Story Stocks^®

The mounting speculation that cybersecurity company Mandiant (MNDT) would soon be acquired came to fruition this morning, but not by the company that many people had expected. In a turn of events, Microsoft (MSFT) recently walked away from making a deal to purchase MNDT, opening the door for Google (GOOG) to swoop in and acquire the company for $23/share in cash, or a total of $5.4 bln.

After Bloomberg reported on February 8 that MSFT was considering making a bid, shares of MDNT rocketed higher, gaining nearly 50% as of yesterday's close. In other words, most of the buyout premium was already priced into the stock prior to GOOG's offer.

For MNDT, the transaction caps off a year of transformation in which the company changed its name from FireEye and sold off its FireEye assets for $1.2 bln last June. By shedding the network, email, endpoint, and cloud security products, MNDT freed itself to focus on cyber-incident response and cybersecurity testing through its Advantage platform. The company had stretched itself too thin in a hyper-competitive market, leading it to post sub-par single-digit revenue growth throughout most of its recent history.

As a streamlined company, MNDT became a more attractive acquisition target, especially in this current geopolitical climate in which cyber-attacks and threats continue to intensify. At nearly 10x estimated FY22 revenue, the price that GOOG is paying is somewhat steep for an unprofitable company, but the addition of MNDT looks like a good fit for the following reasons:

• At closing, MNDT will merge into Google Cloud, significantly bolstering GOOG's cybersecurity capabilities. Consequently, Google Cloud should compete more effectively against Amazon (AMZN) and MSFT, potentially creating opportunities to gain market share.
  • While Google Cloud has grown rapidly -- Q4 revenue jumped by 45% to $5.5 bln -- GOOG has struggled to make much headway against its rivals. MSFT and AMZN still retain sizable double-digit leads over GOOG in terms of cloud market share.
• Expanding its cloud business will help diversify its revenue stream away from advertising. The e-commerce push resulting from the pandemic, followed by the reopening of economies, fueled strong demand for digital advertising.
  • However, if the global economy sours, the tables would turn on GOOG due to its heavy reliance on advertising revenue (~80% of total). A more balanced mix between advertising and cloud would remove some volatility in GOOG's results.

Interestingly, other leading cybersecurity stocks such as CrowdStrike (CRWD), SentinelOne (S), Rapid7 (RPD), and Fortinet (FTNT) are trading lower following the acquisition news. Part of the weakness is attributable to ongoing selling pressure in tech/growth names, but these stocks may also be getting hit on expectations that MNDT will become more competitive under GOOG's wing and with the support of its immense resources.

It's also notable that MNDT is trading about 5% below the $23/share offer price, reflecting some doubt that the deal will ultimately close. Technology giants, including GOOG, are facing intense scrutiny from regulators for anticompetitive reasons. Although a $5.4 bln deal is a drop in the bucket for a $1.68 trillion company like GOOG, regulators may give this deal a closer-than-expected look due to preexisting concerns. Assuming this acquisition does get done, though, we believe it will give GOOG's platform an important edge as cybersecurity threats continue to rise around the world.