ALLCASTLE PRINCETON + Physical Security Industry

Consolidation in the Electronic Security Industry – 2017 to 2018

We have in two previous articles on mergers and acquisitions in the physical security manufacturing, industry, published in A&S International, reviewed consolidation from 2000 to 2017 and benchmarked the value of companies purchased against high technology and growth. In the January issue we reviewed entrepreneurship in the IP Video sector analysing the distribution by company, age and country of origin. In this article we assess the impact of the credit crunch and global recession on the consolidation process and forecast merger and acquisition activity in 2017 through to 2018.

Fig 1 shows that during the period 2000 to 2016 the value of deals increased threefold. In 2002 activity fell off coinciding with a short recession in the economy and in 2016 the figure is somewhat distorted by two previous years of frenzied activity by the major companies. Whilst 2017 saw a fall of 30% in the value of deals completed on the previous year the last quarter was down by 50% on the same period in 2007. The reason for the fall in activity is the credit squeeze and resultant lack of finance which first became apparent in August 2016 and more recently the lack of confidence that the current recession will be short and shallow. It is noticeable that the acquisitiveness of the major companies fell off in 2017 before the worst of the current economic mire was realised. UTC Fire & Security spent $5 billion on purchases in the previous 5 years and similarly Schneider some $2.3 billion. Stanley, Honeywell and Bosch were active in 2017 but no mega deal was completed. Could these companies be building up their cash reserves for some major buys at much lower exit prices in the next two years?

The situation in the security industry mirrors that in the global merger business which dropped by around a third in 2017 and ended five years of deal growth, as a lack of available credit, plunging stock markets and a worldwide financial crisis undermined companies’ ability to make acquisitions.

With regard to the security industry our database on mergers and acquisitions only has micro data for the last 9 months of 2017. However we have been tracking the major suppliers since 2000 and a cursory appraisal of this would suggest that the reduction in deals was hardly noticeable until a severe fall off in the last three months of 2017. Virtually all the 56 deals recorded since April have been cash purchases. But with the lack of finance available to the industry and particularly from Equity Partners this does suggest the nadir of cash acquisitions over the next few years. Finance from Venture Capitalists will be strained and although it is not the right time for IPO’s some may be forced to cash in their chips. But driven by the compelling need to continue high levels of investment in developing new products most will be obliged to take up the option of merging with a suitable peer company. The recent announcement of the Panasonic / Sanyo deal, followed this month by the proposed merging of SCM Microsystems and Hirsch Electronics lends its support to our forecast for mergers to play a much more prominent role in 2017 and beyond.

Consolidation in this very fragmented business still has a vital part to play. For it does require companies to be over the minimum size to make a contribution that will achieve a stable future, and too many are well below it.

However because of the present economic conditions, as we show in Fig 2, we do expect deal activity to fall by another 30% in 2017, by value and remain at that level for 2017 and then return to growth. So that by 2018 it reaches its previous peak of 2007. We forecast that deal activity will then grow around 20% for the next few years.

These figures are based on the value of deals, but we have now entered uncharted waters and it could be that the number of mergers and acquisitions over the next five years significantly increases. The chart forecasts that the importance of cash deals, which have constituted as much as 90% of the business in the last 7 years, will fall to lees than 50% in 2017/10 as mergers become the main driver of consolidation.

We invited three companies to give their views on how they see the consolidation process developing over the next few years. First John Monti VP Marketing of Pixim a young dynamic US IP Video supplier and then Israel Livant President of Nice Security Group a large well established supplier of access control and video surveillance systems and finally Bosch Security one of the majors in the security industry comment below.

Due to global economic conditions, John Monti of Pixim expects M&A activity to affect a number of smaller companies with no or modest revenue. These companies will not be able to secure external funding, and thus will have to look for acquisition. Two recent examples are Mobilygen (bought by Maxim) and W&W Communications (bought by Cavium). Whilst we have not planned to acquire there is always the possibility that Pixim could pick up one or more small technology providers to complement our base image capture and processing technology. It's also unlikely that Pixim will be acquired. We expect that the credit crunch will have a significant impact on acquisitions with the major companies having deep pockets seizing the opportunity to acquire valuable assets at bargain prices. Small companies with minimal revenue may have no other choice, given the lack of external financing, but to seek refuge.

Pixim believe that the downturn in demand will have a particularly adverse effect on the
specialist new start companies and in some cases will oblige their investors to bring about an early exit. Private equity capital is much scarcer than one year ago and Venture firms are choosing winners and losers in their portfolios, so only the top 25-33% of companies can expect continued funding. These economic times are unprecedented. The companies that adapt quickly will have the best chance of success maintains Pixim.

Israel Livnat, President of the NICE Security Group, NICE Systems says that “over the years, NICE’s growth and strategy have been a combination of both organic and external growth, supported by acquisitions. We believe that the Company’s very solid financial standing of over $500 million in cash and equivalents as of the end of December 2017, will enable NICE to seize new and exciting opportunities and emerge as an even stronger company. 2017 was a successful year for NICE. Our strong performance in both the enterprise and security sectors coupled with the company’s strong financial position, demonstrates our growing market share”.

The Bosch Group investigates possible M&A opportunities on an ongoing basis. They confirm that “our preferential focus is not based on current market prices but rather on our fundamental strategic approach, which is to selectively expand our portfolio in 2017 to acquire a technological know-how complementary to ours rather than to increase sales”. They expect that due to the current economic situation, the amount of acquisitions in 2017 will presumably be lower than it was in 2017.

Memoori has identified over the last 4 months a growing trend for many of the smaller players in this industry to form alliances to create end to end solutions, share the expenditure of developing vertical markets and overseas markets and this will continue in 2017. This has recently extended to the medium sized players. It will be incumbent on this and mergers to enable this industry to fight off the worst effects of the current financial crisis and ride out the storm.

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Consolidation in the Electronic Security Industry – 2017 to 2018 + Physical Security Industry