In the last 6 years M&A activity within the security industry, has for the most part been driven by the major conglomerates through strategic buys to acquire new technology, expand their product range, or improve focus on particular vertical markets and regions in the world where demand is growing.
However within the last 4 years their interest has all but disappeared. This has coincided with the fact that within the last 2 years there has been a significant trend for medium sized specialist companies (previously totally dependent on organic growth) to adopt strategic acquisition to speed up growth.
These companies are much more focused within each of the 3 sectors (Access Control, Video Surveillance & Intruder Alarms) and this is having a significant impact on the structure of the market as we show in our 2014 Annual Report – http://memoori.com/portfolio/physical-security-business-2014-2018-access-control-intruder-alarms-video-surveillance/
The chart above shows that the volume of acquisitions has fallen from its peak in 2011 by more than 50% in 2014. This year the proportion of external buys, which accounted for 30% in 2013 has contributed just one deal (4%.) that being Nest Labs (Google) acquisition of Dropcam Inc.
Private equity buys was almost off the radar in 2010 and 2011 but accounted for 5% of the business in 2013. This year Private equity has, through acquisition, pumped in approximately $2 billion; some 46% of the total value of acquisitions in the physical security business. Almost all of this was Carlyle’s acquisition of Tyco’s Fire and Security operation in South Korea.
2014 has seen no change in the major security conglomerates policy to abandon growth through strategic mergers but the drive to make the industry more effective through strategic acquisition has now been picked up by medium sized specialist companies.
Past history of major strategic deals shows in 2009 / 10, Schneider Electric’s acquired Pelco and UTC’s purchased GE Fire & Security. Safran purchased GE Homeland Protection in 2009 and continued this strategy with the purchase of L1-Identity Solutions in 2010.
With the exception of Tyco and Stanley, none of the incumbent major conglomerates have made any significant acquisitions in the last 4 / 5 years. This is very surprising given that acquisition has always featured high on their growth agenda.
Siemens have finally sold off their security products business, a rumour that was raised many times over the last 7 years. Not surprisingly it was not picked up by any of its conglomerate rivals.
Cross border acquisition accounted for 50% of the deals carried out this year and for the most part this has been initiated by the need to extend their geographic coverage.
Cross border acquisition would appear to be the most likely driver for the major conglomerates to return to the dealing table. Our report shows the enormous latent potential in the Chinese market, which is not being maximized by leading edge western technology companies.
At the same time Chinese companies are relatively weak in IP technology and this could in time erode their share of the western market and eventually their home market share if it is not corrected. However as the majority of business in China is in the public sector they have time to correct this.
The 2 leaders in China, HikVision and Dahua are very ambitious and have made significant inroads into the western market in the last 2 years. Could this drive them to merge or acquire leading western security manufactures?
Equally this could be a solution to remedy western companies lack luster performance in the burgeoning China market.
Public equity will continue to dominate the M&A scene for the next few years. Private equity has in the past been a major source of funding for acquisitions but since 2012/13 it has declined although as we have already pointed out one very large single private equity deal, namely Carlyle’s purchase of Tyco’s South Korea business, accounted for 46% and this has distorted the figures for this year.