Merger and Acquisition in the Physical Security industry has been on a roller coater ride over the last 15 years. With an upswing in 2015, Memoori’s New Report predicts that industry M&A will start a new cycle of growth during the next few years.
In 2015 the value of deals increased to $5,700m. The two notable deals - Axis Communications being acquired for $2,800m by Canon and the merger of Kaba Holdings and Dorma Holdings. These two mega deals accounted for more than 80% of the total value of acquisitions this year. However $5,700m is still down by 40% on the peak year of 2011.
The volatility of the last few years has ben caused by a number of factors. The first is that the industry underwent a major restructuring during the period 2009 to 2011 after the 2008 financial crisis. The second is the lack of confidence and/or interest by the major conglomerates in the business to commit more investment to the industry. The third reason is that there has been a shortage of buyers from outside the business, particularly Defense and IT.
We would have expected these 3 factors alone to have resulted in a much greater reduction in the value of acquisitions since its peak in 2011. However, the good news was that acquisition activity in the middle market (mainly populated by specialists focused security companies) increased in the last 3 years and this had a significant impact in the underlining 7% growth in deal value (CAGR) over the last 15 years.
The ongoing problems of terrorism and political / economic uncertainty in some regions is making the industry generally confident that investment will continue to flow into the physical security market. Indeed this has been the situation for several years now; and as our New Research Report shows, during this time the physical security industry has grown and also M&A business in 2015 picked up. Our estimated total value of world production of physical security products at factory gate prices in 2015 was $27.2 billion - http://memoori.com/security-industry-promises-sustained-growth-2020-major-differences-exist-across-sectors-regions/
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Balancing these facts out we forecast that the trend in M&A across the physical security industry will increase to $6,500m by 2020. We expect that some of the major conglomerates may sell off parts of their security products businesses and this will provide a great opportunity for the specialist manufacturers to continue their M&A strategy.
In the Video Surveillance sector, major western manufacturers will take a serious look at buying a Chinese based company if they believe this could provide an entry into opening up the China market. Whether this is possible or practical is debatable as government contracts are still taking the lion’s share of business in this country.
It seems more likely that the leading Chinese manufactures, who now have significant market shares in some western markets, could have good reason to acquire western companies with leading IP technology at the enterprise level.
It was recently reported that Hikvision has been granted a $3.1 billion debt financing package over the period 2015 - 2019 by The China Development Bank, one of the 3 government owned policy banks.
We believe it is likely Hikvision will complete a major acquisition of a western manufacturer in 2016; assuming that they believe this is the best strategy for growth in western markets. The debt financing provides them with tremendous support to further global expansion and continue their current policy of drive down prices, which has worked well so far.