Microsoft (MSFT) is buying an Israeli cybersecurity startup for $320 million, according to reports out today. And while on the surface the deal isn’t that dramatic, with MSFT stock sitting on plenty of cash and the price tag a fraction of what the U.S. software giant is worth, it does signal big things for Microsoft as it looks to evolve its business beyond desktop operating systems.
First the details: The Israel-based cybersecurity firm, Adallom, is focused on traditional security like servers as well as cloud-focused protections that can help corporations using third-party data services — including Salesforce.com (CRM) for customer management, Box Inc. (BOX) for data storage and even Microsoft itself with cloud-based software including Office 365.
Microsoft’s mission to generate reliable revenue from annual software subscriptions, including both Office and its flagship Windows OS, is closely aligned with the idea of security software. After all, firms like McAfee and Norton made their names off regular re-upping of software licenses in order to keep consumers armed with the latest protections — and consequently, McAfee was acquired by Intel (INTC) for $7.6 billion and Norton owner Symantec (SYMC) has grown to a roughly $16 billion valuation.
Figuring out protections for the new digital age, with all the challenges created by the cloud and mobile devices, is sure to be a lucrative game.
And Microsoft has tons of cash to deploy.
It’s important to recognize that MSFT stock boasts about $107 billion in cash on its books, and that much of it is overseas — or at least, it was a few months ago. That means Microsoft is incentivized to spend this cash overseas rather than repatriate it to distribute to shareholders or acquire U.S.-based companies.
In fact, part of the reason Microsoft ponied up $8.5 billion for Skype a few years ago was because of this overseas buying power and the fact MSFT had few better tax-efficient options to deploy that cash the way it did.
So let’s digest this: Microsoft is a company that is increasingly focused on software subscription revenue. MSFT stock has plenty of dry powder to snap up other companies, particularly those not domiciled in the U.S. And right now, cybersecurity is the hotness with the PureFunds ISE Cyber Security ETF (HACK) up about 18% year-to-date and many pure-play cybersecurity stocks like Palo Alto Networks (PANW) and Fortinet (FTNT) up by twice that amount or more.
That seems to me quite a compelling case to expect more Microsoft buyouts like the deal with Adallom in the months ahead.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
