Risks, Rewards of Running With the Cybersecurity Bulls

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By Daniel R. Stoller and Joyce E. Cutler

Investors are bullish on the expanding cybersecurity market in an increasingly hostile online world, attorneys and data security industry leaders told Bloomberg BNA.

Mainstream data breaches, such as the ones that struck over a billion Yahoo! Inc. user accounts, have put the focus on cybersecurity companies that are developing innovative defensive solutions. Increasing investment means that companies awaiting the next generation of cybersecurity solutions, such as artificial intelligence-enhanced threat assessment software, may have products in hand sooner.

With more companies eager to stop a growing cybersecurity risk, the industry is rapidly growing, according to Framingham, Mass.-based IDC Research Inc. The cybersecurity industry is expected to grow about 7 percent a year through 2019 to reach $46 billion in valuation, IDC predicted.

Additionally, the growth of internet-connected cybersecurity solutions is expected to rise 16.5 percent per year to $20 billion by 2020, Bloomberg Intelligence data show. IBM Corp. and Intel Corp. are leading the charge but other companies, including Microsoft Corp., Amazon.com Inc. and Salesforce.com Inc., are also expected to be major players in the arena, according to Bloomberg Intelligence research.

“The cybersecurity market is dynamic and growing,” Mike Gregoire, CEO of infrastructure software company CA Technologies in New York, told Bloomberg BNA. The growth is “fueled by the never-ending barrage of cyberattacks; the expanding attack surface of the growing adoption of cloud and IT; and the advent of the application economy,” he said. CA Technologies is the 13th largest infrastructure software company in the world, with a $13.4 billion market capitalization, Bloomberg data show.

Growing markets bring investors hungry to cash-in. Investors see “a large and growing appetite for cybersecurity solutions, basically a new green field market that translates into opportunity,” Robert Ackerman, founder and managing director at Allegis Capital, told Bloomberg BNA.

cyberbull

But Barmak Meftah, president and CEO of integrated security management solutions company AlienVault LLC in San Mateo, Calif., told Bloomberg BNA investors are looking to find “simplicity, orchestration and integration” in the cybersecurity solutions they invest in. Simply investing in cybersecurity companies that focus on just one or few attack surfaces “isn’t appealing,” he said.

Know Cybersecurity Risks

As investors hit the cybersecurity investment market, they must remain cognizant of data privacy and cybersecurity risks that could ruin any expected profits, attorneys told Bloomberg BNA.

Marc E. Elovitz, who chairs the investment management regulatory & compliance group at Schulte Roth & Zabel LLP in New York, told Bloomberg BNA that investors should inquire about a cybersecurity company’s own security—which it may not have fully disclosed—before acquiring or making a large investment.

Michael L. Yaeger, data security and litigation special counsel at Schulte, told Bloomberg BNA that federal regulators, such as the Securities and Exchange Commission, have done their part to help expose risks. Regulators have started to ask the necessary “sophisticated questions” of cybersecurity companies, he said.

Companies seeking to invest in a cybersecurity venture firm must conduct a risk analysis to make sure the venture is meeting regulator standards, Yaeger, a former assistant U.S. attorney for the Eastern District of New York, said. A risk analysis is a good way to check for any data privacy or cybersecurity shortcomings that could limit investor funds, he said.

Battle for Emerging Cybersecurity Tech

The cybersecurity industry may consolidate with larger players pushing out the smaller venture capitalists and private equity funds, according to Bloomberg Intelligence senior industry analysts. Because businesses are focusing their efforts on next-generation products, such as AI and sophisticated new computing techniques, larger and more established companies, such as Cisco Systems Inc., IBM and Symantec Corp., may begin to buy smaller players and consolidate the market, the analysts said.

Mefta said the “fragmented” cybersecurity industry has many small businesses providing particularized security solutions that present targets for larger companies to swallow up. That may be beneficial in the short-term but not over a longer period because a cyberthreat in 2017 may not have the same “threat vector” in 2020, he said.

Big data “analytics, artificial intelligence and machine learning” will start to thrive “at the core of the security market,” Gregoire said. Blockchain differentiated authentication and new kinds of encryption are beginning to “change the game,” he said.

To contact the reporter on this story: Daniel R. Stoller in Washington at dstoller@bna.com; Joyce E. Cutler in San Francisco at JCutler@bna.com

To contact the editor responsible for this story: Donald Aplin at daplin@bna.com

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