April - 2003 issue > Feature

By Pradeep Shankar

ONE SECTOR’S LOSS IS ANOTHER’S GAIN. THE security sector, to be sure, is a “hot” area of investment. The year 2002 saw a series of acquisitions in the security space, sending out signals that this was a sector set to soar. NetScreen Technologies acquired OneSecure. Symantec Corp. went on a $375 million buying spree acquiring four companies for cash: Security Focus, Riptech, Mountain Wave and Recourse Technologies. Cisco acquired Psionic for $12 million.

As the conglomerates look to bolster their security stance by augmenting the depth of their products and services and extending their geographic reach, an appetite for mergers and acquisition will remain. And this is what excites VCs. Most VC firms see the M&A trend as a positive step toward industry consolidation.

“Selling out to large players is the only viable exit strategy that we see today because the IPO market has shut down,” says Amit Bhargava, Principal at the $90 million ECentury Capital. Acquisition seems to be the only way out for security startups developing niche applications for a smaller market place, which do not seem to create a viable public company.

Another piece of evidence that draws the VCs’ attention to this sector is the performance of public security firms. Apart from the big five security firms, small cap stocks are seeing accelerated earnings.

“The valuation of security focused software companies by Wall Street is high because their revenue multiples are 2-3 times that of the software sector. The market is growing and there is potential for higher profitability,” says Bhargava.

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