Insiders explain why BlackBerry’s $1.4 billion acquisition of Cylance could be the last endpoint security deal of its size (BB)

John Chen looks at a Blackberry

BlackBerry's $1.4 billion Cylance acquisition, announced on Friday, came after tough negotiations, sources told Business Insider.
Cylance was weighing an initial public offering and had its heart set on a higher valuation, but BlackBerry CEO John Chen was committed to spending less, sources said.
But not everyone thinks Cylance would have thrived on the public markets.
Cybersecurity investor Yoav Leitesdorf said he thinks endpoint security is a dead-end, and Cylance may have crumbled against the competition if it was a standalone company. And it may still under BlackBerry.

BlackBerry's $1.4 billion acquisition of Cylance marks a major milestone for the $5 billion company, as CEO John Chen executes further on his strategy to move the once-ubiquitous cellphone manufacturer into the world of software and services.

Sources said that the deal — first reported by Business Insider last week — was touch and go for a while, particularly because Cylance wanted more money than Chen was willing to spend. The startup was weighing going public, sources said, where it potentially could have eventually ended up worth more than $1.4 billion.

One source close to the deal said while there may have been some back-and-forth in the negotiations, overall the process was very straightforward.

The 34-year-old BlackBerry was in the market for a cutting edge AI and security product, which it decided was easier to buy than to build internally. And Cylance was ready for a big exit — IPO or otherwise — and was attracted to its acquirer's reach in sectors like government, finance and automotive, the source said.

The all-cash deal ate up more than half of the $2.4 billion in cash and cash equivalents that BlackBerry had on hand as of August 31. Chen was careful to ensure that the company didn't spend its whole budget on one deal, the source said, especially since the company wants to be ready in case another good acquisition opportunity presents itself.

"Stay away from endpoint security"

Not everyone is convinced that Cylance would have thrived on the public markets, or that it can prove its value as it joins BlackBerry.

Competition from Microsoft and other security startups is steep, said Yoav Leitersdorf, an investor at the YL Ventures, which invests heavily in cybersecurity. That means Cylance risks losing "most of its market share similar to the demise of the BlackBerry smartphone."

"The endpoint security space has become the most crowded in cybersecurity. Cylance has had a difficult time recently battling it out with CrowdStrike," wrote Leitersdorf, who said executives in the space consider CrowdStrike to be a superior product. George Kurtz, CEO and founder of CrowdStrike, a $3 billion company, is an advisor to YL Ventures.

Read more: A startup uses data to forecast which companies are ready to go public — here are its 16 predictions for 2019

Leitesdorf said that YL Ventures doesn't invest in endpoint products, however, and encourages entrepreneurs to "stay away from endpoint security, as margins will strongly erode and industry players will go out of business or be acquired for much lower multiples than what BlackBerry is paying for Cylance today."

Leitersdorf added that while he expects more acquisition in the space in 2019, he thinks those startups will sell at a "very low multiple" — as low as 1x, which would mean investors basically just get their money back.

"Many of these vendors will seek to be bought due to the intense competition in the space and the increasing threat from Microsoft, and buyers (acquirers) will have the strong negotiating leverage, thereby eroding multiples at acquisition," he wrote.

Join the conversation about this story »

NOW WATCH: The first woman in space almost didn't make it back to Earth and she had to keep it a secret for 30 years