The value of Merger and acquisition deals in the Physical Security Industry in 2016 went into the stratosphere on account of one deal. This deal of $16.5 billion between Johnson Controls and Tyco International will have a very significant impact on the wider Building Internet of Things (BIoT) business.
Data we have collected from 2000 shows that in the last 16 years M& in Physical Security has been a rollercoaster ride with four peaks and troughs; With 2016 reaching a zenith of $19.73Bn.
Our recent report shows a general upward trend in consolidation of the industry in the last 16 years but also shows the structure of the physical security industry is still very fragmented with hundreds of small companies finding it increasingly difficult to compete. It looks inevitable that the general trend line of value and volume of Mamp;A will continue upwards at a higher level over the next five years.
In particular we expect the major western players in the Video Surveillance industry to see the need to go for scale and quickly, to fight off Chinese manufactures that are now much larger and are winning share in the developed markets of the world through a pricing strategy that western manufacturers can only meet by cutting margins to the bone.
Whilst there are solutions to ensure survival for western manufactures as we have shown in our previous article Redefining Business Video Surveillance Models to Meet New Challenges, there are other possible solutions that take them down the path of specialization and ultimately moving out of manufacturing and into system supply.
The only solution to stay in the mainstream business is to go for scale and that can only be achieved now through M&A. If in the next two years there is not a flurry of mergers and acquisitions in the Video Surveillance camera business in the western world, then the industry will be controlled by two Chinese manufacturers Hikvision and Dahua, assuming that politics does not become part of the equation. At this time, Access Control and Intruder/ Perimeter Protection industries are not under the same pressure from Chinese suppliers.
History shows that the value of deals increased threefold during the period 2000 to 2007. In 2006 M&A declined by 16% as the industry caught up on the 2 previous years of hyper-activity by the major companies.
Whilst 2008 saw a fall of 30% in the value of deals completed on the previous year the last quarter was down by 50% on the same period in 2007. This decline in activity continued in the 1st 3 quarters of 2009 but the volume by number of deals increased. The fall in activity was initially caused by the credit squeeze and resultant lack of finance, which first became apparent in August 2007. This was followed by the financial meltdown and a lack of confidence that the resultant recession would be short and shallow. It is noticeable that the acquisitiveness of the major companies fell off in 2008 before the financial meltdown.
In 2009 the fall in activity was halted in the last quarter thanks to UTC’s acquisition of GE Fire and Security for $1.82 billion making this the largest deal in the previous 5 years and at a stroke transformed the consolidation process back to growth. In 2009 the total value of deals grew by approximately 7% to $4.583 billion.
The following 2 years were very active with 2010 growing by 76%. This was followed by a further 23% in 2011 when it peaked at $9.847 billion. The following 3 years activity declined and by 2014 it had fallen to $4.33 billion. The main reason for this rapid growth and subsequent decline was a few but major security monitoring deals that involved major physical security companies and the decline in external deals from the Defense and IT Communications businesses. When external deals fell off in 2012 demand for acquisitions plummeted and by 2014 reached $4330 million the same level as 2008.
In 2015 M&A spend grew to $5.7 billion but this was still less than the $6.2 billion realized ten years previous. Nevertheless this was an important year for M&A because the world’s number 1 manufacturer of IP Network cameras, Axis Communications was acquired for $2.8bn by Canon and the merger of Kaba Holdings and Dorma Holdings took place. These two mega deals accounted for more than 80% of the total value of acquisitions that year. In September 2016 the Johnson Control and Tyco International merged completed, creating a $30 billion revenue company.
Technically this is a merger with the new stock being proportionally based on the market valuation of each company at the time of announcement. However in practice it is an acquisition with Johnson Control taking over Tyco, a registered company in Ireland in what is called an inversion deal.
Tyco is one of the world’s leading suppliers of Physical Security and Fire Safety equipment and its market valuation at the announcement was valued at $16.5 billion the biggest ever deal recorded since our records started in 2000 and this has of course distorted the whole picture of M&A in 2016.
The total value of deals in 2016 was $19.73 billion making it almost three and a half times larger than 2015. However the number of deals in 2016 was 27 compared with 38 in 2015. This year will prove to be a peak in value of mergers and acquisitions that is very unlikely to be reached again.
We expect during the next two years to see at least two big mergers between the largest western Video Surveillance manufacturers with the objective of achieving the kind of scale that will make them serious competitors to Hikvision.
This article was taken from Memoori’s Eighth edition of their Annual Report The Physical Security Business 2016 to 2021
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