The 1st quarter results analysed in our monthly Executive Brief “The Physical Security Industry in 15 Minutes” show that both consolidation and investment has slowed down significantly. In the first quarter of this year the number of acquisitions is 20% down on the same period of 2010 when Tyco made a $2 billion acquisition of Broadview Security. Whilst the number of investments has halved compared with the same period of 2010.

We predicted at the beginning of this year that this high rate of consolidation would continue for a few years because the major suppliers absented themselves from the dealing tables in 2010, announcing that they will be active in 2011 and companies from the Defense and IT & Communications industries were expected to continue making forays into the security industry.

The drivers that accelerated the consolidation and investment process in 2010 are still very much in place. Technologies such as Wireless, SaaS, IP Cameras, Video Management Analytics and HDCCTV are rapidly gaining market share and opening up new business opportunities.

IP Networks whether for access control, intruder alarms or video surveillance are on the verge of a long strong run. Through these factors and IT Convergence, the fundamental goal of achieving the buyer’s ROI is becoming a reality. The Defense and IT related companies entered the security business because of its proven robustness during the recession and the fact that it provides opportunities to leverage their high technology... this has not changed.

In the 1st quarter alarm monitoring acquisitions continued to make a major contribution to the consolidation process and we can expect that will continue, driven by the basic need to consolidate this fragmented sector. In addition the players here want to pursue the opportunity that is opening up through integration of the different security services delivered through SaaS which is enabling a much more comprehensive and cost effective service to both residential and commercial customers.

The most notable sale in the 1st quarter of this year was the Initial Public Offering (IPO) of Infinova. This US based company listed on the Shenzhen Stock Exchange in January and got a much higher valuation than it would have got in the western world. Some 37 million shares were issued at RMB53.8/share, yielding a value of about $306 million (US1=RMB6.5).

Within days its price reached an all time high of RMB 62.77 per share raising its value to $357 million, which for a $57 million revenue company (2009) with annual growth running around 20% over the last 2 years is a very high valuation. However today (March 31st) its valuation is approximately $243 million.

In January 2010, HikVision, a much larger Company having annual sales in 2009 of $300 million and solely serving the Chinese market listed on the same exchange and raised $500 million making an exit sales ratio of valuation 1.66 and an EBITDA ratio of 4.4 which is far from being highly rated. So it would appear that within a year the Chinese security market has moved up a gear or two and this will inspire western companies to take a serious look at floating on the China Stock Exchange. Not surprisingly China based, China Security Systems Technology (CSST) listed on the NYSE but based in China is unhappy with its current valuation and is looking to go private.

The most interesting deal this month was Tyco’s purchase of Signature Security Group for AU $171 million. Tyco intends to combine Signature Security's Australian and New Zealand operations with its ADT Security business under the ADT name. Signature Security is a leading provider of electronic security services in Australia and New Zealand, providing security installation and monitoring services. This deal looks an excellent strategic fit with ADT business, providing increased scale and attractive operating synergies. ‚ Alliances in the first quarter numbered 24 compared with 23 in the same quarter of last year, so this is at least one area that is still very buoyant.

The star performers in 2010 include Axis Communications, Mobotix, Basler, China Security & Surveillance, Authentec and Bio-Key, despite the fact that their 4th quarter was well down on 2009. These companies are very specialist and perform in the high growth areas of the business and are strong in geographic markets that performed well in 2010.

Tyco, Honeywell and Siemens all increased both profitability and growth and are bullish about 2011. Cooper and Ingersoll Rand similarly increased their growth and profitability, whist Bosch returned to profitability on increased sales.

With trading conditions looking buoyant and the drivers that accelerated consolidation and investment in 2010 still well in place we believe that the slowdown of acquisitions and funding in the first quarter of 2011 does not indicate in anyway a change of course but is just a short term deviation. This industry will not buck the trend much longer for global merger and acquisition activity is well up on the same quarter of last year. Listings activity has been the highest on record so far this year, with firms raising a total of $24 billion from IPOs. Interestingly Asia, which dominated equity capital markets in 2010, continued to lead the field, with China accounting for 41% of issuance.