Where's Cybersecurity M&A Headed In 2023?

Houlihan Lokey leads global investment banks in M&A Transactions under $1 billion, completing 381 in 2022. Over the past 5 years, it has raised $100 billion for clients. Its recent cybersecurity transactions include the Armorblox sale to Cisco and Carlyle’s acquisition of Pr0ph3cy (NEVERHACK). In addition to funding startups, AI fueled cybersecurity is also spurring M&A activity. Following is a conversation with Bobby Wolfe, the Co-head of Houlihan Lokey’s Cybersecurity Investment Banking Team on his perspective on how generative AI is creating security opportunities for M&A.    

We seem to be living in a contradictory economy. private sector employment keeps beating expectations but 401k draws are rising. How does cybersecurity factor in?    

In any economy, there will be contradictions. Cybersecurity remains a bright spot. The recent Armorblox transaction reflects the increasing importance of cybersecurity to investors and strategic acquirers despite market malaise in other sectors. As the first generative AI acquisition in Silicon Valley, this was a seminal transaction in cybersecurity with implications across the landscape. Demand for innovative solutions, like applying generative AI and large language models (LLMs), continues to surge as threats evolve. The sector remains promising as companies invest in innovative technologies and services to defend against bad actors. Businesses of all sizes will prioritize cybersecurity to stay competitive by safeguarding sensitive information in an interconnected world. 

As previously covered, venture capitalists in cybersecurity are particularly interested in funding emerging areas like AI and DevOps security. What subsectors in security catch the Houlihan Lokey team’s interest? 

Generative AI and LLMs became household terms just a few months ago. Generative AI is the next frontier in cybersecurity as investors and industry leaders are increasingly focusing on the possibilities. The team is particularly interested in how generative AI will be leveraged to enhance elements across the cyber landscape. Emerging security applications for generative AI in threat intelligence, countering malicious AI (for instance, new and more effective phishing attacks), anomaly detection, autonomous security operations, and compliance show promise. Houlihan Lokey’s July 2023 report on generative AI notes several cybersecurity companies that are leveraging these capabilities already.  

Beyond its implications for cybersecurity, anything else noteworthy about generative AI?

OpenAI reached 100 million users in just 2 months. To put that into perspective, it took Facebook 4.5 years to reach that milestone and 75 years for the telephone. The broad use of generative AI represents an inflection point in technology and provides opportunities beyond cybersecurity.

As noted in the report, generative AI presents a substantial addressable market with a projected CAGR of 32.1% between 2023 and 2026, driven by current enterprise use cases alone. Estimated at $42.6 billion in 2023, generative AI's potential spans various industries, with natural language interfaces leading due to customer service and sales automation use cases. Outside of Microsoft’s $10 billion investment in OpenAI earlier this year, innovative venture capitalists, including the likes of Steve Harrod at Juxtapose and TJ Rylander at Next47, have invested more than $12 billion into generative AI since 2020.