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Acquisitions Have Mushroomed in 2010 despite a Stagnant Security Market
By Allan McHale, Director, Memoori 2011/1/10

The value of deals completed in 2010, identified and analyzed through Memoori monthly Executive Brief “The Physical Security Industry in 15 Minutes” was US$7.98 billion; a growth of almost 75 percent on 2009. This is the highest value ever recorded and is 28 percent higher than the previous record set in 2005 and 2007. This is a startling number not least because it is in stark contrast to what has happened in similar businesses. So what has caused such a surge in consolidation, at a time when the global market for physical security equipment has experienced little growth? The value of deals completed in 2010, identified and analyzed through Memoori monthly Executive Brief “The Physical Security Industry in 15 Minutes” was US$7.98 billion; a growth of almost 75 percent on 2009. This is the highest value ever recorded and is 28 percent higher than the previous record set in 2005 and 2007. This is a startling number not least because it is in stark contrast to what has happened in similar businesses. So what has caused such a surge in consolidation, at a time when the global market for physical security equipment has experienced little growth?

In 2009 we identified 77 acquisitions compared with 80 in 2010. So the almost doubling in value of deals is clearly not the result of a lot more transactions. The reason is that this year, consolidation has been much more focused at the top end of the business, between established large companies. The buying price for just three deals amounted to $4.3 billion, some 54 percent of the total business transacted and a further seven companies paid more than $250 million to complete deals.

The drivers to achieve growth in this industry are clearly to deliver products and services that increase productivity and provide a ROI. IT convergence and integrated solutions are seen as the way forward. In order for companies to deliver such systems, many have decided that it is necessary to acquire expertise through merger and acquisition.

One example of this is the need to join physical security with identity management and biometrics. Some of the largest acquisitions have been in this area. HID Global, the 3M and Hewlett Packard have all bought big in the last four months of this year.

We identified 17 significant deals for alarm installation and monitoring companies, netting a total value of some $4.18 billion. So in 2010 this segment of the market has attracted some 52 percent of the total spend on acquisitions. So why has alarm monitoring; long the fragmented and low-growth sector of the security industry, but cash cow provider, undergone a surge in acquisition activity? 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 much more comprehensive and cost-effective service to both residential and commercial customers. This is the reason for its surge in popularity.

There have been some major landmarks during the last 12 months. In Jan. 2010 Tyco purchased Broadview Security for $2 billion. This was followed in Apr. with GTCR’s purchase of Protection One for $828 million. In Sept. Safran bought L1-Identity Solutions for $1.1 billion and in Dec. Monitronics was acquired by Ascent Media for $1.2billion.

With the exclusion of alarm companies the surge in acquisition activity in 2010 has been driven by companies from outside the mainstream physical security market. Safran, L-3 Communications, Flir and 3M have pulled off some major deals in 2010, but mainstream suppliers like Schneider Electric, UTC Fire & Security, Honeywell Security and Bosch Security Systems have been conspicuous by their absence.

Monitronics was purchased by Ascent Media in Dec. for $1.2 billion. Headquartered in Dallas, Monitronics provides monitored business and home security system services to more than 665,000 residential and commercial customers with 93 percent coming from residential customers. It is reputed to be the second largest player to ADT in the U.S. Ascent likes their business model because it operates as a pure dealer program in that the company does not sell, install or service its accounts; all of those activities are provided by dealers in its network, who then offer to sell their new accounts to Monitronics. This has worked well for them for in the 12 years for they have generated 22-percent compound annual growth of revenue, making it one of the fastest growing companies in the industry.

This year is going to be a hard act to follow, because to continue this rate of consolidation will require the merging or acquisition of very large suppliers and their numbers are getting depleted. However we think that this high rate of consolidation can and will continue for a few years because the major suppliers absented themselves from the dealing tables in 2010 and have made claim to be active in the near future.

Two months ago UTC made it publicly known that they intend to grow through acquisition and it is almost a year since their megapurchase 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.

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