The last year was a big one for Parveen Jain and Krishna Kolluri. Jain’s company—Intruvert—was acquired by Network Associates (NYSE:NET) for $100 million in cash. Kolluri’s company—Neoteris—was acquired by Netscreen (NASD: NSCN) for $265 million.

The story doesn’t end there. There were 35 mergers and acquisitions worth $1.6 billion made in the security space during 2003. The appetite for M& A is still there. “The space is in a consolidation phase. Acquisitions will continue,” says Harry Weller, Partner at New Enterprise Associates. According to industry analysts, Symantec, Network Associates, Check Point, Verisign, Computer Associates, Netscreen, Cisco, Microsoft and Hewlett-Packard are likely to buy security startups in 2004. And as we go to press, Symantec folded San Francisco-based Brightmail, an email security firm, into its product offer.

The bigger players know that the road to dominance in the security space is steep and full of competitors. The only way they can take a lead is by gobbling smaller players. “As long as these big guys have currency and are willing to pay the kind of valuation the smaller companies are seeking there is no reason they won’t be sold,” says Marc Sokol, Partner at Chicago, IL-based JK & B Capital.

It is interesting to note that Zonelabs, one of Sokol’s portfolio companies, was acquired by CheckPoint last December for $205 million. “Although acquisitions have always provided more venture-backed exits than any other option, they have become increasingly important in recent years when IPOs are virtually nonexistent. Rising valuations represent good news, and such a trend will support stronger private equity performance,” says Mark Heesen, president of the National Venture Capital Association.
Though 2003 saw no IPOs in the security space, it was primarily because of the sluggish market conditions. Many industry observers believe that in 2004-05 there will be more than half-a-dozen IPOs. (See panel: Suitable IPO candidates)
Despite sluggishness elsewhere in the information technology sector, the market for security-related hardware, software, and services will continue to experience healthy growth, swelling to more than $45 billion in revenue by 2006 from just $17 billion in 2001, according to a study released by IDC.