All the other transactions were related to either completing full ownership of companies, filling gaps in product or service offerings and increasing geographic scope. Surprisingly at least 80% of the deals were cash transactions and our prediction that merger would be a dominant feature in 2009 has just not happened yet.
The logic here was that the credit crisis would drastically reduce the possibility of consolidation but at the same time the recession would drive this very fragmented business to find its solution in merger. Apart from the merger of SCM Microsystems with Hirsch and Panasonic with Sanyo Electric little more has happened. However Felix Marx, chief executive officer of SCM Microsystems quotes in their recently published financial report, "Our merger with Hirsch is proving a strategic success, as it has strengthened our financial performance across multiple metrics, our ability to capture new and existing sales opportunities and our overall business profile. With only two months of operating results from our Hirsch subsidiary included in the second quarter, sales doubled in our Security and Identity Solutions business, overall gross profit margin increased by eight percentage points and the Hirsch subsidiary generated operating profit on a standalone basis". So when will the laggards follow suit?
In our last M&A; report in June we commented on the fact that whilst the majors are always looking to acquire they believed that deals were too expensive as valuations did still not reflect the true nature of the market. Well this month most reported on the 2nd quarter performance to the end of June and now we can see the reason for their lack of confidence. For the majority sales were down by 20%, but the smaller, more focused suppliers such as AXIS, Mobotix, Flir and SCM Microsystems performed far better and those in the IP Video segment are still realising significant growth.
The majors clearly have a dilemma, do they concentrate on the short term by cutting expenditure and increasing margins to improve profitability and so keep up their share price, or do they take the long term policy of investing their cash in more leading edge companies / products and thereby upset the investment community.
Until today it seemed likely that they would sit on their hands for a little while longer but the announcement by Bloomberg News that GE Security is for sale, having hired JPMorgan Chase to find a buyer will change all that. Bloomberg is reporting that "GE asked potential buyers to submit preliminary bids about a month ago," but GE Enterprise Solutions will not confirm or deny.
In April, GE sold off 81 percent of its Homeland Protection business to Safran, a French company known mainly in the security industry for its Sagem Securite business, for $580. At the time GE Security CEO and president Dean Seavers said the deal would allow GE Security to focus on its "core business": intrusion, access, video and transmission, key control, and fire and communications. However the cynical watchers in the industry had already decided that it would not be long before the remaining parts of the security operation would be up for sale.
There are only a few companies that could take on the whole of this business and of these we suspect Honeywell, Tyco and UTC Fire and Security are likely to be the main contenders but Schneider will give this a serious look as it would provide an entry into the fire detection business. Siemens and Bosch have in the past shown a strong preference to add more focused operations to their portfolio.