Big Data and Cybersecurity Key Players in Dynamic M&A Market

A resurgence of activity has hit the mergers and acquisition market this year, with companies operating in big data analytics and cybersecurity seeing a lot of the action, experts say.

"We believe [big data analytics] is going to be an enduring problem," said David Wodlinger, principal with Arlington Capital Partners, a leading investor firm in defense technology and the aerospace market. "Data is getting created at such an astronomical rate, the quality of sensors are getting so much better … that the market for companies that have the capabilities to analyze these massive amounts of data is going to be hot now and going to be hot for the foreseeable future.

“Similarly, cybersecurity is one problem that we don’t see a real solution to any time soon,” continued Wodlinger, a panelist on the Defense, Cyber, Intelligence and Homeland Security; Market Forecast and Emerging M&A Trends forum co-sponsored by The Chertoff Group and AFCEA International. “The problem is that adversaries keep … getting better at what they’re doing; consequently there is going to be a lot of [research and development] dollars spent on that.”

Small businesses with solutions to stamp out waste, fraud and abuse round out his top three of enduring business that will drive market movement and pique investors’ interest, said Wodlinger, also a member of the boards of directors of Novetta Solutions and Quantum Spatial.

There is a whirlwind of big companies buying smaller companies, setting up 2014 as a huge year for mergers and acquisitions. The economic recession spawned a new type of trend in the dynamic merger and acquisitions environment, said Jason Kaufman, principal at The Chertoff Group and the panel moderator.

“We had a long cycle of prosperity over the course of a dozen years where, because of the war years boom and post 9/11 spending, we had a lot of private equity groups who rushed to the market,” Kaufman said. “Since then, we obviously entered into a downturn, and over the course of that downturn, we’ve seen the emergence of a couple of new trends. … We’ve seen a new class of private equity firm come into the market to really focus on building scaled contractors who have the ability to remain agile and innovative and bring technology to the customer, but who also have enough size to handle large-scale programs.”

Sequestration and budget uncertainties created a lull in 2013 that drove down deal flow, Kaufman said. “But in 2014, things seem to be picking up.”

And high-quality companies being bought and sold punctuate the resurgence, Wodlinger proclaims. “Perhaps the better companies were biding their time. We’re seeing a lot of strong companies with differentiating capabilities coming to market.”

Cybersecurity businesses are attractive to venture capitalists now because of the success rate, said panelist Bryan Ware, an entrepreneur who created Digital Sandbox through a combination of private equity, backing from friends and family, and a small amount of venture capital investment. He then sold it to Haystax, where he now leads the company’s technology strategy and research and development activities as its chief technology officer.

“It’s certainly a challenging time across all the market segments that we operate in and I think that it takes a lot of courage for buyers to buy companies when times are challenging,” Ware said. “We have to be smart and we have to look in places where we don’t think others are looking.”

“I think there are angels [investors] that are investing in government services, but there is not a lot of venture capital investment in government services, and that’s an appropriate thing because of the returns that they expect,” Ware continued. “There are some really interesting things, though, that may happen in the cyber area, that are happening, because some of those cyber companies are … still good candidates for venture capital and hit their return expectations just because there is so much frenzy in that marketplace.”

Investors seek out companies with leaders vested in the business and who plan to stay on post acquisition, the panelists said. “When we’re buying a company, we’re expecting that the leadership team is staying,” Ware said. “We’re really looking for people who aren’t cashing out and walking away.”

“There is a certain set of employees, typically the very high-skilled type of employee, that thrives in that entrepreneurial environment, that high-paced, roll up your sleeves, this is how we’re going to beat the big guys type of environment, and that’s the type of investments we’d invest in,” Wodlinger adds.

More and more, it seems the line between products and services is blurring, especially as technology plays more of a market role, Kaufman said. It presents challenges for small businesses courting government work that want to provide both, but often cannot.

“The solution is to have a differentiated offering that provides stickiness to what you’re doing, allows the government to do things more efficiently … [and] you can wrap your services around that technology,” Wodlinger advised. “So your guys are delivering that solution and are part of a project that the government’s going to be excited about and point to as, ‘Look, by using this technology and 10 guys, we can solve this problem instead of bringing in 300 guys and working full time on recreating the wheel.’”