On July 31, 2018, Mimecast (NASDAQ: MIME), one of the large email security players, acquired Solebit, a CDR startup, for $88M. The pricey acquisition left many analysts dumbfounded, given that Solebit had little revenues and a minuscule client base. Obviously, Solebit wasn’t acquired for the top-line boost or their client list.
Mimecast classified Solebit as a “technology acquisition”. We look at what this means and how it justifies the $88M price tag.
Mimecast Acquired Solebit at 100x EV/Sales Multiple
In their 10K annual filing with the SEC, Mimecast disclosed that Solebit had revenues of $876,000 for the trailing 12 months before being acquired.
Therefore, with a net acquisition price of $88M, Mimecast acquired Solebit at an astounding 100x EV/sales multiple.
Solebit Had Less Than 10 Customers
During the Q1 2019 conference call on August 9, 2018, days following the Solebit acquisition, Mimecast’s CFO Peter Campbell said that Solebit “has less than 10 customers”.
So why exactly did Mimecast pay $88M for a startup with less than $1M in revenue and fewer than 10 clients?
Mimecast explained why in a blog post.
“Two For” Benefit: Solebit Increased Detection & Performance Speed
Mimecast is in the business of making email safer for businesses. Their email security service uses multiple cybersecurity solution, including multiple anti-virus engines, file type blocks, static file analysis, and behavioral sandboxing, to detect malicious files.
Generally, existing cybersecurity solutions exhibit a tradeoff: performance for efficacy.
Anti-viruses are economic and quick at scanning (efficient performance), but are unable to detect unknown threats (not effective). Sandbox scanning, on the other hand, is slower and more expensive but more effective at
detecting unknown threats.
Solebit’s CDR technology showed a rare “two-for” benefit. It increased Mimecast’s detection and dropped processing time in half.
How Does This “Two-For” Benefit Help Mimecast?
1. Competitive Advantage
Solebit helps differentiate Mimecast via its efficacy (stops more advanced threats) and performance speed of detection (much faster than traditional methods – like sandboxing suspicious files). This will create a competitive advantage for Mimecast compared to other secure email gateway providers like Baracuda and Proofpoint.
2. Expansion Opportunities
Advanced malware detection capabilities will give Mimecast an advantage as the company enters new security spaces beyond secure email gateways. Mimecast has announced that they will move into the web security cloud services market. Having a technology that contributes efficient detective capabilities will be a key feature in a web security product offering.
The price of upgrading their existing email security product and expanding to web security is how Mimecast justified paying $88M to acquire Solebit.