Gen. Douglas MacArthur famously said: “Old soldiers never die, they just fade away.”
Smart older companies don’t die (or fade away). When their businesses run out of steam, they just buy their way into some other, faster-growing sector.
That’s what I think is about to start accelerating in the cybersecurity sector.
We can already see the strategy in one of America’s “old line” tech companies, Cisco Systems Inc. (Nasdaq: CSCO). For most of us, Cisco means network routers — the guts and pipes of the internet.
Yet Cisco is actually a backdoor cybersecurity trade. It only makes up about 4% of annual revenue — roughly $2 billion in 2016. But that’s up nearly 50% from just three short years earlier.
The point is, successful investing is as much “follow the money” as it is anything else — for big companies as well as individual investors.
That’s why Cisco in recent years bought fast-growing private companies like Cloudlock ($293 million, 2017) and OpenDNS ($635 million, 2015), not all that far removed from the venture capital phase.
But more recently, as awareness and spending in cybersecurity grow and grow, we’re starting to see a shift toward even bigger deals.
Follow the Money
You know the TV commercials you see for LifeLock? It was acquired for $2.3 billion late last year by one of the granddaddies of the cybersecurity world, Symantec. (And this looks more and more like a great deal after Equifax’s security breach in recent weeks.)
Likewise, the pace of deals is on the rise. Security Sales & Integration performed a study of recent mergers and acquisitions (M&As). The sector saw a 70% jump in M&A activity last year, with 137 deals, versus 80 such transactions in 2015.
Likewise, in an analysis of 2017 deals, it saw twice as many M&A transactions, 122 in all, just through the first half (compared to 63 in the same period last year).
So where should we follow the money, with M&A deals in mind?
We have a growing roster of individual cybersecurity opportunities in Total Wealth Insider. But I’ll continue to point to exchange-traded funds like the ETFMG Prime Cyber Security ETF (Nasdaq: HACK) as a simple way to play the trend.
HACK’s net asset value is already up 6% since I mentioned it in mid-August.
With $1 trillion in spending on the way in this sector in the next handful of years, there are a lot more gains to be had with these and other individual stocks in the sector.
Kind regards,
Jeff L. Yastine
Editor, Total Wealth Insider
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