Last month we gave you a run down on the status of the market at the end of 2009 which was abstracted from our report Survey of the Security Business 2009 – Shape Structure & Consolidation. Many thanks to those who supported it and the complimentary remarks received from those who confirmed that it had given them further valuable insight into the business and not least some useful basic but essential data that seems to have been neglected in many expensive market research reports.
Why it will grow
This comprehensive report set out with the objective of establishing a model for analysing consolidation with the foundation being based on fragmentation and this required us to quantify it. From this base we could then review the secondary drivers that impact on mergers and acquisitions and then properly evaluate their influence in 2009 and future trends.
Just everyone in this business will tell you that the security market is highly fragmented evidenced by the fact that there are a lot of players and too much competition. Fine but unless you can quantify fragmentation based on relevant statistics such as number and type of companies and their spread of revenue, combined with a well defined market size you have no means of and what impact it will have on consolidation and the future prosperity of the business and its stakeholders.
By structuring the world’s business into 4 major groups by size of equipment sales, analysing the average revenue per group and the subsequent average market share we have been able quantify fragmentation in our industry. We conclude that more than 50% of the companies in the business are below the minimum economic size to remain viable. Apart from quitting there is only one solution and that is merge or acquire.
Having established the foundation we were then able to analyse other M&A; drivers and strategy through the part played by strategic acquisitions and why focus and specialisation is particularly important at this time, reviewing how market fundamentals and technology drive acquisitions.
Despite the credit crisis in 2007 and the financial meltdown in 2008 the value and volume of mergers and acquisitions grew in 2009. This performance was almost unique for in the vast majority of industries it declined by at least 30%. So even with the lack of finance to fuel the drive, particularly from the private investment quarter consolidation went ahead. Fragmentation was the main driver but it had to be kick started by confidence that this business has growth opportunities and a bright future. But it was not until the last quarter that merger and acquisition activity dramatically picked up also aided by falling exit valuations.
We have forecast a 10% growth by value in M&A; activity in 2010 and the Tyco acquisition of Broadview Security this month at approximately $2billion has got it off to a great start. For more detail read our comment in this months edition of the Executive Brief.
Where it will grow?
Following on from the trends identified in the survey over 2008 / 09 here are some of the most important drivers and market segments that will be merger acquisition active in 2010.
The most significant thing to us about the Broadview purchase is that it follows on from a string of transactions in the alarms installation and monitoring business. We estimate that 25% of the acquisitions madein 2009 involved buys in this segment of the market. This does really reinforce the value of RMR with the investment community taking a particular liking to this business. And wait for this; Broadview were regardedas the No2 in the business with a massive 4% share. One of the remaining US leaders has publicly announced that it would be happy to sell up which whilst not unique is very unusual. It has been suggested that they want to attract companies outsiders the business and our next sentence may be the reason why. However we have not picked up any comments about SaaS being a driver here. It would be a surprise if Tyco with all of their experience about the Security Industry do not consider this a prime attraction for building up this sector of the business but as RMR accounts for 40% of their security revenues, according to their latest accounts, maybe they are just happy to see the cash rolling in.
Emerging Markets & Cross Border Transactions
Statistics on merger activity in emerging countries is sparse but we have identified significant transactions in China and Brazil in the last 18 months. Most of these have been Cross Border Transactions and we expect this trend will grow. 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 South America, 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.
IT Related & Defense Electronic Companies are Buying into Security
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 they can offer expertise in communications and networking technology. This puts them in a strong position to influence convergence with the business enterprise, which is one of the fastest growing areas of the security business. They clearly see it as a growth opportunity and a way of leveraging their client base.
Over the last two years the Defense Industry has entered the commercial security business through the combination of their high technology products and some strategic acquisitions. Their night vision products / thermal cameras are now established in areas where sophistication and robustness is vital. They have purchased video surveillance companies particularly camera manufacturers and have purchased or formed alliances with companies serving particular Vertical markets such as transport and industrial. Some defense companies may prefer to buy systems based solution providers that are service focused.