Yesterday, our friends over at Marker Advisors shared some information on what they see on the financial side of the IT security world. Today they follow up with a brief conclusion about how this is playing out.

We’ve seen a ton of M&A activity ourselves, and have even written about it before. We’re seeing exactly the same trend- from a valuation standpoint it’s a buyers market, but many sellers are hanging on, hoping for a better exit.

I think it will be fascinating to watch this dance play out at RSA this year, and plan on asking Randy and Russ for a follow-on post once we all get back from the show.

M&A activity happens in cycles that are directly related to major product buying cycles. In times of slow growth, larger companies that can invest in the future try to project the ‘next big thing’. They then identify and purchase technology / expertise that will hopefully prepare them for the next upswing. The software business has always been one where ‘the rich get richer’. Large companies have the cash and cash flow, the sales organization, and the market presence to use downturns to augment their product lines. We have seen both traditional software companies (ORCL, MFE, SYMC, QSFT, OTEX, CA, BMC) grow via acquisition, as well as nontraditional buyers (IBM, EMC, HPQ) enter the market. As we came out of the 2001 – 2002 slowdown, M&A activity increased materially. However, in the last couple of years, as that cycle waned, combinations slowed.

Marker believes another M&A cycle is imminent. Today, we have many interested buyers, but few sellers willing to entertain today’s valuations. Although we are not going to the valuations of 2006 / 2007 anytime soon, they should trend higher in time, and buyers and sellers will meet somewhere in the middle. Smaller public and private organizations desiring to be acquired should be preparing their business for this next M&A wave. How a company reacts and positions itself in the short term will eventually determine whether or not they are one of the prize catches, or one of the throwaways.

About Marker Advisors: Marker is a research consultancy firm specializing in the software industry. We work with senior company management as well as sophisticated industry investors to create shareholder value. We provide detailed market intelligence, business and product strategy, and M&A advisory services.