A survey of the 2010 security industry

Industry grew its business through alliances and acquisitions


One example of this is the need to join physical security with identity management and biometrics. Some of the largest acquisitions this year have been in this area. HID Global, the 3M Company and Hewlett Packard all made big purchases in the last four months of 2010.

We identified 17 significant deals for alarm installation and monitoring companies, netting a total value of some USD $4.18 billion. So in 2010 this segment of the market has attracted some 52% of the total spend on acquisitions. So why has alarm monitoring, long the fragmented and low-growth sector of the security industry (but a cash cow provider) undergone such a surge in acquisition activity? On first observation cash flow in the difficult trading conditions of the last 2 years would appear to be the main driver. However, just removing the surface layer reveals that integration of the different security services delivered through SaaS is the enabler of providing a much more comprehensive and cost-effective service to both residential and commercial customers. The need to scale up quickly is driving consolidation in this sector of the business.

There have been some major landmarks during the last 12 months. In January 2010 Tyco purchased Broadview Security for USD $2 billion. This was followed in April with GTCR's purchase of Protection One for USD $828 million. In September, Safran bought L-1 Identity Solutions for USD $1.1 billion and in December, Monitronics was acquired by Ascent Media Corp for USD $1.2billion.

With the exclusion of alarm companies the surge in acquisition activity in 2010 has been driven by companies from outside the mainstream physical security market. Safran, L-3 Communications, Flir and 3M have pulled off some major deals in 2010, but mainstream suppliers like Schneider Electric, UTC, Honeywell and Bosch have been conspicuous by their absence.

This year is going to be a hard act to follow, because to continue this rate of consolidation will require the merging or acquisition of very large leading suppliers and their numbers are getting depleted. However we think that this high rate of consolidation can and will continue for a few years, not least because the major suppliers absented themselves from the dealing tables in 2010 and have made claims to be active in the near future. UTC has made it publicly known that they intend to grow through acquisition, and it is now over a year since their mega-purchase of GE's Fire & Security Division. This month, Tyco announced that they have set aside $500 million to acquire companies in India, Brazil, Middle East and China to push inorganic growth in these markets.

So given these facts -- the continued interest for IT and communications related companies that see benefits in buying into the security business and the industry's current fragmented state -- we are forecasting a 20% growth in the value of deals over the next 5 years as shown in Fig. 3. This illustration shows that cash deals have accounted for as much as 95% of transactions in 2008 and 2009 but this will fall as the security business is once again attracting private equity finance. Without this, the forecast growth in consolidation will be hard to achieve.

Alliance
Since 2008 the number of alliance arrangements recorded by us has doubled from 45 to 91 in 2010 and the most rapid growth was in 2009 when the number increased by 75%.

Both prior to, and in 2008 the vast majority of these arrangements related to partners coming together and making their products automatically communicate. This could be similar products such as cameras or different horizontal layers in a system such as video management and analytical software. The majority of these related to the video surveillance business and a significant portion related to companies that create software platforms (such as Milestone Systems). As there is not yet a common communications standard, such alliance is vital if best of the breed products are to be given the chance to flourish. The other alternative to an alliance is to manufacture a complete portfolio of products that have been designed to work together. That method is what the major suppliers have been doing for many years, using their own proprietary communications protocol, but that method is no longer acceptable to most end users.