Why Alphabet’s acquisition of Mandiant is a smart move

Why Alphabet’s acquisition of Mandiant is a smart move

Last month, cybersecurity company principal (MDT -0.67% ) reached an agreement to be acquired by Alphabet ( GOOGLE -1.91% ) ( GOOGLE -1.91% ) for $23 per share in an all-cash transaction. The deal values ​​Mandiant at $5.4 billion. This is a very interesting move by Alphabet because Microsoft (MSFT -1.46% ) it was rumored that he was considering a bid for Mandiant earlier this year.

Let’s take a look at why Alphabet was forced to acquire Mandiant and how it could further fuel the internet giant’s growth.

IT professionals working in an office.

Image source: Getty Images.

Investments in cybersecurity are on the rise

Investments in cybersecurity platforms are increasingly critical, led by corporate data breaches such as the one from equifax, as well as remote work environments and the increasing number of devices, such as mobile phones and work laptops, that require secure protocols. market research company Gartner estimated that $155 billion will be spent in 2021 on information security and risk management solutions, with the company forecasting a further 10% growth for this year, to $170 billion.

In August 2021, Alphabet announced that it would spend $10 billion to improve cybersecurity over the next five years. Less than a year later, investors have seen Alphabet, as well as its FAANG cohorts Microsoft and Amazon (AMZN -2.11% )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 acquisition of security orchestration, automation, and response (SOAR) platform Siemplify in January for $500 million.

If the Mandiant deal wins regulatory approval, it will serve as a vital integration within Google’s cloud division. The Siemplify and Mandiant overlay in 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 raise significant capital in cloud-native security protocols rather than on-premises networking solutions. Given this dynamic, it may not be surprising that Microsoft, Amazon, and Alphabet have all made acquisitions in cloud security solutions over the past year.

Alphabet management said Mandiant will complement the company’s existing security infrastructure in terms of combating on-premises network security weaknesses, security analytics tracking and professional services such as detection and detection. protection of organizations against cyber threats.

By diversifying their product set, customers have more options when comparing solutions from Microsoft, Amazon, or Alphabet, among other security platforms. This is important because Alphabet’s cloud platform is still operating on a negative margin, meaning it is not yet contributing positive cash flow to the business as a whole. Despite generating $19.2 billion in cloud revenue in 2021, segment operating income was negative $3.1 billion.

One way Alphabet can cut losses in its cloud segment is through cross-selling to its customers, which will come from the additional capabilities that Siemplify and Mandiant bring to the cloud division.

What does this mean for stocks?

The Mandiant deal still needs shareholder and regulatory approval. If all goes well, the transaction should close by the end of this year. Wedbush Securities analyst Daniel Ives said: “Simply put, this deal was a crossfire from Google to Microsoft and Amazon.” Ives said he believes the acquisition will have a “significant knock-on effect” across the entire cybersecurity landscape.

The addition of Mandiant’s service offerings could bring a host of adversary services, automation and response tools, and managed defense capabilities to Google Cloud. As a result, there may be a significant upside to Alphabet’s future blue chip growth as it adds security improvements to its already growing cloud division.

Alphabet currently trades at a price/sales (P/S) ratio of 7.6 and a forward price/earnings (P/E) ratio of close to 25. By comparison, Microsoft trades at a P/S of almost 13 and a Forward P/E of 33, while Amazon is trading for a whopping 69 times forward earnings, but at a P/S of just under 4. Alphabet’s valuation looks compelling relative to its peers, especially considering the Mandiant’s upside potential relative to Google. The financial future of the cloud.

This article represents the opinion of the author, who may not agree with the “official” recommendation position of a premium Motley Fool advisory service. We are motley! Questioning an investment thesis, even one of your own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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