The value of deals completed in 2010 (as identified and analysed through our monthly Executive Brief ‘The Physical Security Industry in 15 Minutes’) was $7.98 billion: a growth of almost 75% on 2009.
This is the highest value ever recorded, and 28% higher than the previous records set in 2005 and 2007.
It’s a startling number, not least because it’s in stark contrast to what has happened in similar business sectors.
What, then, has caused such a surge in consolidation at a time when the global market for physical security equipment has experienced little growth?
Consolidation at the top end
In 2009, we identified 77 acquisitions compared with 80 in 2010. 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% of the total business transacted and a further seven companies paid over $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 return on investment.
IT convergence and integrated solutions are seen as the way forward here. In order for companies to deliver such systems, many have decided that it’s necessary to acquire expertise through merger and acquisition activity.
One example of this is the need to join physical security with identity management and biometrics. Some of the largest acquisitions this year have been in this area. HID Global, the 3M Company and Hewlett Packard all ‘bought big’ in the last four months of 2010.
Alarm installation and monitoring deals
We also identified 17 significant deals for alarm installation and monitoring companies, netting a total value of some $4.18 billion.
In 2010, this segment of the market attracted some 52% of the total spend on acquisitions. Why, then, has alarm monitoring (for so 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 alike. This is the reason for its surge in popularity.
There have been some major landmarks during the last 12 months. In January last year, Tyco purchased Broadview Security for $2 billion. This was followed in April with GTCR’s purchase of Protection One for $828 million.
In September, Safran bought L1-Identity Solutions for $1.1 billion and, in December, Monitronics was acquired by Ascent Media Corp for $1.2 billion.
Acquisitions driven by ‘outsiders’
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 all pulled off some major deals in 2010, but mainstream suppliers like Schneider Electric, UTC, Honeywell and Bosch were conspicuous by their absence.
In December, Monitronics was purchased by Ascent Media Corporation 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% coming from residential customers. It’s reputed to be the second largest player to ADT in the USA.
Ascent likes its business model because it operates as a pure dealer programme 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.
That model has worked well for them for in the 12 years for they have generated 22% compound annual growth of revenue, making it one of the fastest-growing companies in the industry.
What will happen in 2011?
2010 is going to be a hard act to follow because to continue this rate of consolidation in 2011 will require the merging or acquisition of very large leading suppliers… and their numbers are depleting.
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.
A couple of months ago, UTC made it publicly known that it intends to grow through acquisition and it’s now almost a year since the ‘mega purchase’ of GE’s Fire and Security Division.
Last month, Tyco announced that it has set aside $500 million to acquire companies in India, Brazil, the Middle East and China and push inorganic growth in these markets.
Tyco’s 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.
At present, Tyco has $2 billion cash on its books.
Allan McHale is director of Memoori
The Memoori Blog focuses on business intelligence, comment and insight in relation to the physical security and smart grid industries
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