The number of mergers and acquisitions in the cybersecurity sector has ramped up this year as valuations have dropped. That’s according to a recent report by 451 Research, an S&P Global Market Intelligence company.

In the first six months of 2022, a total of 113 deals were closed for companies providing cybersecurity tools. That’s 10 percent higher than the same period last year.

While the volume has soared deal sizes have dropped, indicating that investors and acquirers are probably getting better valuations. “The median multiple contracted sharply, from 9.0x trailing revenues to 6.8x,” says Garrett Bekker, 451’s principal research analyst.

Bekker’s report paints the picture of a highly fragmented sector that is ripe for consolidation. “By our count, there are probably about 4,000 security vendors,” he says. He also called the industry “a relatively safe harbor in a down market.”

Digital defense tools are now a critical part of any enterprise operation. Meanwhile, government regulations such as the European Union’s General Data Protection Regulation (GDPR) and the California Consumer Privacy Act of 2018 have made some elements of cybersecurity mandatory.

Vendors who help companies manage passwords, access, and online identity are exceptionally popular, according to the 451 report. This subsector of the cybersecurity industry “has been in the top three for at least the past five years, if not number one,” for M&A activity.

Thoma Bravo’s acquisition of enterprise identity management company SailPoint Technologies Holdings Inc. highlights this subsector’s popularity. The all-cash transaction valued at approximately $6.9 billion was completed last month and is the largest deal in this sector this year. The private equity giant is now pursuing another cybersecurity firm called Darktrace, according to a report by Reuters.

Thoma Bravo’s enthusiasm for this sector isn’t shared by its peers. Private equity firms completed 38 percent of cybersecurity transactions last year. This year, their participation has dropped to 20 percent, according to the 451 report.

“I’m not sure why, but PE activity has certainly declined,” adds Bekker. “One guess would be that financial sponsors are being more selective in their dealmaking as financing costs rise.” Strategic buyers have stepped in to fill the gap and pushed deal volume higher this year, according to Bekker’s data.

With new technologies emerging every year and the demand for security tools steadily rising, there seems to be plenty of room for further consolidation in this sector.

-Vishesh Raisinghani