If you’re looking for merger or acquisition (M&A) opportunities, the coming years might yield more possibilities than the recent past.
What with the credit crunch, collapse of the financial market, languishing and rising debt, a bruised and bleary investment community and banks cutting off most channels of cash and credit, it’s safe to say 2009 was probably one of the quieter M&A markets in some time.
Several of the most notable buys came in the last quarter. On the higher end of the scale, there was the purchase of well-known systems integration firm Adesta in late November by G4S, a global security solutions company for $66 million (based on annual revenues from Adesta of $92 million in 2008). Electronic security services provider Vector Security announced earlier in that same month it had acquired Florida-based Certified Security Systems. Other systems integrators made their mark in M&A. Alarm Detection Systems of Aurora, Ill., made a few buys during the year, the most recent MBN Security Systems, Morris, Ill. Other companies, such as ASG, ADS in Nashville, Stanley Convergent Security Solutions, Monitronics International, APX Alarm, Protection One and other high-profile firms made several buys or acquisitions, but certainly the movement was not at the fever pitch the industry had witnessed prior to the recession deepening its grip in 2008 through 2009.
Mike Duffy, chief executive officer and president/owner of Per Mar Security Services, Davenport, Iowa, said he expects there to be plenty of buying opportunities as retirement becomes closer for a large number of companies. “Also, technology changes will cause a separation between those companies willing to reinvest in their business and those that are not.” Duffy commented that he believes there will be more opportunities to purchase established companies in 2010 versus 2009 and that “government intervention is wearing down many small companies.” Contracts, quality people and quality installations and a good reputation for client service are important criteria for Per Mar in the search for suitors.
Bid-ask spread widens in 2009
Companies that provide consulting and brokerage services to the industry, such as Mergers & Acquisitions LLC in Pennington, N.J., found merger and acquisitions in 2009 relatively slow due to the credit market meltdown and lack of capital, according to John Colehower, principal.
“The credit market meltdown and lack of capital also had an impact on the amount and pricing of the valuation of companies,” he said. “What we saw in 2009 was a larger spread in what the companies who were buying would bid versus what the sellers were looking for. There was a gap in the bid-ask between what the sellers wished they could get for the company and the reality of what buyers were willing to pay,” Colehower said. These companies had to leverage down their deals because of the amount buyers were willing to spend and also the amount banks were willing to finance. Financing was more expensive and the terms for financing more restrictive, he said. Despite all this, Colehower said, there’s optimism in the industry moving forward. “This industry does tend to be cyclical and we can expect more M&A activity in the coming years,” he said.
Bill Polk, a managing director at CapitalSource, a company that specializes in the security industry and is based in Chevy Chase, Md., concurred on the lack of large transactions in 2009 because of the tight capital market, but he’s predicting an end to that in 2010.
“There’s definitely been softness in the market,” Polk said. “But for the most part the sellers have not been distressed and good companies are still attracting larger companies. Polk said companies like
ASG acquired many smaller companies throughout the year, with some being inter-generational transfers. On the RMR side of the coin, Polk said he sees a trend to more non-traditional sources of RMR starting to come into the industry, such as specialized managed services and bundling solutions. “This has become an important part of the RMR landscape,” Polk said. “We’re getting the benefit of that additional RMR and the definition of security is changing,” he said.
Michael McManus, managing director, Investment Banking in the Security and Homeland Security Group of Imperial Capital LLC, Los Angeles, which offers advisory and debt and equity capital markets capabilities, concurred that M&A activity in 2009 “took a break overall and particularly so with security integrators,” he said.
“There are a number of reasons for that,” McManus continued. “On a macro level it was obviously the economy, however within the industry you had a combination of the large strategic acquirers who had been very active in the past (Siemens, Niscayah, Tyco, Stanley, UTC, etc.) saw the need to conserve cash through the downturn as well as their stock price declining in a way that even then didn’t seem to make sense, i.e. Tyco trading in the 4x EBITDA range. On the other side of the ledger you had seller’s price expectation mindset set by previous transactions that occurred in a much more frothy M&A market and consolidation efforts by large strategics (8x + EBITDA levels). All in all, it was clearly a recipe for a bid-ask spread that was too wide to overcome,” he said.
McManus said convergence continues to drive the security market towards the IT segment and vice versa. “Integrators are increasingly asked for projects that contain ever-growing technological components. The need to understand IP and IT is slowly and undeniably driving the need for integrators to change. Some will, (or should) sell if they don’t want to make the change (or get relegated to a wire pulling subcontractor or much smaller jobs though technology is making the consumer installed system more of a reality than it has ever been), or if they intend to remain in the business for the long haul, SI’s should redouble their efforts to get ahead of the technology curve. The value proposition is clearly being driven by the IP/IT side of the business (i.e. video analytics, remote monitoring, business process improvements, SaaS, etc.),” McManus commented.
As far as overall activity, it was definitely down but some still played. “For the first part of the year, I would point to UTC’s acquisition of Detection Logic as recognition of the close ties that fire and security have (and getting closer as systems increasingly are integrated with building controls).” He cautioned that this deal reflected pre-downturn pricing.
In the second half of the year there were fewer deals but many groundbreaking. “For example, you see GE Security, stretched on other fronts, throw in the towel on security (again to UTC) and a very large quasi-new entrant in G4S buying one of the few remaining sizable independent integrators in Adesta, with G4S clearly expanding their service offering and dedication to the U.S. market,” McManus said. They will be an interesting company to watch in 2010.” For 2010, he expects to see increased levels of activity from ‘09 as some systems integrators become weary from the technological change, working capital pressures from customers, construction and refit project delays that are pushing revenues out to the right, intersecting with the increased realization that the days of heady multiples are gone for the foreseeable future.
“I also expect to see increased activity from the new entrants that now see the security industry not as a boring low-growth market but a very large steady and reliable market that is profitable and somewhat counter-cyclical. As far as transaction count goes, both increased activity but probably a greater increase in smaller deals will occur,“ he summarized.
Ultimate Forecaster: Barnes Buchanan Conference
One of the industry’s premier M&A and financial conferences is the Barnes Buchanan gathering in West Palm Beach, Fla. Each year for the last 14 the gathering has attracted top systems integration and central station monitoring firms, who listen to the topics they need to help position and grow their companies. The 15th annual conference is slated for February 4 through 6 at the Breakers. Visit www.barnesbuchanan.com.