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Consolidation Process Back on Track, Says Memoori
Source: Memoori 2009/12/9

Major players realize organic growth insufficient to sustain market share— By Allan McHale, Director, MemooriMajor players realize organic growth insufficient to sustain market share

— By Allan McHale, Director, Memoori

There has been a slowing down in the consolidation process since the start of 2008, but it was not until August 2008 and the financial meltdown that this trend became manifest. The reason for the fall in activity is the credit squeeze and resultant lack of finance, first apparent in August 2007. More recently, there is little confidence the current recession will be short and shallow. Memoori's records show the acquisitiveness of the major companies fell off in 2008 before the financial meltdown. Despite this, Memoori has seen merger activity increase in the last three months on the same period of 2008. So will the green shoots of consolidation that are now starting to develop grow and flower?

The November announcement of UTC's acquisition GE Fire and Security for US$1.82 billion makes it the largest deal in the last five years, confirming the consolidation process is back on track. In 2009 the total value of deals grew by approximately 7 percent to $4.6 billion. While the outcome of consolidation activity in December has yet to be seen, the security industry has outperformed most industries with one major deal. For example, the architecture, engineering and construction business has fallen by 30 percent in 2009. Other industries have suffered a much more drastic decline but have seen some improvement in this last quarter.

When the news broke and details of the size of GE's security business were revealed, I suspect the market research companies rushed to revise their market sizing figures. The GE Security figures are laid bare and at about $700 million, they are a fraction of what most watchers in the market believed. It looks as though the security business part of the operation pulled down the total value of the business. An exit benchmark based on sales of 1.5 is not particularly attractive for a deal of this size. This was a good deal for both parties, but in the short term, the GE negotiating team had more to celebrate on the day. In the present economic climate, two years of steeply declining revenues and profits and only one serious buyer for the combined operation, they came out with a good deal.

Momentum is now building up, driven by the fact that there is more opportunity to buy at realistic prices. The majors realize they can't maintain let alone grow through organic sales. But the market is holding its breath that confidence in the future will hold up. This month further third quarter results announced by the majors show the same dismal picture as last month with declining revenues and earnings.

However at least two companies have bucked the trend — Techwell and China Fire and Security Group. Both have increased revenues in the Asia market and expect higher rates of growth next year. Tyco's revenues declined again, but it reported better trading conditions in Asia. Growth in 2010 will be hard to find, but should marginally improve on 2009 trading conditions. For those who are in the market to acquire, 2010 should bring some tasty opportunities. But I expect fewer bargains will be available in 2011.

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