The objective of our annual study is always to bring together valuable statistics about the security business’ size, shape and structure across three main segments – namely access control, CCTV/video surveillance and intruder alarms – and then analyse the business opportunities that have taken place in mergers/acquisitions, alliances and investment across the globe.
Our new report also reviews those technological and commercial trends that are shaping the future of the business and those trends’ impact on where investment is most likely to be targeted in 2011 and beyond.
Developing the business through acquisition and alliance
2010 has been a monumental year for the security industry. Despite a weakened economy, the market has grown and confidence in its future has returned.
Once more, the market is attracting private equity investment as well as delivering explosive growth through mergers and acquisitions, as well as alliances between suppliers.
We estimate that the world market for electronic-based physical security equipment at factory gate prices in 2010 was USD$18.67 billion; a growth of 4%-5% on 2009, but still marginally below its peak in 2008.
Of this, video surveillance took the largest share at 47.5% (increasing its overall share by 4.5%) at the expense of intruder alarms (29.5%) and access control (at 23%).
So, despite overall growth in the business, intruder alarm sales have declined and access control system sales have lifted marginally while video surveillance has performed well (particularly considering the poor economic trading conditions that have prevailed over the last three years).
This is a robust market which has outperformed many of the electronic equipment businesses supplying the industrial/commercial markets. For this reason, acquisition and investment has surged ahead in 2010, and is forecast to continue over the next couple of years.
The geographic distribution of equipment sales has changed significantly in the last three years.
China has more than doubled its market share from 2005 to 11%, while other emerging markets in Asia, central and Eastern Europe and South America have similarly increased their share of the market.
This trend will continue, with China probably becoming the biggest single market come the end of the decade.
Mergers and acquisitions in 2010 and forecasts to 2015
The value of deals completed in 2010 was USD$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.
However, when measured by number of deals growth has been marginal. The reason for the surge in value is a combination of increased exit value and a concentration on landscape changing deals, with just three such deals amounting to $4.3 billion.
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.
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 quarter of 2010.
We identified 17 significant deals for alarm installation and monitoring companies netting a total value of USD$4.18 billion. In 2010, this segment of the market attracted 52% of the total spend on acquisitions.
Surge in acquisition activity for alarm monitoring
That being the case, why has alarm monitoring – long the fragmented and low growth sector of the security industry (but cash cow provider) – undergone such 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.
The overriding need to scale-up quickly is undoubtedly driving consolidation in this sector of the business.
There have been some major landmarks during the last 12 months. In January 2010, Tyco purchased Broadview Security for USD$2 billion. This was followed in April with GTCR’s purchase of Protection One for USD$828 million.
In September, Safran bought L1-Identity Solutions for USD$1.1 billion and, in December, Monitronics was acquired by Ascent Media Corp for USD$1.2billion.
With the exclusion of alarm companies, the surge in acquisition activity in 2010 was 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 while mainstream suppliers like Schneider Electric, UTC, Honeywell and Bosch were conspicuous by their absence.
2010: a hard act to follow
2010 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 leading suppliers… and their numbers are depleting.
However, we think that this high rate of consolidation can and will continue for a few years, not least because the major suppliers absented themselves from the dealing tables in 2010 and have made claims to be active in the near future.
UTC has made it publicly known that it intends to grow through acquisition, and it’s now over a year since its ‘mega purchase’ of GE’s Fire & Security Division.
Tyco has set aside $500 million to acquire companies in India, Brazil, Middle East and China and so push inorganic growth in these markets.
Given these facts, the continued interest for IT and communications-related companies to realise benefits from buying into the security business and its current fragmented state is there. We are forecasting a 20% growth in the value of deals over the next five years (as shown in Figure 3).
This illustration highlights the fact that cash deals accounted for as much as 95% of transactions in 2008-2009, but this percentage will fall as the security business once again attracts private equity finance.
Without this, the forecast growth in consolidation will be hard to achieve.
Alliance arrangements in focus
Since 2008, the number of alliance arrangements recorded by ourselves has doubled (from 45 to 91 in 2010), the most rapid growth being in 2009 when the number increased by 75%.
Both prior to and during 2008 the majority of these arrangements related to partners joining forces and making their products automatically communicate. This could be similar products such as cameras or different horizontal layers in a system (for example video management and analytical software).
The majority of these related to the video surveillance business and a significant proportion were related to companies creating software platforms (such as Milestone Systems).
As there’s not yet a common communications standard, such alliances are vital if Best of Breed products are to be given the chance to flourish.
The other alternative to alliances is to manufacture a complete portfolio of products that have been designed to work together. This is what the major suppliers have been doing for many years, of course, using their own proprietary communications protocol as a base.
However, this method is no longer acceptable to most end users who are demanding full plug-and-play and seamless integration with other control infrastructures, importantly including convergence with the business enterprise.
Thus, alliances need to go one step further to extend the digital link and enable end-to-end communication such that all the information and data can be brought together.
We believe this was the reason for rapid growth in alliance activity in 2009 and its continuation last year.
Alliances: some of the key collaborations
In June 2010, 3VR and Arecont Vision announced their alliance whereby 3VR has certified Arecont Vision’s full line of megapixel cameras as part of its SmartCam programme.
Arecont Vision said that 3VR had completed participatory testing in the camera maker’s MegLAB programme, and had been certified in three areas: camera integration, feature integration and load testing.
In addition to proving a degree of product differentiation, more comprehensive certification programmes will be important as digital cameras and edge devices take on more features that require IT-like configuration at the time of installation or, later, when users wish to make add-ons or changes.
Megapixel cameras, in particular, come with features and settings that can perform differently when used with different video management systems.
Alliance is also extending across business boarders to deliver value add solutions. A good example of this was the announcement last June of a strategic partnership between CNL and ESRI (UK).
CNL, of course, supplies physical security information management (PSIM) software. ESRI is a software manufacturer providing the backbone for world mapping and spatial analysis.
The combination of these technologies will allow ESRI customers to bring their entire security estate into one system, and CNL customers to leverage greater efficiencies (and significantly improve their operations).
Sharing development costs or working together
We expect that both alliances and mergers and acquisitions will become one of the main conduits for delivering this de-layering process.
However, some companies will select to develop their own products. A good example is Axis Communications, because it has chosen to develop its own ‘layers’ in relation to video management software.
While less frequent, alliances for the purposes of sharing development costs or working together to explore new markets are increasing. Some opportunities have been taken up by the suppliers of video surveillance to join with access control and intruder alarm manufacturers and combine information and data through a common software program. Again, this has extended the application for their products.
The move has been partly driven by the need to counter the consolidation process that’s taking place across the horizontal layers of security systems.
Three years ago, manufacturers of security equipment focused on one particular discreet aspect of the business.
In the case of video surveillance, the business was made up of a number of horizontal layers including IP video software platforms, video hardware and video management systems. Most of the leaders in these fields sold to other hardware suppliers that offered systems, as well as distributors or system integrators.
As the demand for total solutions grew, alliances rapidly developed between manufacturers in the different layers so that Best of Breed products could communicate and work together. This has developed with time into much stronger partnerships sharing development and promotional costs.
Further progression has seen companies joining together through merger or acquisition in order to produce vertical integrated companies that can deliver a full surveillance system.
Manufacturers and systems integrators working in unison
More recently, we have identified alliance arrangements between manufacturers and system integrators, working together to provide a solution for a particular vertical market and sharing the development and promotional costs.
IT network design and install companies are crossing the boundary between IT and physical security to offer a complete solution but are, in many cases, doing so through collaboration and alliance with physical security suppliers.
Very noticeable of late has been the identity validation suppliers moving towards integration with access control. Their preference appears to be to acquire an access control manufacturer.
Alliances will almost certainly play a more important role in the future, and it would be surprising if the more successful partnerships do not ultimately lead to mergers or acquisitions.
2010 has shown us that mergers, acquisitions and alliances have become a vital part of security companies’ business strategies.
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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*This review is based on Memoori’s report ‘Survey of the Security Business 2010’
For further details of this report and a free trial of the monthly Memoori report: ‘Executive Brief: The Physical Security Industry in 15 Minutes’ access the website (a dedicated link is provided on the right hand panel of this page)
Part 2 of the report ‘Strategy, Drivers, Valuation and the Investment Market’ will be published in April
