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VC’s Latch on to Security Tech

November 6

A recent Red Herring story suggests that the venture capital community is responding to the rising level of M&A activity in the security tech industry market by pouring record levels of investment into it. Kuhn Capital and it M&A Roundup have been closely following the burgeoning security market for the last few years, reporting on prominent deals by Zone Labs, SAIC, Symantec, IBM, and Network Associates.

The Red Herring piece cites a PWC/Thomson Venture Economics Study stating that in 2002, VC firms invested over $1 billion in security-related firms, nearly 5% of total VC investment. It also mentions a recent IDC report claiming that worldwide spending on information security will skyrocket from about $17 billion in 2001 to $45 billion by 2006, a compound annual growth rate of 21%.

Why the increased interest? Besides the need for technological solutions to comply with recent Federal regulations like Sarbanes-Oxley and HIPAA, increases in homeland security spending, the rising plague of dangerous worms and viruses and the threat of cyber-terrorism are all mentioned as possible reasons for the sector’s upswing.

But another reason for increased VC investment may simply be the rising wave of merger activity and industry values as reported in our July Dispatch:

“According to Mergerstat, in the last five years, about 500 M&A deals -- or about 100 per year on average -- were consummated among government IT and defense-related companies. Things have clearly been speeding up: 2002's share of these deals totaled 140."

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