Strategic buys within the industry have been the main driver for consolidation in 2012 but its impact is down on 2011 and this trend may well continue as companies from the ICT and Defense business and Private Equity Companies make further forays into the security industry.
The proportion of external buys has increased and in 2012 accounting for 30% of the total acquisition business measured by volume. Consolidation in 2012 has therefore been more influenced by external companies buying into the physical security market than in the previous 3 years whilst conversely the internal players, particularly the major conglomerates have decided to abandon growth through strategic mergers and acquisitions in the last 2 years. With the exception of Tyco and Stanley, none of the incumbent major conglomerate suppliers made any significant acquisitions in 2011 or 2012. This is very surprising given the volume of M&A deals transacted during this time increased on previous years.
In our 2011 report we identified that the single most important trend in M&A activity in that year was the growth in acquisition of biometric and identity assurance solution technology companies. This trend has continued in 2012 accounting for 24% of all deals completed this year. The application of this technology is very important to the growth of Access Control but is by no means the only application to embrace the need for improved identity security.
Cross border transactions continue to be a strong feature of the consolidation process. Over the last 2 years exposure to US markets has become a strategic priority for a number of European companies. For the first 8 months of this year the notable acquisitions by European companies in the US include Assa Abloy’s purchase of LaserCard to incorporate within its HID operation, Identive Group (German / US) purchase of idOnDemand, and Kaba’s purchase of e-Data.
Gradually over the next 5 years we expect that most activity under this dynamic will centre on Asia and particularly China where rules on ownership have been significantly relaxed in recent times. In December 2010 Infinova floated on the Chinese Stock and received a much higher valuation than it would in the western world. The market thought that more companies would take up this option but so far no have. China Security & Surveillance Technology (CSST) however did delist on Nasdaq (reported to be unhappy with its valuation) and privatized. The Chinese stock market is very volatile and indeed Infinova’s value has fallen sharply since it floated.
External Buys – ICT & Defense Related CompaniesDefense, IT and communications companies have over the last 3 years bought into the security industry. The initial flurry of activity has reduced somewhat in the last 6 months as they digest and take stock.
We expect them to resume their interest in the business both through acquisition of product and system suppliers and through alliance. Defense expenditure is likely to decline across the western world during the next 5 years and the security industry provides an expanding market and a way of leveraging their high technology base.
So expect these transformational deals from the Defense and IT and Communications businesses, to gain further traction in 2013 and beyond.
M&A Activity Declines in 2012Merger and acquisition activity has grown by a compound annual rate of 15% in the first ten years of this millennium but during this time it peaked and declined twice. In the last 3 years it has completed another cycle of rise and fall. External more than internal forces have had most influence in creating this volatility.
The value of merger and acquisition deals in 2011 was $9.847 billion a rise of 23% over the previous year which was a record high, but in 2012 it declined to $7.168 billion a fall of 27%. So why has the love for growth through acquisition cooled off in 2012?
There are two main reasons for this. The first is that the industry has undergone major consolidation and restructuring during the last 5 years and is now catching breath and the second is the lack of confidence by the traditional major conglomerates to commit more investment to the industry.
These 2 factors alone would have caused a much greater reduction in acquisition activity than 27% but for the increased activity in the middle market, mainly populated by specialist security companies. The decline in the volume of deals in 2012 was only 15% and this reflects the fact that in 2011 a number of mega deals over $1 billion were completed. This is a remarkable performance given the economic crises that the industry has had to ride through and the fact that most of the major conglomerates have not had the confidence to go for growth through merger and acquisition in the last 3 years.
So to conclude 2012 has been a good year for acquisition activity particularly considering that poor economic trading conditions have reduced the confidence to spend big but nevertheless this industry has fared better than most.
Further ResearchMemoori’s report “The Physical Security Business in 2012” combines clearly defined market sizing statistics with financial analysis of M&A and investment. It brings together all the factors that influence this industries future; including technology, finance and the capability to deliver products that meet the customers need to drive more ROI out of investment.
For more details visit the Website, http://memoori.com/physical-security-2012