Strategic Buys Drive Acquisitions Growth but the Major Security Companies and VC’s Keep Their Powder Dry

Well it was always going to be difficult to follow on from last month, when the industry posted the biggest monthly acquisition spend on record and not surprisingly it has failed to keep up this pace. But nevertheless, consolidation continues at a high rate and this month has thrown up some interesting trends that are taking place and lessons to be learnt.

The consolidation process in the security industry ran out of steam in August 2017 coinciding with the financial melt-down and it re-ignited some 15 months later in the last quarter of 2017. This coincided with the return of confidence that the security business had turned the corner, trading conditions were more stable and most major players had built up their cash reserves. In the meantime the general economic gloom has not fully lifted but as we show later companies at the high tech end of the market are growing at 20% plus and profitably.

We have for some time been expecting that the Venture Capital companies would take some of their investments to the IPO stage and this would add further momentum to the pace of consolidation. However it is interesting to note that in May HIK Vision was the first IPO that we had recorded for well over a year and no major IPO’s have come to market since. So the long standing process of private equity companies selling off their more mature investments has yet to happen. In fact in some sectors such as alarm monitoring services (low tech) VC’s are active buyers rather than sellers at this time.

Strategic Buys Drive Acquisitions
This month HID Global acquired ActiveIdentity a leading supplier of identity assurance solutions for $162m. This strategic buy provides the foundation for HID’s security offerings with capabilities focused on the convergence of physical and logical access control. This acquisition will play a vital role in developing HID’s converged physical and logical security business so long the privilege of the IT Integrators. Combining their expertise should produce a more standard off the shelf solution and reduce the design and engineering costs. However the incumbent powerful IT based competitors will fight their corner aggressively. The Enterprise Value of the transaction (total value of the transaction minus cash plus debt) is approx $84.6 million. Trailing twelve month (TTM) revenues were $57.3 million, meaning that the transaction was valued at 1.48x annual revenue. This does seem a low multiple for a high tech business, but ActivIdentity’s revenues have been flat over the last 3-4 years. At the same time, Earnings and EBITDA have been non-existent and cash burn in the TTM was about ($1.5 million). As a standalone operation this looks an expensive buy but this is a strategic move that will long-term prove to be a very shrewd acquisition.

Expect others in the security and IT business to make similar moves although we believe at this time the majority will go for technical and marketing alliances as the preliminary stage of their courtship. ActiveIdentity was on our list of the top 50 Acquisition Targets as indeed was Vumii, also acquired this month.

Last month saw the sale of L-1's biometric and enterprise access businesses to Safran, 3M’s announcement of an agreement to buy Cogent, a maker of biometrics products, and the biggest single deal, Hewlett-Packard’s buy of security software company ArcSight Inc for $1.5 billion. All of these deals are intended to build platforms that will facilitate the convergence of some aspect of security with the business enterprise.

These 3 major acquisitions tell us more about how the future shape of our market will develop. HP / ArcSight and their IT competitors could ultimately influence and or be major buyers of physical electronic security systems. In previous issues we have discussed the influence of IP and the Network in the security business and showed that the IT Enterprise and Communications channel was being courted by both security manufacturers and their clients to get involved in providing holistic solutions. This together with Cisco and IBM’s activity in the market confirm this trend and we should expect this to extend to more acquisitions of security companies by IT and Communications companies in the future.

Nice Systems must be a serious acquisition target because it holds strong positions in both video surveillance and business enterprise solutions that extract insight to impact business performance. Nice have recently experienced a surge in sales and profitability. It will require a company with deep pockets to acquire Nice which should be worth over $2 billion.

Other acquisitions that we detailed this month included Lockheed’s sale of the EIG operation to Veritas Capital for $815m in cash, Trimble’s purchase of ThinkMagic, Securitas’s acquisition of Reliance Security, Assa Abloy’s purchase of 32.95% of Agta Record stock, Opgal’s deal for Vumii, the Kratos purchase of Henry Bros and ManTech International’s acquisition of QinetiQ North America’s Security and Intelligence Solution business.

Sitting on a Powder Keg
The number of transactions in October 2017 was unchanged on the same period in 2017, which was one of the most active months in that year. The value of transactions this month is well down on last month but this is hardly surprising given that September was the highest ever recorded for a single month with two purchases being over 1 billion dollars. Consolidation activity for the first ten months of this year far exceeds the same period in 2017. We could be sitting on a powder keg that’s about to ignite for 2017 looks like setting a new record, because most of the majors including Honeywell, Schneider, Siemens, Johnson Controls, Bosch and UTC have yet to seal a deal this year and the VC’s must soon sell some of their investments in the security business.

Confidence despite the Gloom
The 3rd Quarter financial announcements this month show a continuing trend of steady but solid results that appear to defy the general economic gloom and threatening double dip in GDP growth. The star performers this month are Nice Systems and Mobotix AG. Both recorded revenue growth of 20% plus and on improved margins. They are forecasting continued growth in 2018.

Revenue from Flir’s Commercial Systems division, excluding Raymarine, increased 8% from the third quarter of 2017, to $132.4 million. Within the Commercial Systems division, revenue from Commercial Vision Systems increased 17% from the third quarter of last year, to $61.4 million.

China Security & Surveillance third quarter revenues were up by 15% but this was approximately half the average growth for the last few years but this is because of the change in mix of business. They are now concentrating on large scale sophisticated government projects which are delivering increased margins up by 10% on the same period of last year. They are forecasting a 26 - 29% growth in revenues for 2018.

Honeywell and Johnson have not separated out their security business but both reported increased revenues in their controls businesses for the third quarter. UTC Fire & Security Group increased third quarter revenues by almost 20% on the previous year, whist the sales for the 9 months are up by 17% on the previous year.

However we assume these figures include the sales of GE Security & Safety business acquired in November 2017. GE sales should have added on at least $300m this quarter and this would have accounted for an additional 22%, making organic growth zero.

Stanley security sales increased by 6% whilst Ingersoll Rand fell 4% in the last quarter. So the trend we have witnessed over the last year where specialist high tech companies have substantially increased their financial performance, whilst the majors have fallen behind continues.

ActiveIdentity, HID Global, HP, Nice Systems, Opgal, and more:

Strategic Buys Drive Acquisitions Growth but the Major Security Companies and VC’s Keep Their Powder Dry + Vumii