While cybersecurity M&A continued near or above recent highs in the second quarter, macroeconomic challenges are making subsequent quarters more difficult to project.
The second quarter saw 45 cybersecurity deal announcements totaling $12.94 billion in transaction value, according to data compiled by 451 Research. While the deal volume was slightly lower than the 52 announcements reported in the same period a year earlier, it remained well above the second-quarter volume seen in 2020, 2019 and 2018.
Deal multiples, meanwhile, continued to climb from pandemic lows. Cybersecurity acquirers valued their targets at 7.3x trailing 12-month revenue on average in the second quarter of 2022, up from 5.5x in the same period of 2021. The wider tech sector reported deal values at 3.2x trailing 12-month revenue on average in the second quarter of this year.
A growing number of companies plan to invest in cybersecurity in the near term, according to 451 Research's latest quarterly Voice of the Customer: Macroeconomic Outlook, SME Tech Trends survey. A third of surveyed IT decision-makers representing small- and medium-sized enterprises said they will focus IT spending on security in the next 12 months, up from 26% a year prior. The survey was fielded in February 2022.
"With more operations moving online, security is expected to surpass all other IT categories," wrote 451 analyst Malav Parekh in a report on the survey's findings. "Security is also the top spending focus of organizations across all stages of digital transformation."
Still, the sector is not immune from the fallout of broader economic concerns.
"We are starting to learn of some early signs of increasing caution among buyers, such as additional approvals for larger deals, budget reviews and lengthening of deal cycles," William Blair Equity Research analyst Jonathan Ho said in a July 20 note. "Typically, we have observed these actions in advance of more pronounced slowing of deal activity, but it remains too early to tell what the extent of the impact could be."
Downward pressure on public-market equity values may be contributing to the increased caution. The ETFMG Financial LLC Prime Cyber Security Index traded down 19.3% from the opening of the second quarter through July 19. The First Trust Exchange-Traded Fund II - First Trust NASDAQ Cybersecurity ETF dropped 20.9% over the same period.
Rising interest rates are also making it more expensive to take on debt.
"Overall, NYSE- and Nasdaq-traded companies are likely to announce 25% fewer infosec acquisitions this year," 451 M&A analyst Brennon Daly said in a June research note. "U.S. publicly traded companies are accounting for only about one of every five infosec transactions so far this year, down significantly from their average of one of every three deals over the previous half-decade."
451 Research is part of S&P Global Market Intelligence.
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