Cybersecurity company SentinelOne (S -0.10%) recently announced a blockbuster deal to acquire identity security company Attivo Networks for $616.5 million in cash and stock. The deal's size is notable, representing 6% of SentinelOne's roughly $10 billion market cap.
Large mergers can be concerning; they sometimes backfire on management when the pieces don't go together well. However, I'll explain why I don't think investors should have that fear. Here's why SentinelOne's move was a wise decision, and what it means for the company's future.
How does Attivo Networks fit into SentinelOne?
Attivo Networks is a cybersecurity company that specializes in identity security. Windows operating systems have what's called the "Active Directory (AD)." It's like a master key that enables system administrators to control access to items on a network. If your work computer is accessing a network printer or a particular folder, the AD is there to verify that you're supposed to access these features. Otherwise, you would be denied.
Since most companies run on Windows, an estimated 90% of enterprise networks feature an AD. The directory is a high-value target for hackers and data breaches, because if you compromise the AD, you essentially can do whatever you want on the network.
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Attivo Networks specializes in detecting corrupt credentials and preventing potential attacks on the AD. SentinelOne's Singularity XDR platform, its core product, lacked coverage of this security type, and the company will add Attivo's technology to SentinelOne's platform to work alongside its existing offerings. In other words, it makes SentinelOne's platform a more comprehensive product that covers more ground within the security space.
The impact of the deal
SentinelOne paid a hefty price; Attivo Networks generates about $30 million in annual recurring revenue, which means that the company paid about 20 times sales to make the deal.
However, the deal has several long-term benefits for SentinelOne. Management estimates that Attivo Networks' product is expanding its total addressable market by about $4 billion, meaning there's a lot of room for these services to grow as part of SentinelOne.
Attivo Networks has more than 300 customers, compared to SentinelOne's 6,700, and includes multiple Fortune 500 companies. Attivo Networks grew recurring revenue by 50% year-over-year in 2021, and the potential cross-selling opportunities between the two could accelerate that growth.
This all needs to play out over the coming quarters, but there seems to be room for SentinelOne to get plenty of long-term value, despite the high price paid.
Thinking "big picture"
That brings investors to the broader cybersecurity space. According to Fortune Business Insights, the industry could reach a global value of more than $366 billion by 2028 from $165 billion in 2021. IBM estimates that the average data breach in 2021 caused an average of $4.2 million in damages, the highest number in the 17-year history of the report.
The potential consequences of breaches are driving demand in the industry, creating a "race" among cutting-edge cybersecurity companies to take market share from outdated security solutions like anti-virus, which are struggling to remain effective in modern times.
Companies that provide innovative solutions like SentinelOne and its chief rival CrowdStrike are not only among the new-age security companies in the space, but are trying to provide all-inclusive solutions with complete protection. Crowdstrike also acquired an identity security company called Preempt Security in September 2020, which I don't think is a coincidence.
The evolution of the cybersecurity space will be something for investors to watch over the coming years, and growth and business results will show who the winners are. SentinelOne's recent blow-out quarter showed that it's an emerging force in the industry, and its efforts to expand and evolve should be welcome signs to shareholders.
