IT Security Q Investment Banking. Market Challenges Slow Near-Term Activity in IT Security. Highlights from RSA Conference.

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1 Q Investment Banking Market Challenges Slow Near-Term Activity in IT Security IT Security In This Report Highlights from RSA Conference IPO activity slows as valuations decline Volatility delays consolidation wave

2 FRONT LINE INSIGHTS Market Challenges Slow Near-Term Activity in IT Security The sell-off in equity markets during the first six weeks of 2016 caused a dramatic pullback in valuations across the technology sector, and IT security was no exception. While recent valuation declines are having a significant impact on the near-term exit environment for IT security companies, long-term growth trends and interest in the sector as evidenced by the recordsetting attendance at this year s RSA Conference have never been stronger. In this quarter s IT Security report, we examine the impact that the early 2016 equity sell-off is having on IPO and M&A activity in the sector. We also discuss several of the most important takeaways from the RSA Conference, one of the premier events for the IT security industry. have rebounded, and year-to-date the index was down 9.8% as of March 31, compared with a 2.8% decrease for the Nasdaq. Amid the renewed volatility, the IPO market for technology companies has seen a dramatic slowdown over the past several quarters. Only two U.S.- based IT security companies went public in 2015: Rapid7 in July 2015 and Mimecast in November While IT security companies are continuing to file and move through the process, IPO activity in the space will be limited until investor risk appetite returns and markets become more accommodative to new issues. Over the last few weeks of the first quarter, however, the IPO window appears to be reopening for highquality companies, especially those generating positive cash flow. Earlierstage, very high-growth companies will likely continue to have to wait to get public, as the IPO window will be reopened by more established players. Volatility Delays Consolidation Wave Anyone who attended this year s RSA Conference in San Francisco in late February and early March could attest to the need for vendor consolidation in IT security. There were more than 500 total exhibitors at this year s conference, including 70 first-time exhibiting companies. The growing IPO Activity Slows as Valuations Decline IT security and other small-cap technology stocks faced valuation challenges in the equity sell-off during the first six weeks of The IT security index fell more than 30% between January 1 and February 9. Since then, IT security valuations

3 demand for IT security solutions and the massive amounts of private capital that have flowed into the space over the past several years have caused this proliferation of new vendors. The overlapping marketing messages and business models of these companies has made it increasingly difficult for chief information security officers (CISOs) to identify how a particular company s offering fits into the larger IT security ecosystem. The coming consolidation wave, while still inevitable, has been delayed by the recent pullback in valuations. The recent market downturn is serving as a headwind to M&A activity for two primary reasons: First, the valuation pullback has reduced the value of consolidators currency for making acquisitions. Second, the downturn has created a temporary disconnect between buyers and sellers perceptions of what a company is worth. Not surprisingly, sellers have been much slower to adjust their expectations downward in the wake of the equity sell-off. While this disconnect should serve as a headwind to M&A activity over the next few quarters, consolidation activity will eventually accelerate. In the meantime, there will still be a handful of high-profile, high-value exits for IT security companies. To achieve these outlier outcomes, companies will need to be a strong strategic fit for a buyer with a large balance sheet and/or have nextgeneration capabilities in emerging end-markets. Strategic fit was the driving force in Lancope s sale to Cisco for $452.5 million in December William Blair served as sell-side advisor to Lancope on the transaction. Lancope fills an important void in Cisco s portfolio, adding network behavior analytics that extend protection further into the network and creating powerful new sales opportunities for Cisco. The companies combined solutions can help turn a customer s network into a sensor to identify the anomalous activity of security breaches as it happens. Importantly, Lancope s solutions fit across the broader Cisco portfolio, creating cross-sell opportunities with enterprise networking and security. Despite the pullback in valuations in early 2016, IT security continues to grow in strategic importance, driving strong interest from acquirers in the technology, defense, and telecommunications industries. Conclusions From RSA In addition to growing vendor confusion and the need for consolidation, one of the biggest themes from this year s RSA Conference is that end-market trends have never been better. Demand continues to surge as IT security grows in strategic importance for companies in practically every industry. The interest in and growth of the sector is reflected by the increase in attendance at the conference, which has grown from 24,000 attendees in 2013 to 40,000 attendees in Cloud security and next-generation endpoint protection were two other major themes that emerged from this year s conference. Whether securing cloud-based applications and data or providing security through cloudbased security solutions, security companies need to be thinking about how to extend their architecture to support cloud environments. This led to considerable M&A activity and capital inflows to the cloud access security broker (CASB) market for companies such as Netskope, Skyhigh Networks, and Elastica. As endpoint devices have emerged as a significant attack vector, companies are looking for next-generation endpoint protection. As a result, companies such as AlienVault, Carbon Black, Cylance, Malwarebytes, and Tanium have been generating significant traction recently. We will continue to monitor these and other trends that are shaping the capital-raising and deal-making landscape in IT security.

4 MARKET UPDATE AND ANALYSIS IT Security Market Analysis Each quarter we look behind the numbers to examine the market dynamics that are driving trends in the deal-making landscape in IT Security

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6 WILLIAM BLAIR IT SECURITY INVESTMENT BANKING William Blair By the Numbers Drawing on our deep sector expertise and the strength of our relationships, William Blair has built a leading IT security franchise. Recent transactions include: 300+ bankers globally with local cultural knowledge 2,000+ completed advisory and financing transactions $200+ billion in transaction value for our clients

7 Most Trusted Research William Blair was ranked No. 1 for Most Trusted Research in the 2014 Greenwich Associates survey of small and mid-cap portfolio managers. William Blair was also ranked No. 1 for Greatest Knowledge of Companies and Industries and Best Tailored Research Calls. Our analysts cover more than 120 technology companies across the following industries: Communications equipment, hardware, and software infrastructure Cybersecurity and security technology Digital media and Internet Financial technology Internet infrastructure and communications services IT and business process services Semiconductors and wireless Software and SaaS Relevant Research Coverage: Barracuda Networks Imprivata With more than 150 senior bankers around the world, William Blair has completed more than 2,000 advisory and financing transactions totaling more than $200 billion in value for our clients* IT Security Dan Daul Managing Director ddaul@williamblair.com Scott Stevens Managing Director sstevens@williamblair.com Drew Thomas Director dthomas@williamblair.com Check Point Citrix CyberArk Software EMC FireEye Fortinet Gigamon Infoblox Palo Alto Networks Proofpoint Rapid7 Splunk Symantec VMware Imperva *In the past five years as of March 31, 2016

8 Disclosure William Blair is a trade name for William Blair & Company, L.L.C., William Blair Investment Management, LLC and William Blair International, Ltd. William Blair & Company, L.L.C. and William Blair Investment Management, LLC are each a Delaware company and regulated by the Securities and Exchange Commission. William Blair & Company, L.L.C. is also regulated by The Financial Industry Regulatory Authority and other principal exchanges. William Blair International, Ltd is authorized and regulated by the Financial Conduct Authority ( FCA ) in the United Kingdom. William Blair only offers products and services where it is permitted to do so. Some of these products and services are only offered to persons or institutions situated in the United States and are not offered to persons or institutions outside the United States. This material has been approved for distribution in the United Kingdom by William Blair International, Ltd. Regulated by the Financial Conduct Authority (FCA), and is directed only at, and is only made available to, persons falling within COB 3.5 and 3.6 of the FCA Handbook (being Eligible Counterparties and Professional Clients). This Document is not to be distributed or passed on at any Retail Clients. No persons other than persons to whom this document is directed should rely on it or its contents or use it as the basis to make an investment decision. About William Blair Investment Banking William Blair s investment banking group combines significant transaction experience, rich industry knowledge, and deep relationships to deliver successful advisory and financing solutions to our global base of corporate clients. We serve both publicly traded and privately held companies, executing mergers and acquisitions, growth financing, financial restructuring, and general advisory projects. This comprehensive suite of services allows us to be a long-term partner to our clients as they grow and evolve. From , the investment banking group completed more than 350 merger-andacquisition transactions worth $95 billion in value, involving parties in 26 countries and four continents, was an underwriter on more than 20% of all U.S. initial public offerings, and raised more than $120 billion in public and private financing.