Analysis: Darktrace’s Potential Takeover

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Earlier this week, the cybersecurity industry was awash with the news that Darktrace had entered discussions regarding a possible takeover by private equity giant Thoma Bravo.

The move could provide Darktrace with much-needed financial stability in an uncertain economic climate.

In a statement, Darktrace confirmed it “is in the early stages of discussions with Thoma Bravo, L.P. (Thoma Bravo) regarding a possible cash offer for the entire issued and to be issued share capital of the Company.” The firm, which specializes in AI-based cybersecurity solutions, emphasized that “discussions are at a preliminary stage and there can be no certainty that any offer will be made, nor as to the terms of any such offer.”

US-based Thoma Bravo has until 17.00 on September 12, 2022 to announce a firm intention to make an offer for Darktrace or not, in accordance with the UK’s City Code on Takeovers and Mergers.

The market responded positively to the announcement, with Darktrace’s shares reportedly rising by 19% on London’s stock exchange on Tuesday August 16.

Darktrace was founded in 2013 and has a presence in both the US and UK, with its headquarters in Cambridge, UK.

Ongoing Cybersecurity Investment 

While there is a long way to go before any deal is finalized, it is worth taking an early look at the potential implications of this acquisition for this renowned company and its customers, and what it tells us about the wider state of the cybersecurity industry.

Thoma Bravo has a growing presence in the cybersecurity space. The private equity firm has acquired or invested in over 380 software and technology companies, representing more than $190bn in value. In recent years, it has been involved in a number of deals in the cybersecurity market. This includes a definitive agreement to acquire identity solution firm Ping Identity earlier this month (August 2022) and investing in SaaS security firm AppOmni (June 2022).

Speaking to Infosecurity, Forrester’s VP, research director, Merritt Maxim, believes should a deal be concluded, Thoma Bravo’s substantial financial firepower and knowledge of the cybersecurity market will provide financial stability for the Darktrace brand amid an uncertain economic climate.

“Thoma Bravo has ample capital to invest and has already spent over $9bn in 2022 acquiring SailPoint and Ping Identity, two well-established publicly traded security companies,” he said. “As capital markets continue to face price resistance from ongoing global macroeconomic headwinds, taking a company private via private equity allows companies to generate solid immediate returns for existing investors instead of trying to wait out positive returns in today’s tumultuous public markets.”

“Thoma Bravo has ample capital to invest and has already spent over $9bn in 2022 acquiring SailPoint and Ping Identity"

Demand for New Technology Solutions

Maxim also hopes the new ownership model would increase Darktrace’s ability to innovate in the AI solutions space and even expand its presence into other cybersecurity technologies. “Thoma Bravo has a strong track record in cybersecurity so if they do purchase Darktrace, it means that Thoma Bravo can provide capital and resources to help Darktrace expand into cybersecurity areas without the pressure and scrutiny to deliver the quarterly results expected for publicly traded firms,” he added.

Daniel Walters, head of IT & cyber security services sector coverage, mergers & acquisitions at KPMG UK, said the shift to hybrid working and increased digitization since the start of COVID-19 is key to the growing interest in investment in cybersecurity. In general, companies that are developing advanced technological solutions in cybersecurity, such as AI and ML, will be at an advantage, and he noted that improving the efficiency of security staff is crucial given the skills shortage being experienced today.

“The corporate network is home to a huge number of endpoints, both human and machine, as well as cloud and hybrid cloud infrastructure and complete software supply chains. With more remote workers connected to the corporate network, frequently using broadband connections and VPNs, access to the corporate network has grown more distributed, adding another degree of complexity. The potential for vulnerabilities increases as the technology stack does, therefore the need for technology and security teams grows as a result,” he explained.

Walters added: “From an M&A perspective, we predict there will be a continued demand for AI/ML underpinned solutions to ingest and contextualize large and complex datasets which will seek to reduce the burden on human resource for triage and remediation.”

Broader Context

Darktrace customers will likely be considering what this possible take-over will have on them. Short-term, Maxim does not expect them to experience any “drastic changes” regarding the products and services they receive.

However, longer-term, the company’s direction is less certain due to the way investment firms like Thomas Bravo operate, involving the frequent buying and selling of businesses. “It is also possible that Thoma Bravo purchases additional security companies that could complement Darktrace’s offering leading Thoma Bravo to reconstitute Darktrace into a new private company, reenter the public markets via an IPO, or be sold to another large enterprise software provider,” he explained.

Overall, Maxim did not find the announcement of takeover talks between Darktrace and Thoma Bravo surprising, as it reflects a broader trend in the sector. He stated: “Private equity firms like Thoma Bravo are playing an increasingly significant role in shaping the cybersecurity market.”

While an acquisition of cybersecurity vendor Darktrace is not imminent, the announcement of discussions regarding its acquisition by Thoma Bravo has already caused quite a stir. Whether it concludes or not, the announcement reflects the growing role of private equity in the booming cybersecurity market. It is yet to be seen how this trend will affect the solutions offered to customers but it is something well worth keeping an eye on going forward.

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