Why Alphabet’s Acquisition of Mandiant Is a Smart Move

Last month, cybersecurity company Beggar ( MNDT -0.67% ) entered into an agreement to be acquired by Alphabet ( GOOGLE -1.91% ) ( GOOGLE -1.91% ) for $23 per share in a cash transaction. The deal values ​​Mandiant at $5.4 billion. This is a very interesting decision on the part of Alphabet because Microsoft (MSFT -1.46% ) There were rumors that an offer for Mandiant was considered earlier this year.

Let’s take a look at why Alphabet may have been forced to acquire Mandiant and how it could further propel the internet giant’s growth.

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Investments in cybersecurity are on the rise

Investments in cybersecurity platforms are becoming increasingly critical, driven by corporate data breaches like the Equifax, as well as remote work environments and the growing number of devices, such as mobile phones and work laptops, requiring secure protocols. market research company Gartner estimates that $155 billion was spent in 2021 on information security and risk management solutions, and the company expects an additional 10% growth for this year to $170 billion.

In August 2021, Alphabet announced that it would commit $10 billion to advancing cybersecurity over the next five years. Less than a year later, investors saw Alphabet, along with its FAANG Microsoft cohorts and Amazon ( AMZN -2.11% )are making significant investments in the cybersecurity landscape.

Mandiant gained notoriety last year because its services helped identify and thwart the SolarWinds attack. The proposed acquisition of Mandiant follows Alphabet’s acquisition of security orchestration, automation and response (SOAR) platform Siemplify in January for $500 million.

If the Mandiant deal receives regulatory approval, it will serve as a vital integration within Google’s cloud division. Layering Siemplify and Mandiant in its cloud ecosystem can quickly help Alphabet establish a full-spectrum, end-to-end security operation.

All signs point to the cloud

As remote working becomes more widely adopted, the number of devices such as phones, tablets or business computers will increase. Essentially, companies will need to significantly increase their capital in cloud-native security protocols rather than on-premises network solutions. Given this momentum, it’s perhaps unsurprising 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 addressing on-premises network security weaknesses, monitoring security scans, and professional services such as detection and protection of organizations against cyber threats.

By diversifying its product suite, customers benefit from increased options when comparing solutions from Microsoft, Amazon, or Alphabet, among other security platforms. This is important because Alphabet’s cloud platform is still operating with negative margin, meaning it is not yet contributing to positive cash flow for the overall business. Despite generating $19.2 billion in cloud revenue in 2021, segment operating profit was negative $3.1 billion.

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

What does this mean for the stock?

The Mandiant deal still needs regulatory and shareholder approval. If all goes well, the transaction should close later this year. Wedbush Securities analyst Daniel Ives said, “In a nutshell, this deal was a punch between Google, Microsoft and Amazon.” Ives said he believed the acquisition would have a “major ripple effect” on the cybersecurity landscape.

Adding Mandiant’s service offerings could bring a wealth of anti-adversary services, automation and response tools, and managed defense capabilities to Google Cloud. As a result, Alphabet’s future revenue growth may have a significant upside as it adds security enhancements to its already growing cloud division.

Alphabet is currently trading at a price-to-sales (P/S) ratio of 7.6 and a forward price-to-earnings (P/E) ratio approaching 25. In comparison, Microsoft is trading at a P/S of nearly 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 against to its peers, especially given Mandiant’s potential advantage when it comes to Google’s financial future of the cloud.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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