A particularly strong feature of the physical security business in the first ten months of 2010 was the acquisition of security companies by IT-related organisations.
That trend has been particularly evident in the last three months, with strong players in the identity business buying access control companies in order to deliver total solutions.
It’s not a one-way trade, either, as HID Global has shown with the recent acquisition of ActiveIdentity (a leading supplier of identity assurance solutions).
Technology through IT convergence and the influence of IP and networking has made it possible, but the real driver behind all of this has been the goal of better and more cost-effective solutions.
This year has shown that the acquisition of high-tech companies (or seemingly low-tech ‘cash cows’) has been driven by the opportunity to deliver better and more effective security solutions enabled by IT technology.
Alarm monitoring business
Long the fragmented and low growth sector of the security industry (but ‘cash cow’ provider), alarm monitoring has similarly undergone a surge in acquisition activity this year.
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.
The number of transactions this month is double the same period in 2009, which was one of the least active months in that year. Although the number of transactions is up on October, the value looks significantly lower.
However, consolidation activity for the first eleven months of the year is already well up on last year, and it now looks almost certain that 2010 will equal the historic high of 2007.
The most interesting deal in November was the purchase of Optelekom-NKF by the TKH Group.
The past two years have been difficult for Optelekom, with sales and profitability falling from the peak of 2007-2008. Only recently, though, the company reported its third quarter results and these look more encouraging. Losses have just about been stemmed and the order book is looking somewhat healthier.
TKH Group came in with an offer to acquire every outstanding shares of Optelecom-NKF in an all-cash merger transaction for $2.45 per share.
The per share consideration represents a premium of 59.1% over Wednesday 10 November’s closing price on the NASDAQ Capital Market (of $1.54) and a premium of 72.7% over Optelekom-NKF’s average closing share price on the NASDAQ Capital Market across the last 30 trading days.
The buyer pitched it about right, as Optelekom shares were trading at $2.38 on 29 November.
Acquisitions in the security services market
ManTech International first appeared on our radar in October with the purchase of Quinetiq North America. In November, it bought Homeland Security company MTCSC for $75 million.
Both businesses were acquired for relatively low multiples for companies operating in this fast-growing sector of the market.
The security services business notched up a series of acquisitions in November, with Stanley CSS buying two companies and Securtitas acquiring three: two in the USA and one in Poland. This sector of the security industry has consolidated in 2010 at a faster rate than any other.
As forecast, the high rate of consolidation experienced in the third quarter has continued. Two months ago, UTC made it publicly known that it intends to grow through acquisition, and it’s now almost a year since that organisation’s ‘mega purchase’ of GE’s Fire and Security Division.
In November, Tyco announced that it has set aside $500 million to acquire companies in India, Brazil, the Middle East and China so as to push inorganic growth in these markets.
Tyco is also looking at building product and systems integration capabilities in India.
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.
Upward trend in revenues and profitability
The third quarter financial announcements in November elongate a similar trend to those recorded in the previous two months. For the most part, these show a continuing and steady upward trend in revenues and profitability.
Star performers this time around are Basler AG, Electronic Control Security and Genetec Systems. The first two recorded increased revenues for the quarter were up by 58% and 105% respectively on the same period in 2009.
CheckPoint and Tyco both recorded improved financial performance, with revenues up 4% on increased margins on the same period of 2009. All these companies are expecting the market to grow in 2011.
Napco, Optelekom and Mace suffered more severely during the downturn, but have now strengthened their balance sheets and are returning to profitability.
Nine alliance arrangements were officially announced in November, but this is quite typical. However, only two funding arrangements were identified. That’s well down on the monthly average of four, and a trend that has continued for the last two months.
At this time, venture capitalists are neither active in investing nor realising previous investments in security companies.
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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