FrieEye (FEYE), Imperva (IMPV) and Fortinet (FTNT) Seen as Takeover Targets in Security Following Barracuda's P/E Takeover - Evercore ISI

November 27, 2017 1:19 PM EST
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Evercore ISI analyst Ken Talanian weighed in on Security M&A into 2018 following today's deal for Barracuda Networks (NASDAQ: CUDA) by private equity firm Thoma Bravo.

Talanian said this may be an inkling of activity to come in 2018. "We continue to believe that private equity will remain active acquirers of software assets," he said. "Further, we believe these firms may behave increasingly as strategic acquirers as their portfolios grow."

The analyst views Sophos (SOPH.LN), Mimecast (NASDAQ: MIME), and Fortinet (NASDAQ: FTNT) as the nearest comps for Barracuda’s business. Meanwhile, he said both FrieEye (NASDAQ: FEYE) and Imperva (NASDAQ: IMPV) have an opportunity to rerate particularly because they are more enterprise oriented.

Talanian highlights using the ‘rule of 40’ for security companies, which suggests a company’s organic revenue growth + EBITDA margin should be greater than 40%. This rule was espoused in Bain Capital’s 2017 Global Private Equity report and CUDA was among the companies on our ‘Rule of 40’ List. Within their coverage FrieEye, Imperva and Fortinet fall into this group.

They believe that FrieEye, Imperva and Fortinet fall into list for potential acquisitions assumed under the Rule of 40. Further, they believe that smaller-cap names in their coverage with strategic technology such as Cyberark Software and Proofpoint (NASDAQ: PFFT) could find themselves viewed similarly, but with a lower probability of acquisition compared to FEYE, IMPV, and CYBR.

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