ALLCASTLE PRINCETON + Physical Security Industry

Security Merger & Acquisition Activity Holds Up Well.

Whilst global mergers and acquisitions have declined rapidly in the first quarter of the year, deals in the physical security industry have held up relatively well. Comparing the last quarter of 2017 with the first quarter of 2017, activity measured by numbers of deals has remained steady, whilst demand in sales of security equipment has fallen.

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

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 believes we are about to fall off the edge of the cliff. 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. The exit price will fall and mergers will increase their share of the business over cash buys. A trend is starting to show that exit prices are falling and whilst mergers did not feature in 2007/8 they are now taking place, but this is in a patchy market with no major deals taking place and it is too soon to properly confirm. However there is evidence that a spot of spring cleaning is taking place with the GE's divestiture of GE Homeland protection to Safran for $580m for 81% of the company. The rationale for the sale of this attractive business operating in one of the few growth markets in physical security is not particularly convincing, but the exit price on a sales multiple of 2.23 is good.

No one really knows whether or when the current economic decline will turn
around. But the general financial performance of some notable security manufacturers for the first quarter of 2017 shows a marked deterioration on the last quarter of 2017. Our view is 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 growth. However security system sales to the retail sector are experiencing very difficult times even for the well managed specialist companies like Checkpoint Systems which reported a loss in 2017, with the last quarter falling off quite dramatically.

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 re-examine fundamental value propositions and develop new strategies.

Measures that will have a profound impact on maximising business opportunity
include focusing on your good customers and spending more time in finding out
about their future plans. Don't be tempted to chase any lead at the expense of
reducing your contact time with the best prospects. More time spent in working your
sales relationships will radically improve your chance of keeping price-conscious
customers loyal. More fundemental measures to action include, reducing and restructuring debt, and preserving cash but don't stop spending on innovation: Re-direct your best people to innovation projects. Move early to anticipate emerging needs and seriously review the part that acquisition and merger of innovative start-ups can play: Only acquire ailing competitors when their heritage estate can deliver profitable sales and recoup the investment within 2 years.

You can not only ride out dour economic times, but emerge stronger and more successful, but having a positive mindset throughout is crucial.

Aquisitions, Mergers, and more:

Security Merger & Acquisition Activity Holds Up Well. + Physical Security Industry