On Monday, shares of cybersecurity company Mandiant Inc. (MNDT, Financial) spiked 16% on rumors that Alphabet Inc.’s (GOOG, Financial)(GOOGL, Financial) Google is interested in acquiring the company. This came not long after a Bloomberg report in February that Microsoft Corp. (MSFT, Financial) was interested in acquiring it.
Google and Mandiant confirmed the rumors on Tuesday, announcing Google will buy Mandiant for $5.4 billion, or $23 per share, in an all-cash deal. Mandiant shares were down 2% on the news.
In a press release, Mandiant had the following to say:
“The acquisition will complement Google Cloud’s existing strengths in security. Together with Mandiant, Google Cloud will deliver an end-to-end security operations suite with even greater capabilities as well as advisory services helping customers address critical security challenges and stay protected at every stage of the security lifecycle.”
This deal comes as the global spotlight turns to cybersecurity with Russia’s invasion of Ukraine. Cyber attacks have the ability to cripple critical infrastructure, and as the world increasingly adopts cloud technology to scale up computing power, cybersecurity solutions are becoming an increasingly pressing necessity.
Google appears to be taking a step in the right direction by expanding its cybersecurity capabilities. However, not every acquisition translates to greater profitability. The question for investors is, will Mandiant remain just as unprofitable under the Google umbrella as it has been in the past, or does Google have the ability to turn things around?
Mandiant’s history
The company that’s known as Mandiant today first went public as FireEye in 2013. It wasn’t profitable at the time, which was understandable; tech startups need to invest a lot of money up front in order to grow their customer base and gain market share, and not investing enough in the beginning stages can doom a startup to obsolescence.
However, not only did FireEye underprice its initial public offering, but it also became overly focused with Wall Street’s perception of its stock, much to the detriment of its business. At the end of 2013, FireEye bought Mandiant, a response and remediation services company, for $1 billion in a cash-and-stock deal, with the cash portion being funded by a secondary share offering. The acquisition was supposed to be a step in the right direction for growth.
Instead, this marked the beginning of FireEye’s transition from a software model to a services model. While the company undeniably had some highly effective security tools, it became known for Mandiant’s response services. Services are difficult to scale in a profitable manner because the more you scale up services, the more employees and assets you need.
If FireEye had stuck with the easily scalable software model, it might have reached profitability already. Instead, the company has never recorded a quarterly per-share profit and has effectively been eclipsed by the Mandiant acquisition.
High up-front investments and consistently losing money laid the foundation for FireEye’s demise. The incident in late 2020, in which Russian hackers utilized “novel techniques” to breach FireEye’s data security and make off with its tools, dealt the final blow to its reputation that necessitated a change of pace.
Thus, in October 2021, FireEye sold its name and FireEye Products to a consortium led by Symphony Technology Group, renaming itself Mandiant and fully embracing Mandiant’s cloud-based security services as its path forward.
Growth under the radar
If Mandiant has never been profitable in the past, can it become so under Google? This depends on how well Google is able to integrate Mandiant’s offerings with its existing ecosystem in order to add value and draw in new customers.
In the past, analysts have cited underinvestment as a key reason why Mandiant was struggling to turn a profit, claiming the only way for it to succeed was through an acquisition. Certainly, Google’s existing cloud and cybersecurity offerings will catapult Mandiant to a much more prominent market position than it ever would have achieved on its own.
The acquisition could also be key to retaining customers. Alphabet Chief Financial Officer Ruth Porat said at a Morgan Stanley (MS, Financial) conference on Tuesday that one of the main reasons for the Mandiant acquisition was to help the company “build out to compete with competitors’ scale,” implying that if the company does not make a move to expand cybersecurity, it cannot remain competitive.
While playing catch-up isn’t a good sign, losing market share to competitors is worse. Porat said Mandiant would address customers’ requests for more automation and sophisticated security analysis. Google’s cloud business itself is still operating at a loss, and this could very well continue until it gains a more prominent market share; according to Synergy Research Group, Google Cloud only holds about 10% of the cloud infrastructure market compared to Amazon’s (AMZN, Financial) AWS with 33%.
A public relations move
While the main motivator behind Google’s acquisition of a cybersecurity company is the need to expand its cybersecurity offerings for customers, one additional selling point of Mandiant in particular really stands out, and that is its response to the Ukraine-Russia conflict.
Mandiant has launched a task force to track the crisis in Ukraine and provide relevant insights and guidance to customers. Citing a significant increase in cyber threat activity, the company is making efforts to proactively assess and neutralize cyber threats.
These actions have drawn attention to the importance of the business aside from directly generating cash. By providing value-added services to Google Cloud’s ecosystem, Mandiant could help draw in and retain more customers.
Conclusion
As Google pursues an acquisition of Mandiant to boost its cybersecurity offerings, it’s important for investors to be aware of the company's lack of profitability as well as Google’s need to entice more cloud customers away from top competitors like Amazon.
However, the boost from being included in Google’s ecosystem could be the push that Mandiant needs to become a profitable asset. Even if it still struggles to turn a profit in its own right, it could bring in more customers for Google Cloud. It’s certainly worth keeping an eye on the Mandiant integration post-acquisition to see if it holds the potential to boost the market share of Google’s cloud unit.
