Last month, cybersecurity company Mandiant (MNDT) reached an agreement to be acquired by Alphabet (GOOGL -2.12%) (GOOGL -2.12%) for $23 per share in a cash transaction. The deal values Mandiant at $5.4 billion. This is a very interesting move by Alphabet because Microsoft (MSFT -3.45%) had been rumored to be considering a bid for Mandiant earlier this year.
Let's dig into why Alphabet may have been compelled to acquire Mandiant and how it could further propel growth for the internet giant.
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Cybersecurity investments are on the rise
Investments in cybersecurity platforms are becoming more critical, spearheaded by corporate data breaches like that at Equifax, as well as the remote work environments and the increasing number of devices, such as mobile phones and work laptops, requiring secure protocols. Market research company Gartner estimated that $155 billion was spent in 2021 on information security and risk management solutions, and the company is forecasting 10% added growth for this year, to $170 billion.
In August 2021, Alphabet announced that it would be committing $10 billion to advance cybersecurity over the next five years. Less than one year later, investors have seen Alphabet, as well as its FAANG cohorts Microsoft and Amazon (AMZN -2.43%), make significant investments in the cybersecurity landscape.
Mandiant gained notoriety last year because its services were instrumental in identifying and thwarting the SolarWinds attack. The proposed acquisition of Mandiant comes on the heels of Alphabet's takeover of security orchestration, automation, and response (SOAR) platform Siemplify in January for a reported $500 million.
Should the Mandiant deal gain regulatory approval, it will serve as a vital integration within Google's cloud division. Layering Siemplify and Mandiant into its cloud ecosystem can quickly help Alphabet build an end-to-end, full-spectrum security operation.
All signs point to the cloud
As remote work becomes more widely adopted, the number of endpoints such as work phones, tablets, or computers will increase. In essence, companies will need to increase significant capital into cloud-native security protocols over on-premise network solutions. Given this dynamic, it may not be surprising that Microsoft, Amazon, and Alphabet have all made acquisitions in cloud-security solutions over the last year.
Alphabet management said Mandiant will complement the company's existing security infrastructure as it relates to combating weaknesses in on-premise network security, tracking security analytics, and professional services such as detecting and protecting organizations from cyber threats.
By diversifying its product suite, customers are given increased optionality when comparing solutions from Microsoft, Amazon, or Alphabet, among other security platforms. This is important because Alphabet's cloud platform is still operating at a negative margin, meaning that it does not yet contribute positive cash flow to the overall business. Despite generating $19.2 billion in cloud revenue in 2021, the segment's operating income was negative $3.1 billion.
One way that Alphabet can shed losses in its cloud segment is through cross-selling to its customers, which will come from the additional capabilities Siemplify and Mandiant bring to the cloud division.
What does this mean for the stock?
The Mandiant deal still needs regulatory and shareholder approvals. If all goes well, the transaction should close later this year. Wedbush Securities analyst Daniel Ives said, "In a nutshell, this deal was a shot across the bow from Google to Microsoft and Amazon." Ives said he believes the acquisition will have a "major ripple impact" across the cybersecurity landscape.
The addition of Mandiant's service offerings could bring a wealth of adversary services, automation and response tools, and managed defense capabilities to Google Cloud. As a result, it is possible that there will be a significant upside to Alphabet's future top-line growth as it adds security enhancements to its already growing cloud division.
Alphabet currently trades at a price-to-sales (P/S) ratio of 7.6 and a forward price-to-earnings (P/E) ratio approaching 25. By comparison, Microsoft trades at a P/S of almost 13 and a forward P/E of 33, while Amazon trades for a whopping 69 times forward earnings but at a P/S of just under 4. Alphabet's valuation appears compelling in relation to its peers, especially considering the potential upside of Mandiant as it relates to Google Cloud's financial future.
