How will economic setbacks affect the security industry?

This time last year economic indicators took a hit with major concerns about the need for countries within the Euro Zone to cut back on public expenditure; in order to repay their massive debts. While this did have an effect on demand for security equipment it was marginal and the fragile recovery in the economy has limped on in the last nine months.

However, recent events in Greece, Portugal and Ireland would suggest that that the bail-outs have not worked and they are likely to default on the loan repayments. This has both extinguished any recovery in these markets and has taken its toll in other weak economies in Europe. It will have an adverse impact on world trade. Stock markets across the world have significantly marked down share prices and the buoyant forecasts of economic growth made some five months ago are being revised.

However the emerging markets of China, India and Brazil have so far not been affected. For some years financial markets have turned tail at the mere hint of bad news and have exaggerated the possible consequences; but by the same token the upswing also responds as rapidly. The facts and statistics shown in this month’s executive brief from Memoori do not flag up any serious adverse trends that will reduce the opportunity to grow the security business in the near term of the next 6 months, but they do suggest that there is less confidence and a hint of caution in the air.

Our figures for the first quarter of this year showed that consolidation had slowed down significantly with the number of acquisitions down by 20 percent on the same period of 2010. The last two months have seen a significant recovery: Tyco claims they are about to close a $110m deal; there is serious talk about Securitas and Niscayah making a reunion; and there is the possibility that Cisco will put Linksys on the block. If these deals reach fruition, then we will be on track to beat the 2010 record for value of deals exceeding $7.98 billion.

Investment for the first five months of the year is marginally up on the same period of 2010 but much of this is the result of arranging new lines of credit. There appears to be little change in the area of venture capital funding.

The most encouraging feature of the business is reflected in the financial performance of security players. The fourth quarter 2010 and first quarter 2011 financial announcements made recently show that -- for the most part -- revenues and profitability are well up on the same quarter of 2010 and the full year is seen to be outperforming 2009. With almost all anticipating improved trading conditions in 2011, it looks as though revenues and profitability will improve on 2010.

The star performers in 2010 include Axis Communications, Mobotix, Basler, Authentec and Bio-Key, despite the fact that their fourth quarter was well down on 2009. These companies are very specialist and perform in the high growth areas of the business and/or strong in geographic markets that performed well in 2010. They are all companies that spend on product development in the high-tech areas of IP networking.

Similarly the world’s major security companies such as Tyco, Honeywell, Schneider and Siemens all increased both profitability and growth, and they are bullish about 2011. Cooper Industries and Ingersoll Rand likewise also increased their growth and profitability, while Bosch returned to profitability on increased sales.

With trading conditions looking buoyant in some geographic regions and with the drivers that accelerated consolidation and investment in 2010 still well in place, we expect that the slowdown of acquisitions and stagnation in funding in the first five months of 2011 does not indicate in anyway a correction but is just a short term deviation. One major acquisition would bring consolidation well back on track.

So despite economic setbacks we expect the market to continue to flourish in the high technology areas of the security business particularly where IT convergence can deliver better returns on investment. Working the emerging markets and the United States with emphasis on some vertical markets will produce the best results while mainstream and low-tech business will continue to reduce their shares of the business.

About the author: Allan McHale is director of security industry market analysis and research company Memoori and a contributor to the Memoori blog.