August 22, 2023

Tech Deal Making in Cybersecurity: The Year of Consolidation and the Rise of Add-Ons

Tech Deal Making in Cybersecurity: The Year of Consolidation and the Rise of Add-Ons

After a relatively quiet year, especially in the tech sector, things are picking up again, and the buzz around tech deal-making is starting to make a comeback. Banking insiders are signaling that conversations that stalled just months ago are now returning. What's driving this resurgence? A belief in macroeconomic stabilization, an expectation of stabilized interest rates, and, of course, the fervor surrounding Artificial Intelligence (AI).

The Ingredients for Successful Deals

Deal-making can be likened to making wine; it requires both art and science. You can have all the tools, but without the right environment, it's challenging to craft the perfect blend. In the world of deals, stability is the vital ingredient, much like location is for real estate. With the macroeconomic landscape appearing to stabilize and enthusiasm around AI, the time seems ripe for deal-making.

Not All Tech is Created Equal

This year, we're seeing a trend away from mega-deals like the $69 billion Activision-Microsoft deal. Instead, insiders are calling this the "year of the add-on." Consolidation is on the horizon, and many are looking for capabilities they might not have otherwise. Add-ons are becoming attractive as they are easier to finance in a high-rate environment and less likely to run into antitrust issues.

Areas to Watch: Cybersecurity, Fintech, and AI

Some key areas are primed for significant deals. Cybersecurity, for instance, is the perfect sector for deals. It's mission-critical and fragmented, with previous examples of big deals even in tough environments like Google's $5.4 billion acquisition of Mandiant. Risk and compliance, Fintech, and AI are other areas showing potential. However, caution is advised with AI, as a lot of the companies drawing excitement are pre-revenue, and VC dollars are still lower than previous peaks.

The Year of the Add-On

With regulators clearly on the prowl, this year makes sense to focus on consolidation and add-ons rather than mega deals. The emphasis on avoiding antitrust issues, the drive for capabilities, and the growth in key sectors like cybersecurity signals an exciting time in tech deal-making. The year of the add-on, as some are calling it, is shaping up to be a period of careful strategizing and potentially profitable collaborations, aligning with the broader themes of digital transformation that continue to influence the tech landscape. In the end, as with fine wine, it's about finding the right blend of elements to create something truly exceptional.

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