In early August, NICE Systems announced it will be selling its physical security business unit (PSBU) to Battery Ventures, an American venture capital and private equity firm for a sum of up to US$100 million. The new company will become a standalone company headquartered in New Jersey, U.S. — with offices in London and Singapore, and a R&D center in Israel — and will focus mainly on NICE's situation management offering.
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NICE Systems' physical security business unit (PSBU) is the second such move by NICE Systems — earlier this year, in May, NICE sold its cyber and intelligence unit to an Israeli company, Elbit Systems. The move was part of NICE's strategy to focus on its core business in enterprise software and "off-load" other units. The identity of the buyer is what makes this deal different.
a&s spoke with Jesse Feldman, general partner in Battery Ventures who lead the deal, to hear more about the potential and future directions for NICE PSBU.
a&s: The purchase of NICE PSBU by Battery Ventures came as a surprise to the security industry. In the past two years there were many M&As of security companies, but all from within the industry. What were the processes that lead to the deal? Were you actively looking for investment in the security industry?
Feldman: Our focus is on technology and not sectors. For the past 30 years Battery has focused exclusively on technology companies and we have identified physical security as a market with growth potential. Prior to the acquisition we were actively looking in this space, we spoke with several dozens of companies and have known NICE PSBU for some time.
a&s: What drove you to invest in NICE's PSBU?
Feldman: We have identified two macro themes that we believe will push the industry to grow further. The first is the advent of knowledge "beyond physical security" — particularly around operations. In the past, security systems could tell you if there was a breach, today users can benefit from their systems by gathering more data regarding their operations. The second is the continued improvement in technology used in physical security solutions. From these two perspectives, we identified NICE PSBU as a market leader with regard to the technology they have.
I divide the NICE PSBU offering into three: the video management software (VMS), physical security information management (PSIM), and video analytics. The VMS platform which is stable and robust is an excellent core product for the high-end market. The PSIM product, Situator, is an industry leader in a sector we believe holds big opportunities; especially regarding operations management. Regarding analytics, my honest opinion is that a lot in the industry has been promised but not too much delivered. We believe that NICE's new suspect search is the exception as it has made great inroads in using big data from video to make informed decisions and will deliver on its promise.
a&s: PSIM is also problematic in that sense. It promises a lot of value but when push comes to shove the integration efforts and costs are not simple at all.
Feldman: True, we are aware of that; however, as part of our due diligence process we spoke with several customers and what we heard consistently is that even though it is a complex product to implement, NICE enabled successful implementation and services, so we do expect this will continue to be the trend with future installations.
a&s: Your initial press release mentioned "complementing NICE's technology with strategic acquisitions." Many of the recent acquisitions in the security sector have been hardware+software, are you also considering acquiring hardware manufacturers? Will NICE PSBU remain focused on software? What kinds of security companies are you interested in?
Feldman: We do think that PSBU is a fantastic platform to grow organically and inorganically. One of our investment ideas in this opportunity is adding complementary products to the company. As an example, if we look at the PSIM product, it is VMS agnostic, but VMS is an important part that can complement it. There are of course many other systems that can feed in the PSIM but we think access control will be a natural complement to the portfolio we have today.
a&s: What is your future vision for NICE PSBU? What kind of strategy will it follow? How will it increase its competitiveness?
Feldman: We are excited about the market opportunity in the security industry and we will focus on helping the company grow and become a successful standalone business. We have seen that while inside NICE the PSBU has executed very well. We believe that as a standalone business they will be more focused and more flexible. This will give better responses to our partners and customer requests.
The plan is not to combine NICE PSBU with any of our existing portfolio companies; NICE will be a platform which will combine new investments in physical security.
As far as strategy is concerned, we have seen a trend of companies in physical security focusing on vertical solutions and NICE PSBU will continue to play a role in this as well. NICE has a strong position in several verticals, transportation, finance, governments, and we expect those relationships to continue with continued expansion of NICE Situator in the operations field.
Betting on PSIM – The Future is Not Clear
The transaction is scheduled to close during the third quarter of this year. There are several possible outcomes for the new company. Feldman points to the potential future growth of the PSIM market in which NICE PSBU has a successful track record of implementations. However, the PSIM market has long been a relatively small niche market within security, with high costs and pains associated with integration efforts and the lack of open standards in the industry.
If the new NICE PSBU chooses to focus on "information beyond security" and operational management, this could potentially give the product the needed push that will increase its adoption rate. By focusing on operation management more, stakeholders (and not just security managers) can be tied into the system thus making it more justifiable. For this to happen, NICE will have to bring to the table not just technology but also a strong consultative capability in all operational aspects, which will help clients discover and solve the challenges in their respective vertical. The acquisition of NICE PSBU definitely has a lot of potential, the new company's performance will reveal whether or not Battery's bet was right in its analysis of the market.