High Tech or Cash Cow Business – It's Innovative Technology that is Fuelling Acquisitions in the Security Industry

A strong feature of the physical security business in the first 10 months of this year has been the acquisition of security companies by IT-related companies. It has been particularly evident in the last three months with strong players in the identity business buying access control companies in order to deliver total solutions. This is not a one way trade as HID Global have shown with the recent acquisition of ActiveIdentity, a supplier of identity assurance solutions. Technology through IT-convergence and the influence of IP and networking has made it possible, but the driver has been the goal of better and more cost-effective solutions.

"This year has shown that the acquisition of high-tech companies or low-tech cash cows has been driven by the opportunity to deliver better and more effective security solutions enabled by IT technology."

Alarm monitoring; long the fragmented and low-growth sector of the security industry, but cash cow provider similarly has undergone a surge in acquisition activity this year. On first observation cash flow in the difficult trading conditions of the last two years would appear to be the main driver. However, just removing the surface layer reveals that integration of the different security services delivered through SaaS is the enabler of providing a comprehensive and cost-effective service to both residential and commercial customers.

The number of transactions this month is double the same period in 2009, which was one of the least active months in that year. Although the number of transactions is up on last month the value looks significantly lower. However consolidation activity for the first eleven months is well up on last year and it looks almost certain that 2010 will equal the historic high of 2007.

The most interesting deal this month is the purchase of Optelekom –NKF by TKH Group. The past two years have been difficult for Optelekom with sales and profitability falling since its peak in 2007 and 2008. This month they reported their third-quarter results and these look more encouraging for they have just stemmed their losses and have built up their order book. TKH came in with an offer to acquire all of the shares of Optelecom-NKF in an all cash merger transaction for US$2.45 per share.

ManTech International first appeared on our radar last month with the purchase of Quinetiq North America and has this month purchased homeland defense company MTCSC for $75 million. Both companies were acquired for relatively low multiples for companies operating in this fast-growing sector of the market.

The security services business notched up a series of acquisitions with Stanley CSS buying two companies and Securtitas acquiring three, two in the U.S. and one in Poland. This sector of the security industry has consolidated in 2010 at a faster rate than any other.
As forecast the high rate of consolidation experienced in the third quarter has continued. Two months ago UTC made it publicly known that they intend to grow through acquisition and it is almost a year since their mega purchase of GE's Fire & Security Division. This month Tyco announced that they have set aside $500 million to acquire companies in India, Brazil, Middle East and China to push inorganic growth in these markets. Tyco is also looking at building product and system integration capabilities in India. And since the company has enough cash, it wants to surge ahead of its competitors through inorganic growth. The company currently has $2 billion cash on its books.

The 3rd Quarter financial announcements this month continue a similar trend to that recorded in the previous two months. These show for the most part a continuing and steady upward trend in revenues and profitability. The star performers this month are Basler, Electronic Control Security and Genetec Systems. The first two recorded increased revenues for the quarter up by 58- and 105 percent respectively on the same period in 2009. CheckPoint and Tyco both recorded improved financial performance with revenues up four percent on increased margins on the same period of 2009. All these companies are expecting the market to grow in 2011. Napco, Optelekom and Mace suffered more severely during the downturn but have now strengthened their balance sheets and are returning to profitability.

Nine alliance arrangements were officially announced this month, which is quite typical. However only two funding arrangements were identified in November which is well down on the monthly average of four and this trend has continued for the last two months. Venture capital companies at this time are neither active in investing or realizing previous investments in security companies.
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