling this continued investment and ongoing exits are unlikely to abate anytime soon, suggesting 2006 will shape up to be yet another banner year.
Leading information security vendors are enjoying strong and sustained demand for their solutions. Drivers include the increasing frequency, diversity and sophistication of attacks, viruses and worms as well as the proliferation of spyware, with its often-criminal intent. Coupled with the evolving threat landscape is an increasingly demanding regulatory environment, in which organizations must respond to a widening array of laws and regulations including Sarbanes-Oxley, HIPAA and the recently issued FFIEC online banking authentication mandates. Enterprises have responded with steady increases in security spending, driving a market that was estimated by IDC to have reached $17 billion in 2005.
Enterprise security deployment strategies last year were marked by “defense in depth” spending in which organizations invested in multiple layers of anti-virus, anti-spam, firewall and other threat identification and mitigation solutions.
Defensive spending was complemented by enabling investments in authentication, access control, identity management and web services security to support remote communication, web computing, service-oriented architecture and e-commerce requirements.
This year, spending is likely to reflect tighter integration among both defensive and enabling elements.
This robust environment drives accelerating M&A activity for a number of reasons including cyber threats, compliance requirements and convergence. Add to these the urgent quest for scale in development, distribution and support and consolidation is bound to continue.
Similarly favorable factors are influencing dynamics in the data center. Massive data growth continues to drive processing and storage requirements. The same distributed computing trends that are fueling enabling security convergence are driving demand for application acceleration, wide-area file services and remote data protection and backup solutions.
The “urge to merge” has been no less strong in the data-center arena. Because customer access is still highly concentrated among a small number of large successful systems vendors, leading startups frequently seek OEM or other distribution deals and are occasionally rewarded for their efforts with an acquisition term sheet.
These positive sector characteristics attract strategic and financial acquirers as well as ongoing public and private equity investment. Information security acquisitions saw a 38 percent increase to 58 transactions in 2005 over 2004, while data-center deals numbered 32, up 33 percent. Median acquisition multiples in both sectors continued to hover in the four to six times trailing 12 months’ revenue range, or record post-bubble territory for technology segments.
Symantec Corp. and Cisco Systems Inc. top the list of serial security acquirers, while EMC Corp., Hewlett-Packard Co. and Sun Microsystems Inc. were among the most active in the data center space.
Venture funding also continued strong in these sectors with more than $1 billion pouring into 142 information security deals nationwide, comparable to 2004 levels. Data center activity was only half as robust, with $500 million invested in 28 funding rounds, up 85 percent.
Public equity performance among data center and information security vendors’ stocks was mixed. Our market cap-weighted information security universe advanced 5 percent on the year while our data-center sector plunged 16 percent.
The uneven performance helped account for the lackluster level of public equity fund raising in 2005. Only a single IPO, Rackable Systems of California (which has delivered exceptional 250 percent appreciation since its issuance), took place in these sectors; and follow-on and PIPE funding was also scant.
Maria Lewis Kussmaul is a co-founder of investment bank America’s Growth Capital in Boston. She can be reached at maria@americasgc.com.
