Facebook (NASDAQ:FB) recently approached "several" major cybersecurity companies regarding a potential buyout, according to The Information. The report, which cites four people familiar with the matter, didn't disclose any potential targets, but it claims that a deal could happen by the end of the year.
Buying a cybersecurity company could address Facebook's recent streak of security debacles, which includes the Cambridge Analytica scandal, a data breach involving millions of security tokens, and a video call security vulnerability in WhatsApp. It would also fill the void left after the abrupt resignation of Facebook's chief security officer, Alex Stamos, in August.
Many cybersecurity stocks rallied after the report, and analysts compiled lists of potential takeover targets. However, I think the most obvious takeover target for Facebook is FireEye (NASDAQ:FEYE), for four simple reasons.
1. An established relationship
In July, Facebook announced that it removed 32 accounts, pages, and groups from its platform and Instagram over attempts to influence the US midterm elections. But in late August it announced that that number had surged to 652 after FireEye uncovered a broader "influence operation" across its platforms.
FireEye noted that the operation targeted Facebook's users in the US, UK, Latin America, and the Middle East, and that the campaigns were used to "promote political narratives in line with Iranian interests." Facebook and FireEye jointly made the statement, which strongly hinted at future collaborations between the two companies.
2. A "best in breed" reputation
FireEye provides threat detection services for a large number of Fortune 500 companies and entire cities like San Francisco. It was the first threat prevention firm to be certified by the U.S. Department of Homeland Security, and was tasked with investigating high-profile data breaches at companies like Target, Sony, and JPMorgan Chase.
Therefore, buying FireEye and letting it operate as a dedicated security unit could help Facebook prevent future data breaches and regain its users' trust. Adding FireEye CEO Kevin Mandia (who joined FireEye via its acquisition of Mandiant in 2014) to Facebook's board would also go a long way toward repairing the company's tarnished image.
3. Stable growth and improving profitability
FireEye's revenue rose just 5% to $751 million last year, mainly due to the company's strategy of pivoting from sales of physical appliances toward cloud-based services. However, that growth rate is expected to accelerate to 10% this year as it expands its Helix, email, and endpoint protection services.
FireEye isn't profitable yet by GAAP or non-GAAP metrics. However, the company believes that it can achieve non-GAAP profitability next year as it reduces its operating expenses.
I previously argued that was a risky strategy for FireEye, since the company faces formidable competition from rivals like Fortinet (NASDAQ:FTNT), Palo Alto Networks (NYSE:PANW), and Cisco. But as a subsidiary of Facebook, FireEye won't need to worry as much about hitting those short-term targets.
4. A cheap price tag with a reasonable valuation
FireEye is expected to generate $827 million in revenues this year, yet the company has an enterprise value of just $3.1 billion. That means it trades at less than 4 times this year's revenue estimate.
For comparison, Palo Alto and Fortinet trade at 6 times and 7 times this year's revenue estimates. Palo Alto and Fortinet have higher revenue growth rates than FireEye, but they're also much pricier -- Palo Alto has an enterprise value of nearly $17 billion, and Fortinet has an enterprise value of over $12 billion.
Many investors shun FireEye because it generates slower sales growth than many of its peers in a competitive market. That's why the stock remains below its IPO price of $20. However, this also means that FireEye might be willing to sell itself at a much lower premium than its rivals.
But will Facebook really buy FireEye?
I personally don't like FireEye as a stand-alone investment, and I don't recommend buying stocks on buyout buzz alone. After all, FireEye has been the subject of countless buyout rumors -- often involving Cisco and Symantec -- which were all fruitless. But if Facebook is really serious about buying a cybersecurity company, it makes more sense to buy FireEye than any of its industry peers.