ALLCASTLE PRINCETON + Security

The Future for Mergers & Acquisitions in the Security Industry Looks Promising.

Merger and acquisition in the security industry is holding up well and continues to
defy the global trend of a rapid decline in activity across developed. This month the
volume of trade has continued at the same level as that achieved in the first quarter
of 2017 and that is in an environment of a decline in the growth of sales for security equipment.

This confirms our opinion that a decline in sales output is not going to have a major impact on mergers and acquisitions unless the market losses all confidence and turns inwards. However liquidity will, so we believe that in value terms there is likely to be less spent on acquisitions in 2017 but the volume of deals may well increase. We have identified a number of new venture investment companies that have significant funds available to invest in IP Video and management software companies. In addition over the last 6 months a number of relatively small companies including 3VR and Pixim have received new funding and are looking for suitable acquisitions.

Whilst Nice Systems and Mobotix have strong balance sheets with cash to invest. Economic conditions in the last 8 months have deteriorated and this will lower buying prices as we have shown in this months edition with one well respected profitable business being sold for only half its annual revenues. Exit prices will fall and mergers will increase their share of the business over cash buys in the longer term, but so far our research shows that cash buys are still taking the major share of the business. Last month we did show evidence that a spot of spring cleaning had taken place with the GE's divestiture of GE Homeland protection to Safran for $580m for 81% of the company, but here the exit price was on a sales multiple of 2.23 which is good price in todays business climate. So when can we expect Honeywell, Tyco et al to follow this lead?

The majors have strong balance sheets and despite poor trading conditions, which have hit them more than some of the highly focused medium and small companies,
they have the cash to buy. But excluding UTC and Stanley they are conspicuous
by their absence from the merger and acquisition scene in the last 12 months. Growth in demand for security equipment continues to decline for even the most successful companies. However for some such as ICx Technologies, Mobotix and L1 Identity Soutions a growth in revenues of 20 to 30% has been achievd. More modest growth was achieved by March Networks and Flir Systems. Optelecom and GVI Security Solutions saw a decline in first quarter revenues. If we stack up these figures against those provided over the previous two months a clear trend is starting to evolve. Companies that are focused in the specialist high tech areas of security are doing very well whilst less focused more general manufacturers are starting to have a lean time. Our view remains as forecast at the beginning of this year, that demand across the whole range of physical security equipment will continue to fall and reach the bottom of the curve by the end of this year and will bump along the bottom for the first half of 2017, before it starts to lift off again. Some vertical markets and products will perform better and that has already been evidenced in IP Video and Biometrics which are still showing high growth. However security system sales to the retail sector are experiencing very difficult times even for the well managed specialist companies like Checkpoint Systems.

Further evidence of difficult trading conditions is the falling prices of new and improved products. Reports of 25% decline in price is quite common and figures much
higher than this are being quoted and at the same time there has been a proliferation
of new IP Video offerings. However for every downside there has to be an upside at
least that is the possibility open for well managed companies that are prepared to reexamine fundamental value propositions and develop new strategies. Don’t turn off
the innovation and development programme for within this fast moving business within less tha 2 years it will come back to haunt you.

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