HACK: Is Cyber Security Ripe For Consolidation?

With the most recent alleged terrorist attack on U.S. soil, as well as the many recent cyber security breaches being announced by U.S. multinational corporations, it appears as though the cyber security and security stocks in general that operate to protect Americans here and abroad may be ripe for consolidation and buyout offers, as the area is fragmented with equity companies that can benefit from mergers of equals. According to Gartner, companies that operate on- line will have to increase their spending on cybersecurity, which is estimated to reach more than $100 billion dollars in 2019. Leading cyber-security company McAfee said that cyber warfare and espionage will increase in the next few years due to substantial growth in the number of connected devices used.This makes the cybersecurity area potentially one of the fastest-growing segments to invest in as of now.

Fireeye (NASDAQ:FEYE) stock jumped late Wednesday on a Bloomberg report that it had snubbed a pair of low-ball takeover bids, including one from Blue Coat Systems-acquirer Symantec (NASDAQ:SYMC), according to unnamed sources. Wednesday, FireEye stock rose 4%, to 16.05, after earlier rising as much as 7.6% on the report of the two bids that FireEye reportedly rebuffed this year. Still, FireEye stock is down 21% for the year amid a CEO transition and struggling sales.Both offers were below the $30 per share that FireEye expected when it hired Morgan Stanley (NYSE:MS) to seek bids, the sources said. In March, the second bidder suspended negotiations, the sources told Bloomberg. FireEye and Symantec reportedly ended their negotiations in February. This week, Symantec agreed to pay $4.65 billion to acquire cloud security firm Blue Coat.

Recent Mergers And Buyouts

Microsoft (NASDAQ:MSFT) acquired two Israeli security firms, Adallom and Secure Island, as well as Double Labs, based in Palo Alto, California. Adallom fits into Microsoft’s cloud computing initiatives as a security provider, while Secure Islands specializes in securing advanced data systems. Double Labs developed the Echo Notification Lockscreen app for Android smartphones. In February 2016, IBM (NYSE:IBM) announced its intention to buy Resilient Systems, which provides incidence response systems, a service that automates reactions to security breaches. The technology is in use at 100 companies in the Fortune 500.

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FireEye’s acquisition of iSight Partners is an example of the fall of valuations for private companies since the summer of 2015. In early 2015, iSight had set its sights on a $1 billion IPO in the second half of 2016, but instead agreed to be acquired by FireEye for $200 million in January 2016. FireEye agreed to pay an additional $75 million if sales and other benchmarks are reached by 2018. iSight specializes in providing intelligence and breach detection of cyber-attacks for governments and enterprise-sized businesses.

Because HACK contains many high beta stocks that react swiftly to any type of security news events- breaches, attacks, or threats- traders or investors can look at this vehicle in many different ways. A close look at the top 10 companies that comprise HACK ((NYSE:CUDA), (NASDAQ:CHKP), (NASDAQ:QLYS), (NYSE:BLOX), (NASDAQ:FTNT), (NASDAQ:SPLK), (NYSE:SAIC), (NASDAQ:CYBR), (NASDAQ:PFPT), (NASDAQ:CSCO)), shows a wide array of stocks with many different market capitalizations. The most obvious one being Cisco (CSCO) with a market cap of $145 billion.

The investment seeks investment results that, before fees and expenses, correspond generally to the price and yield performance of the ISE Cyber Securityâ„¢ Index. The fund invests at least 80% of its total assets in the component securities of the index and in ADRs and GDRs based on the component securities in the index. The index tracks the performance of the common stock of companies across the globe. The fund is non-diversified.

Written By: Warrior Trading