Business this year was better than ever in physical security, as detailed by Allan McHale, Director of Memoori Business Intelligence.
Business this year was better than ever in physical security, as detailed by Allan McHale, Director of Memoori Business Intelligence.
One of the most encouraging findings from Memoori's third annual report, “The Physical Security Business in 2011,” is that this industry has outperformed most peers. Despite a troubled economic climate, it has increased revenues and profitability, while merger and acquisition has surged by more than double in the last two years to US$9.847 billion. This business looks like a safe port in a storm.
The total value of world production at factory gate prices was $19.17 billion and it has grown by a CAGR of 4.25 percent over the last two years. Of this, video surveillance products at $9.1 billion made up 47 percent of total market, making it the fastest growing sector. This was followed by access control at $4.41 billion, which took a 23 percent share. Sales of intruder alarms fell to $5.65 billion and now have a 30 percent share. The developed markets of North America and Europe are losing market share to Asia — particularly China, which will be the largest single market by the end of this decade.
Figure 1 shows the relationship between the performance of the market by size, value of acquisitions and company EBITDA valuation on acquisition over the period 2007 to 2011. It shows that the market for physical security products did not decline until 2009, while acquisition activity and valuations declined in 2008. In 2009 both acquisition and valuation started a rapid two-year rise, while the market has grown by a CAGR of 4.25 percent.
The anticipated aftershock from the 2008 financial meltdown now looks inevitable, irrespective of whether the right corrective actions are taken now. This will dampen future demand, but we are optimistic as it can now deliver more attractive opportunities for clients to improve security and profit from it. Demand will edge forward at a CAGR of 3.7 percent over the next five-year period, while we forecast a much more modest growth in mergers and acquisitions well down to single figures.
One factor stands out in the report, and that is growth has been driven, not so much by the need for security, but by the industry's capability to produce a constant stream of new products that meet customer needs to drive more ROI. Across almost all verticals, security managers have found the budget to invest in systems that have moved from being a cost center to a profit center in some applications, through delivering increased productivity at lower prices.
It is the application of new technologies that has enabled this to happen. The report identifies five emerging technologies that have created new business opportunities. They are
1. Wireless communications;
2. IP networking technology;
3. Video surveillance as a service (VSaaS);
4. Managed video, analytics software and security management software, including physical security information management (PSIM); and
5. Physical identity and access management (PIAM).
Less M&A by Incumbents
New technologies have one thing in common: Improving productivity, providing safer and more efficient security systems, and in some cases lowering cost. However all of these technologies embrace a wide divergence of skills and expertise, which will require large R&D budgets to take them forward. It is unlikely that any one company in the security industry will master them all. So far, the leaders in introducing these new products are small- to middle-sized companies focused on one segment of the market, with the majority having been in business for less than 10 years. The traditional market leaders' shares have stagnated and the average share is less than 10 percent. Financing these developments will not improve their competitive positioning in the short term, but they have the cash to buy this expertise through acquiring companies steeped in it. However, the traditional leaders seem reluctant to take the initiative at this time.
This is one of the baffling things thrown up by the report. Despite a doubling in acquisition activity in the last two years, most of the traditional market leaders have not participated. It is not easy to fathom why, because they have had an active policy of growth through acquisition up to 2008 to 2009, and they all have strong cash reserves. By 2010, the security industry had got itself back to profitable growth and the industry had proved itself to be an attractive robust business. Although company valuations have gone up, they are still below 2008 levels.
Interestingly, some $1.178 billion accounting for 12 percent of total investment in acquisitions in the last 12 months was made by companies from defense and IT-related industries. In addition, venture capital and private equity groups acquired six companies investing some $3.605 billion, including Bain Capital's purchase of Securitas for $3.26 billion. This follows on from an active campaign in 2010 of companies external to the business seeking to become a part of it. Both defense and IT companies see opportunities in the industry to leverage through their technological expertise. With their strong finances, they will play a significant role in strengthening and growing this business.
The long standing multinational suppliers are both product manufacturers and system suppliers for almost all aspects of physical security, such as Bosch Security Systems, Honeywell Security, Johnson Controls, Schneider Electric, Siemens and UTC. When you review market share by product sales, it shows that average market share figures are little more than 3 percent, with the highest around 12 percent. Compared to market share in some segments, such as the fast-growing IP video market at $1.3 billion, leading network camera supplier Axis Communications has a share around 35 percent, with no other supplier in reach.
We wondered if the traditional suppliers are spreading themselves thin on the physical security front and need to refocus on either the product, systems business or a combination of the two to focus on specific vertical markets. They have all performed well financially in the last three troubled years and have been successful in growing their systems business. One of reason for this is they have fed off their heritage estate business and at the same time integrated activities from other parts of their organization for their clients, such as fire detection and extinguishing, evacuation control, mass notification and energy management into holistic solutions. This has been a successful strategy but it appears to have taken their eye off the product business.
In September, Tyco International announced it would split into three separate companies, with two based on security and safety. This opens the opportunity for at least one megamerger in 2012. Our bet is the traditional players will not sit it out this time around. However they will have to make sure that if they are going to stay in both product and systems camps, they commit sufficient resources to spend on the enabling technologies or acquire companies that have this expertise.