Based on M&A data collected over the last 17 years on the Physical Security industry, our annual report shows a general upward trend in consolidation of the industry over this period with 4 cycles of rise and fall sometimes exaggerated by a number of billion dollar mega deals.
In 2017 mergers and acquisitions at $6.213Bn looks like the start of a new wave of growth. The structure of the 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 mergers and acquisitions will continue upwards over the next 5 years.
There is also a need for the leading western players in the Video Surveillance industry to go for scale and quickly. Merger and acquisition is the most appropriate strategy to achieve this. The reasons for this are both to fight off Chinese manufactures that are now much larger and are winning share in developed markets; And also to meet the longer term trend of commoditization of IP network cameras.
The total value of deals in 2017 was $6.213 billion, although this was only a one third of the $19.73Bn realized in the previous year, if we take our the Johnson Controls / Tyco merger then it’s almost double the size by value and 30% more by number of deals than in 2016. We forecast that 2017 will be the start of a new wave of growth that will reach $7.85Bn by 2022. To achieve this it will require a number of billion dollar deals and based on past history these will distort the picture on an annual basis but the trend line will be a gradual increase in M&A activity over the next 5 years.
In 2017 / 2016 deals over $100m that we believe will strengthen the Physical Security business included; Flir’s acquisition of Point Grey Research a leading developer of machine vision cameras for use in industrial, retail, scientific, traffic, mapping, and other advanced imaging applications, for approximately $253 million in cash.
Advent (Oburthur’s) acquisition of Safran’s Card Systems and Identity divisions for $2425m. Advent International, a global private equity fund, aquired Oberthur Technologies in 2011. The fund’s objective is now to bring together Safran I&S with Oberthur Technologies to create a global player in the domain of identity technologies strongly rooted in France.
Gemalto acquired 3M’s identity management business for $850m. There are three key components included in 3M’s portfolio that will become part of Gemalto’s Government Programs business: the biometric offerings that came to 3M following the Cogent acquisition, a document reader line and 3M’s internal secure identity materials business. Together the three areas generate $215 million annually.
FLIR Systems acquired Prox Dynamics AS, a developer and manufacturer of nano-class unmanned aerial systems (UAS) for military and para-military intelligence, surveillance, and reconnaissance applications, for approximately $134 million in cash.
HID Global, a leader in Identity Management and Access Control hardware signed an agreement to acquire Mercury Security, an OEM supplier of controllers and management software for physical access control for an estimated $250m.
Vivotek one of the largest remaining independent video surveillance manufacturers has received an offer to become majority owned by Delta Group, a Taiwan conglomerate. Delta Group has an $8 billion annual revenue and is one of the 20 largest companies in Taiwan.
Bain sold Uniview to Hangzhou Jiaozhi Technologies Co., owned by China Trans Info, a publicly based company with a ~$2.5 billion market capitalization. The price paid for Uniview was $535.5 million USD. We assume that Bain would have approached / invited a number of western companies to make a bid. This could have been the moment for a foreign manufacturer to seize the opportunity to both build up scale and get established in China, the largest single market in the world for Video Surveillance equipment.
Cross border acquisitions accounted for 32% of the deals carried out this year compared with 48% in 2016, 42% in 2015 and 50% in 2014. Therefore the motivation to extend geographical coverage has declined significantly in 2017. Acquisition was driven by the need to acquire leading technology and innovative products.
Public equity will continue to dominate the M&A scene for the next few years for many of the larger players are sitting on substantial cash reserves. Private equity has in the past been a major source of funding for acquisitions but since 2012 / 13 it has declined. In addition their interest in acquiring physical security companies has tapered off but as we have shown above, Advent acquired Safran’s identity Management division this year and Bain sold Uniview for a substantial profit.
As detailed in Part 1 of our report the structure of the market has strengthened and is now more effective and efficient. Part of this process is being achieved through the consolidation of businesses and part through organic growth and innovation. It is noticeable that specialist manufacturers operating in Groups B and C are growing at a much faster rate than Group A (excluding Dahua and Hikvision) and part of this is being brought about through acquisition.
Most players in the business believe that it is too fragmented and consolidation will be needed to meet the challenge of commoditization. Some talk of the top 10 companies taking a market share of 90 percent of the total market by 2023. We think that this is unlikely. However Video Surveillance could well be dominated by no more than 10 players within the next 10 years.
So to conclude 2017 was a very positive year for acquisition deals with the average value deal rising to $168m and the number of deals increasing by 26%, More important this has been the third year in succession that players from Group B and C have taken a more active role and through this the industry structure is becoming better able to deliver against customer value propositions.
The two leaders in China, HikVision and Duaha have made significant inroads into the western video surveillance market and they are very ambitious to build on this. Could this drive them to merge or acquire leading western security manufactures? They have not been tempted so far but if the “race to the bottom” does not achieve their objective of rapidly gaining very substantial market share then they are likely to spend on acquiring their western competitors.
All the information from this article has been taken from our new report - The Physical Security Business 2017 to 2022, Access Control, Intruder Alarm & Video Surveillance - available to purchase now.
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