In the dynamic world of cybersecurity, the amalgamation of small and medium-sized enterprises
(SMEs) through mergers and acquisitions (M&A) has emerged as a potent strategy for fostering innovation, scaling up novel solutions, and capitalizing on the economic value of intangible assets. This approach, exemplified by firms like the Areopa Group (Belgium) which obtained a €1 Billion valuation after just a decade of acquisition; achieved by leveraging the financial power and market reach of larger entities to bring groundbreaking ideas (intellectual capital) to a broader market. EAG is following a broadly similar, financially proven, path.
M&A as a Catalyst for Innovation
SMEs in the cybersecurity and IT sectors are often hotbeds of innovation. They are agile, adaptable, and able to develop novel solutions to emerging threats. However, they often lack the resources to bring these solutions to a larger market. This is where M&A comes into play. By acquiring these SMEs, larger firms like EAG can harness their innovative potential and integrate their unique solutions into a broader product portfolio.
Scaling Up through Financial Power
Once these innovative solutions have been acquired, the next step is to scale them up. With their substantial financial resources, firms like EAG can invest in the development, marketing, and distribution of these solutions, reaching a larger customer base than the original SMEs could have achieved on their own. This not only increases the market penetration of these solutions but also enhances their potential impact on cybersecurity.
Capitalizing on Intangible Assets
The value of these innovative solutions often lies in their intangible assets, such as proprietary technology, software, patents, and brand recognition. Recognizing and capitalizing on the value of these assets is crucial. Under International Accounting Standards (IAS) 38 and International Financial Reporting Standards (IFRS), intangible assets acquired through M&A can be recognized and measured, which can significantly enhance the acquiring firm's balance sheet.
IAS 38 requires that an intangible asset acquired in a business combination be recognized at fair value, which often requires a complex valuation process. This process can include assessing the expected future economic benefits of the asset, the reliability of measuring its fair value, and the ability of the firm to control those benefits.
The Role of EAG
EAG exemplifies the potential of this proven approach. By strategically acquiring SMEs with innovative cybersecurity and IT solutions, EAG can leverage its financial power to scale up these solutions and bring them to a larger market (increased sales). At the same time, EAG can capitalize on the economic value of the intangible assets it acquires (stronger Balance Sheet), and thus enhance its pre-IPO financial position and then continue to create additional post-IPO value for its stakeholders.