Figures 1 & 2 show security deals completed from 2000 to 2009 and our forecast to 2015. Looking at the future, we are forecasting a 50% growth in the value of deals completed in the first half of the new decade. This may seem rather bullish given that we expect 2010 to realise only marginal growth but volume of business in 2015 would be only 10% more than that achieved in 2007, so far the peak year for acquisitions.

Our forecast is based on a number of factors and the most important one is that the business is still very fragmented. Even at the current rate of M&A; activity, it will take more than a decade before consolidation brings about a well structured business. Closely connected with this is the drive to increase market share. Can you imagine the other fourteen major global players sitting back and letting UTC dominate the market? Growth in market share is not going to be achieved organically to any real extent by these companies in the present economic climate. In fact the reverse is more likely to apply.

There is a significant interest from the IT industry particularly companies providing networks, audio visual and stockists / distributors to get involved in the physical security business. Well the grass always looks greener from the other side. They are attracted because there is a heightened global awareness of the need for better security and terrorist type attacks are sadly occurring almost everywhere in the world. They clearly see it as a growth opportunity and a way of leveraging their client base.

The market is in the process of rapidly adopting to changing requirements for more converged and integrated solutions. In particular, the wider security market is being driven by the need to join physical security with identity management and information security. But moving further on there is a need for convergence to take in all aspects of the business enterprise. This has made CIO’s take on an important role in the specification and purchase of security equipment. In addition their already strong relationship has favoured the IT Network installers in the bid selection process and this in turn has brought about partnerships between leading suppliers from both camps.

The importance of specialist knowledge and experience in vertical markets, particularly Transport and Health, has been the driver of a number of high profile acquisitions in the last two years particularly when associated with geographic coverage in fast growing markets. The demand for IP based security solutions will continue to grow rapidly over the next five years. This is almost unstoppable and it not only makes the leaders of this technology very desirable but also all companies with a sizable heritage estate, mainly built on analogue technology. For at this time this is a captive market that is waiting to be updated. Whilst UTC’s purchase of GE Security did not get them leading edge technology in the video surveillance sector, they did inherit a substantial heritage estate.

Technological development and its continual advancement is a major driver of acquisition. Technologies such as biometrics, megapixel, compression, storage, data association and management software, RFID and contactless smart cards are very much in demand. So there are plenty of good reasons to go out there and acquire or indeed be acquired but where is the money coming from in the present difficult economic climate? Well we believe that it’s precisely because of the present economic climate that merger activity will grow. In our report “Survey of the Security Industry 2009 – Shape Structure & Consolidation” we show how valuations of companies have fallen very significantly during 2009 and that lack of finance is driving more companies to become proactive in looking for a solution through merger or acquisition. There is plenty of anecdotal evidence around from the major suppliers that they are now being approached much more regularly than earlier this year by companies or their agents wanting to talk about selling out.

In the last two years merger and acquisition activity has been driven by strategic buyers, particularly the major global security companies and major defence companies. This dynamic will continue to apply in 2010. The reason for this is that private equity has suffered as a result of the financial melt-down and has not been able to recycle through the natural process of IPO’s. This business is going through a process of restructuring and is redefining investment parameters. So private equity will take a much more diminished role in buying and a more dominant one in selling during the next few years.

It is expected that defence companies and multinational security companies will engage in more transformational transactions, commonly referred to as landscape altering deals, to gain entry into the security market or to radically expand existing activities. In the last two years such deals included Safaran’s purchase of GE Homeland Protection, Schneider Electric’s acquisition of Pelco and UTC’s buy of GE Fire & Security.

Cross Border Transactions will also continue to be a significant driver. Exposure to U.S. markets has become a strategic priority for a number of European companies but we expect that most activity under this dynamic will centre on Asia and particularly PR China where rules on ownership have been significantly relaxed in recent times. UTC Fire & Security have made a number of strategic investments in the last three years in China. Conglomerates active in the security business have made a noticeable shift in strategic direction with security taking priority and viewed as a growth vehicle. Stanley works is a good example and others may follow.

Over the last two years the Defence Industry has entered the commercial security business through the combination of their high technology products and some strategic acquisitions. We expect this convergence process will continue, blurring the lines between security and defence. General Dynamics, BAE Systems, Flir, and Thales have already entered the fray and there are a number of others that could follow. Some defence companies may prefer to buy systems based solution providers that are service focused.

Merger and acquisition activity is now certainly on the rebound.