Report author Allan McHale is director for UK-based market research firm Memoori.
Market growth for 2010 was up slightly, but the real indicators were in the size of acquisitions and the depth of market alliances.
Photo credit: stock.xchng/sardinelly
[Editor's note: This is part 1 of a 2 part synopsis of Memoori's study "Survey of the Security Business 2010". This is the firm's second annual review of the world's business for physical security equipment.
The objective of the review is to bring together valuable statistics about the business size, shape and structure across three main segments: Access Control, CCTV/Video Surveillance and Intruder/Intrusion Alarms. The goal is to then analyze the business opportunities that have taken place in mergers and acquisitions, alliances and investments across the world in 2010. It also reviews those technological and commercial trends that are shaping the future of the business and impact on where investment is most likely to be targeted in 2011 and beyond.]
Part 1 - Developing the Business through Acquisition & Alliance
2010 has been a monumental year for the security industry. Despite a weak economy, the market has grown and confidence in its future has returned. Once more the market is attracting private equity investment as well as delivering explosive growth through mergers and acquisitions as well as from alliances between suppliers.
Market Size, Share & Distribution
We estimate that the world market for electronic based physical security equipment at factory gate prices in 2010 was USD $18.67 billion; a growth of 4 or 5% over 2009 but still marginally below its peak in 2008. Of this, video surveillance took the largest share at 47.5% (increasing its share by 4.5%), at the expense of intruder alarms 29.5%; with access control at 23%.
So despite overall growth in the business, intruder alarms sales have declined and access control sales have lifted marginally, while video surveillance has performed well, particularly considering the poor economic trading conditions that have prevailed over the last three years.
This is a robust market which has outperformed many of the general electronic equipment businesses supplying the industrial and commercial markets. For this reason acquisitions and investment have surged ahead in 2010 and are forecast to continue over the next two years.
Fig 2.2 shows the geographic distribution of equipment sales in 2010 and this has changed significantly in the last three years. China has more than doubled its market share in the last five years to 11%, whilst other emerging markets in Asia, Central and Eastern Europe and South America have similarly increased their share of the market. This trend will continue with China probably becoming the biggest single market by the end of this decade.
Merger & Acquisition in 2010 and Forecast to 2015
Fig 4.1 shows security deals completed from 2000 to 2010. The value of deals completed in 2010 was USD $7.98 billion; a growth of almost 75% over 2009. This is the highest value ever recorded and is 28% higher than the previous record set in 2005 and 2007. This is a startling number not least because it is in stark contrast to what has happened in similar technology/electronics businesses. So what has caused such a surge in consolidation, at a time when the global market for physical security equipment has experienced little growth?
In 2009 we identified 77 acquisitions compared with 80 in 2010, so the almost doubling in the value of deals is clearly not the result of more transactions. The reason is that this year, consolidation has been much more focused at the top end of the business, between established large companies. The buying price for just three deals amounted to $4.3 billion, some 54% of the total business transacted, and a further seven companies paid over $250 million to complete deals.
The drivers to achieve growth in this industry are clearly to deliver products and services that increase productivity and provide a return on investment. IT convergence and integrated solutions are seen as the way forward here. In order for companies to deliver such systems, many have decided that it is necessary to acquire expertise through merger and acquisition.
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.
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.
End users are demanding full plug and play and seamless integration with other control infrastructures, including convergence with the business enterprise. So alliance needs to go one step further to extend the digital link and enable end-to-end communication so that all the information and data can be brought together. We believe this was the reason for rapid growth in alliance activity in 2009 and its continuation in 2010.
As an example: In June this year 3VR and Arecont Vision announced their alliance whereby 3VR has certified Arecont Vision's full line of megapixel cameras as part of its SmartCam program. Additionally, Arecont Vision said that 3VR had completed participatory testing in the camera maker's MegLAB program and had been certified in three areas: camera integration, feature integration and load testing. In addition to proving a degree of product differentiation, more comprehensive certification programs will be important as digital cameras and edge devices take on more features that require IT-like configuration at the time of installation or, later, when users wish to make add-ons or changes. Megapixel cameras, in particular, come with features and settings that can perform differently when used with different VMS systems.
The creation of alliances is also extending across business borders to deliver value-add solutions. A good example of this was the announcement in June of a strategic partnership between CNL and ESRI (U.K.). CNL supplies physical security information management (PSIM) software. ESRI is a software manufacturer providing the backbone for world mapping and spatial analysis. The combination of these technologies will allow ESRI customers to bring their entire security estate into one system and CNL customers to leverage greater efficiencies and significantly improve their operations.
We expect that both alliances and M&As will become one of the main conduits for delivering this de-layering process. However some companies will select to develop their own products. A good example is Axis Communications because it has chosen to develop its own "layers" -- in their case, a video management software.
Alliances for the purposes of sharing development costs or working together to explore new markets, whilst less frequent, are also increasing. Some opportunities have been taken up by suppliers of video surveillance to join with access control and intruder alarm manufacturers to combine information and data through a common software program and this again has extended the application for their products. This has been partly driven by the need to counter the consolidation process that is taking place across the horizontal layers of security systems. Three years ago manufacturers of security equipment focused on one particular discreet aspect of the business. In the case of video surveillance, the business was made up of a number of horizontal layers including IP video software platforms, video hardware and video management systems. Most of the leaders in these fields sold to other hardware suppliers that offered systems, to distributors and to system integrators. As the demand for total solutions grew, alliances rapidly developed between manufacturers in the different layers so that best-of-breed products could communicate and work together. With time this has developed into much stronger partnerships sharing development and promotional costs. This has now progressed further by companies joining together through merger or acquisition in order to produce vertically integrated companies that can deliver a full surveillance system.
More recently we have identified alliance arrangements between manufacturers and system integrators, working together to provide a solution for a particular vertical market and sharing the development and promotion costs.
IT network design and install companies are crossing the boundary between IT and physical security to offer a complete solution. However, in many cases these IT VARs are doing this through collaboration and alliance with physical security suppliers. Very noticeable of late has been the identity validation suppliers move to integrate with door access control technologies. Their preference appears to be to go the whole way and acquire an access control manufacturer.
Alliances will almost certainly play a more important role in the future, and it would be surprising if the more successful partnerships do not ultimately lead to mergers and acquisitions. This last year has shown that mergers, acquisitions and alliances have become a vital part of security companies' business strategy.