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FireEye’s share price plunges after $1.2bn Symphony deal

FireEye’s [FEYE] share price plunged 17.62% on Thursday, after the cybersecurity firm announced it is selling its product business — including the FireEye name — to private equity company Symphony Technology Group for $1.2bn.

The deal will see FireEye, the maker of network and email cybersecurity products, separate from the digital forensics and incident response arm, Mandiant, reports techcrunch.com.

Despite falling 15.24% across the week to close Friday at $18.92, FireEye’s share price was still 47.12% higher over the last year (as of 4 June’s close). After last week’s slide, though, FireEye’s share price is down 9.56% for the year-to-date (to 7 June’s close).


Valuation of product business sale to Symphony Technology Group


FireEye is also the eighteenth largest holding in our Cyber Security ETF theme, with a 2.77% weighting in the tracked First Trust Nasdaq Cybersecurity ETF. The theme slipped 0.75% last week to feature towards the bottom of our thematic performance screener.


Why should investors care about FireEye’s share price?

FireEye is known for its research into hacking groups, and was lauded within the cybersecurity sector after admitting its own networks had been hacked in December, as it helped to speed up efforts leading to the discovery of the SolarWinds [SWI] espionage attack, which was attributed to Russian foreign intelligence, reports techcrunch.com’s Zack Whittaker.

The Mandiant unit deals with major security incidents, and helped one of the largest US pipeline operators, Colonial Pipeline, recover from a ransomware cyber-attack earlier this year, which forced the company to close all its operations and freeze IT systems. The move to split the two businesses comes after FireEye acquired Mandiant in 2013 for around $1bn, when Kevin Mandia became overall CEO.

FireEye’s share price is trading below the average price target on Wall Street, indicating there is still some upside left to the stock, although investors will need to weigh up the impact of the Symphony deal.


What’s next for FireEye?

The transition will enable FireEye to focus on security breach response. Mandia said the deal will “unlock our high-growth Mandiant Solutions business and allow both organisations to better serve customers.” Mandiant will focus on “scaling our intelligence and frontline expertise … while the FireEye products business will be able to prioritise investment on its cloud-first security product portfolio.” The deal is expected to be completed by the end of the fourth quarter.

FireEye also revealed longer-term targets for $1bn in revenue by 2025, with 20%-plus annualised growth and better than 20% operating margins. The company also said it has approved a $500m stock-repurchase plan, equating to just under 10% of its current market capitalisation.


Why did Symphony acquire FireEye?

FireEye will become the latest cybersecurity giant in Symphony’s portfolio, after the private equity group bought McAfee’s [MCFE] enterprise business for $4bn in March. Symphony’s managing partner, William Chisholm, said there’s “enormous untapped opportunity for the business that we’re excited to crystallise by leveraging our significant security software sector experience and our market-leading carve-out expertise.”

Mandia added: “STG’s focus on fueling innovative market leaders in software and cybersecurity makes them an ideal partner for FireEye products. We look forward to our relationship and collaboration on threat intelligence and expertise.”

“STG’s focus on fueling innovative market leaders in software and cybersecurity makes them an ideal partner for FireEye products. We look forward to our relationship and collaboration on threat intelligence and expertise” - Kevin Mandia


What do analysts think of the deal?

Morgan Stanley analyst, Hamza Fodderwala, maintained an equal weight rating and $19 target price on the FireEye share price, reports Barron's, a fraction below Monday’s closing price of $19.77. While Fodderwala thinks focusing on the higher-growth part of the business is positive, the surviving Mandiant business has a “lower gross margin and scalability.”

Fodderwala calculates the deal’s value at 2.3 times the next 12 months’ sales, which is lower than the average at 3.5 times, saying “the discount likely reflects lower margins and ongoing transitions in FireEye’s product business.” He also reckons FireEye’s revenue target is ambitious “given the investment required in a highly competitive market.”

Mizuho analyst, Gregg Moskowitz, kept a neutral rating and a $23 target price, which represents a 16.33% jump from 7 June’s close. Moskowitz says the deal offers FireEye “the potential to unlock additional growth opportunities”, but in also acknowledging the lower-than-expected price, says the surviving company “still has much to prove.”

FireEye is a consensus hold according to the Wall Street Journal — overall the stock has four analyst Buy ratings, one overweight, eight hold and one sell rating. An average price target of $22.92, which represents a 15.93% gain on 7 June’s close, suggests FireEye’s share price has room to move higher, but looking further into the distance, much will depend on the company’s success in growing its remaining Mandiant business.

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