The acquisition highlights for this month include a bolt on acquisition by the defense company Federal Signal which was obliged to up its offer on two occasions in order to secure Sirit Inc. Too early to say that exit prices are rising but a sure sign that more companies are joining the acquisition trail. We did forecast that the defense contractors would be active in acquiring commercial security companies in 2010 and this is Federal’s second buy in the last two months.

L-3 Communications purchased Insight Technology Inc for their well respected night vision and thermal imaging products. This transaction required an EBITDA of 9 to secure the deal so whilst 2 swallows do not necessarily herald the summer, it surely indicates that exit prices are coming off the bottom of the previous declining curve.

This month saw three IP Video companies raise finance, Proximex, Smartvue and VideoIQ. As the capital markets thaw a bit more in the coming months, we expect the strongest of the innovative emerging companies to WIN new funds. For the major manufacturers there appears to be no difficulty in raising finance. United Technologies has sold $2.25 billion in debt in order to raise money for its now completed acquisition of GE Security. Bill Polk, managing director at investment bank CapitalSource, said the terms of the deal — $1.25 billion of 10-year notes priced to yield 87 basis points over comparable U.S. Treasuries and $1.0 billion of 30-year bonds priced to yield 109 basis points more than U.S. Treasuries—are “extraordinarily cheap capital against what a typical buyout firm has to pay”. Considering that UTC reported $4.5 billion in cash on hand in its last filing, it could be said that the company doesn’t need the capital being raised to make the GE Security acquisition. This year should be the ultimate buyers’ market for investors with cash to spend because entrepreneurs who tightened their belts last year cannot do so indefinitely. As now evidenced, many are looking for funding to grow and continue operations. However many will be looking to sell if the right opportunity becomes available, 2010 will be a buyer’s market, for fragmentation is driving those hundreds of companies, operating well below the minimum economic size, to sell up or exit the business.

We have identified some 12 alliance and partnership arrangements announced this month. The trend for more manufacturers to align their offerings appears to be speeding up. Possibly the most notable one is the teaming up of IBM with Johnson Controls to work together on the merging of building systems and IT systems. Mirasys, Pelco and Milestone each announced two alliance partnerships.

Whilst the general economic trading conditions show a slither of improvement, on both sides of the Atlantic it is far from clear that we can yet be confident that they will continue over the next few months. Modest economic growth is forecast in 2010 for most developed countries, with much higher levels for the BRIC nations. In particular construction activity in the private non residential sector, a significant driver for physical security, is forecast to decline in 2010 in the US and the UK and whilst over the last two years it has been supported by an increase in public sector construction there is unlikely to be any further growth here for the next two years. However the financial results announced over the last three months are encouraging. We have this month provided financial results for the last quarter on Verint, Bluehill ID, Vicon, Honeywell, General Dynamics, Ingersoll Rand, Nice Systems, Federal Signal, Checkpoint, Napco, Flir, Mobotix, March Networks and AthenTec.

There are no real surprises here with the specialist companies Mobotixs, Flir and General Dynamics delivering growth in sales and profit and showing better than expected results. Checkpoint increased its profitability on stable revenues. The performance of the majors with regard to their security business is more difficult to determine but Ingersoll Rand and Honeywell revenues have fallen by 7% and 4% respectively. March Networks, Napco and Federal Signal reported declining sales in 2009. Nice Systems turned in a very good performance showing growth in sales and profits and a very healthy balance sheet. This is a financially strong company with cash on hand to invest in product development, integrator support with marketing and sales materials, and bolt-on acquisitions that can help focus the market as a whole. Fourth quarter 2009 net income increased to $12.7 million, from $7.8 million in the third quarter 2008, and compared to $18.7 million in the fourth quarter 2008. Net income for the year 2009 increased to $42.8 million, up from $39.1 million in 2008. NICE has increased its cash on hand from $144 million to $214 million, so don’t be surprised if there’s another acquisition of some kind in the works.

These results tend to confirm the reports declared in the last two issues that demand for security products has stabalised in the last three months with the specialist suppliers delivering a better financial performance and increasing their share of the market.