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Hacking Drives Cybersecurity Deals

An uptick in cyberattacks has dealmakers, including Chertoff’s David Leach, turning to security software

Cybersecurity companies are very busy these days and some industry experts expect them to remain so in the near future. The recent uptick in cyberattacks, including the data hack of extramarital dating site Ashley Madison, is making companies tighten their web security and driving up demand for cybersecurity providers. Recent deals include the Chertoff Group partnering with the Carlyle Group (Nasdaq: CG) private equity firm to acquire Coalfire Systems Inc. Coalfire, founded in 2001, helps protect companies from data theft and security breaches. The New York-based company lists 3M Co. (NYSE: MMM), Amazon.com Inc. (Nasdaq:: AMZN) and IBM Corp. (NYSE: IBM) among clients.

The Chertoff Group is a business strategy and M&A advisory firm that focuses on the security and risk-management sector. The Washington, D.C.-based company was co-founded in 2009 by former U.S. Homeland Security Secretary Michael Chertoff. Chertoff principal and head of private equity David Leach spoke to Mergers & Acquisitions about the Coalfire investment and other trends in the cybersecurity space.

What did the Chertoff Group already know about Coalfire Systems before making the investment?

The Chertoff Group and Coalfire Systems have worked together over the past few years on different client engagements. As the Chertoff Group delivered cybersecurity services to help companies assess and mitigate cyber risk, we invited Coalfire to assist with tactical security assessments of the network, such as vulnerability scanning and penetration testing, to determine if adversaries have or could penetrate existing security mechanisms. As a result, the Chertoff Group was able to work hand in hand with Coalfire, and it could speak from these experiences and relationships when it came time to pursue this investment opportunity.

What kind of demand are you seeing for cybersecurity companies?

The Chertoff Group and Carlyle see a growing demand for cybersecurity services due to the evolving nature of today’s cyber threats, an increasingly complex compliance environment and a tremendous increase in the number of mobile devices and technological end points within enterprises, which can lead to multiple entry points for cyber criminals and the need for effective risk management.

How are Chertoff and Carlyle planning on helping Coalfire grow?

Coalfire is well positioned to respond to this demand and plans to invest in additional talent, expand into new global markets, and roll out new technical services and software capabilities as a result of the additional capital made possible by the Chertoff Group and Carlyle investment.

Are Chertoff and Carlyle going to seek add-on acquisitions for Coalfire?

We certainly can, but that’s not top priority. The priority is to continue to support the company in growth and market size. Coalfire has more than 1,500 clients and the company is expected to achieve $100 million in revenue by 2017. A lot of the organic growth is penetrating clients. They have been doing a good job of retaining their customers.

What other trends are you seeing in this sector?

Everyone is vulnerable, whether it is a retailer, an airline or a government agency, and that is driving demand for cybersecurity services. How do we resolve risks? That is a tough question to answer. There are a different number of factors staging from stealing credit cards, funds and other valuable assets and releasing that valuable information to the public. They get to choose who to attack and when. No one company can come in and say they resolved the problem.

What are you seeing in terms of deal activity in the cybersecurity space?

We have seen a lot of activity. Software companies will continue to make acquisitions. There are not a lot of large pure-play cybersecurity companies. There are a lot of companies where cybersecurity is just one thing they do. A lot of the pure-plays are small, but not a whole lot of large ones. There are a lot of smart entrepreneurs that are starting companies. We are seeing the early stages of the maturation of the cybersecurity space. We are getting into that phase where we are seeing consolidation.

Is Chertoff going to do another deal by partnering with Carlyle?

Chertoff and Carlyle had a professional relationship for years, prior to this transaction. This is the first time we partnered with a PE fund like Carlyle and we would love to do another deal with them in the future, if we can find it.

 

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