Confidence Returns to the Market as Trading Conditions become Robust and Funds Liquid, Memoori Says

Even the pessimists are now convinced that the light at the end of the tunnel is not a train, and there are real signs the recovery in our industry is back on track, according to a Memoori report. The two factors that confirm it for us are the real statistics of financial reports delivered over the last four months together with increased activity in acquisitions, alliances and funding.

This month witnesses the same trend that we have noted over the last four with the specialist companies Axis Communications , Techwell, FLIR and L-3 Communications delivering growth in sales and profit and showing better than expected results in the last quarter.

In particular Axis has delivered a strong performance and has confirmed that growth is strong in the IP video business across all markets with Asia leading the way and profitability has increased almost in parallel with revenues. They are the leaders in this market with an often quoted share of 30 to 35 percent, so this should reflect this segment of the market and its future prospects.

Techwell revenues almost doubled in the first quarter of 2010 compared with the same period in 2009. Revenues fell from their peak in 2008 and profitability to less than a quarter on peak performance in 2007. This semiconductor company to the video surveillance market was hit hard by the consequences of the financial meltdown in 2008. However it is now on the way to making a remarkable recovery judging by these figures and the confidence of its recent acquirer to pay a forward P/E ratio of 21, an exit multiple on sales of 5.8 and EBIT of 37 based on 2009 earnings, whilst based on 2007 earnings the EBIT multiple falls to 26.

In the four months of 2010 the number of acquisitions announced has grown by 50 percent on the same period of 2009 and although we do not have all the figures on the buying price, we estimate that the value has doubled based on the cost of buying. This trend would be difficult to continue into the last quarter of 2010 because in the last quarter of 2009 there was a spurt of acquisition activity and in November UTC acquired GE Fire & Security for US$1.8 billion.

This month the two most notable deals have been the acquisition of Techwell and Protection One. The purchase of Protection One by private equity firm GTCR for $828 million including debt draws another major player into the consolidation process of the alarm monitoring sector which Stanley and ADT have dominated over the last few years. Also this month ADS Security bought the accounts of Alarm Center Security Systems so the trend for consolidation in this business that has now been active for more than a year continues. Techwell was purchased by Intersil for the staggering price of $370 million. This shows confidence in the future; for Intersil know this market and the synergy and prospects now available to the combined group. Good news for other suppliers of semiconductors for the video surveillance market such as Pixim.

Investment funds are available, with four companies this month receiving between them $82 million. In March, three IP video companies raised finance following on from three the previous month. The recipients in March were Pivot, Aimetis and Avaak and they raised some $40 million between them, whilst Exacq received a tax incentive for investing in additional manufacturing facilities. RFID firm TAGSYS topped all of this by raising $97 million. So the Venture Capitalists are back picking and choosing no doubt, looking for companies that can prove they are growing and profitably or thereabouts. However many will be looking to sell if the right opportunity becomes available as we have clearly shown in our survey.

So far this year buyers have focused in on strategic buys and have been prepared to pay well. We suspect that it is a buyers market for mainstream companies. Fragmentation must drive those hundreds of companies, operating well below the minimum economic size, to sell up or exit the business.

The physical security business has in the last two years proven its resilience and now growth has returned to the market there is a need to strengthen balance sheets so that companies are able to finance growth both organically and through acquisition.

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