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Cyber Concerns Fuel Pentagon Spending and Commercial Growth


The cybersecurity industry has experienced solid growth, driven in part by fears of indiscriminate foreign cyberattacks that target commercial companies and government agencies alike.

President Obama’s recent meeting with Chinese leader Qi Xinping included discussions on Chinese hacking of American networks and potential bilateral steps to reduce foreign intrusion.  The meeting raised several important issues regarding the jurisdiction of cyberspace, causing officials to ponder whether “active defense” measures (e.g. retaliatory and / or preemptive cyberattacks against foreign hackers) should be considered in response to domestic intrusions.

Such fears regarding network intrusions prompted the Pentagon to outline nearly $23 billion in 2014 – 2018 cybersecurity spending, even as the broader defense budget declines or remains flat.  The plan requests $4.7 billion in spending for 2014, an increase of more than 18% over 2013, to develop initiatives ranging from network protection to offensive capabilities.  Secretary of Defense Chuck Hagel cited the growing threat of cyber intrusions, some of which appear tied to the Chinese government, as justification for the increase in spending.  Fears of cyber warfare as a new theater of international conflict have driven government interest in the sector with regard to protecting financial networks and critical infrastructure.

Projected Pentagon Cybersecurity Spending(1)

($ in billions)

Bolstered by federal cybersecurity priorities, the private market has also adapted to accommodate the additional demand for cyber threat protection.  The security and protection software industry grew to $19.2 billion in 2012 from $17.9 billion in 2011, representing an increase of 7.9%(2).  As described in previous blog posts, venture capital investments have increasingly flowed into cyber companies –  approximately $353 million was invested in IT security deals in 1Q13, up 90% from 1Q12(3).

Strong industry growth has also spurred an appetite for cyber-related IPOs.  Barracuda Networks, a provider of content and data security, is expected to hold its IPO later this year, following a string of highly successful cyber IPOs including Gigamon Systems, Palo Alto Networks, Proofpoint, and Qualys.  Additionally, M&A activity remains strong, as noted in KippsDeSanto’s “Cyber Intelligence Review” series; recent headlines include Blue Coat Systems’ acquisition of Solera Networks, and Vista Equity Partners’ purchase of publicly-traded Websense.

The convergence of federal demand for innovative threat protection with the success of cybersecurity in the commercial sector bodes well for firms that offer cutting-edge cyber solutions, both in the government contracting and commercial markets.

(1)       Bloomberg
(2)       Gartner
(3)       MoneyTree