With inflation at record levels and supply chain struggles that don’t appear to be abating anytime soon, it’s reasonable to assume that the security industry might see minimal or even flat growth over the next few years. However, the current market pressures have done little to dissuade investor interest in the industry as both public and private capital continue to be poured into a multitude of companies.
These investment dollars are also fueling what seems to be an unquenchable appetite for M&A across both the manufacturing and integration segments of the industry.
Earlier this week, Motorola Solutions, which has emerged as one of the bigger players in the video surveillance market with its purchase of industry stalwarts Avigilon and Pelco, further expanded its solutions portfolio with the acquisition of London-based video analytics provider Calipsa. The acquisition is just one of several the company has made in recent months, which include deals for Ava Security, Envysion and Openpath.
ACRE, which was acquired by UK-based private equity firm Triton last year, has also been extremely active on the M&A front. Over the last two years, the company has acquired a variety of both household and under the radar industry brands, including Razberi Technologies, Time Data Security, and most recently, Feenics and Matrix Systems.
Perhaps the greatest pace of consolidation occurring in the current market though is in the integration channel where several firms flush with private equity cash are purchasing smaller competitors and expanding their geographic footprints across the U.S. and the globe.
Bolstered by a partnership with Ares Management, Convergint Technologies has continued to acquire companies at a pace of nearly one a month, expanding its reach in the U.S. as well as in Australia, Latin America, and the UK. CTSI, which became a part of Chicago-based Wind Point Partner’s portfolio in June 2020, has acquired no less than eight different integrators over the last 12 months.
Of course, there has never been a time like the present for those looking to sell their companies. Even with markets as volatile as they are currently with a war in Ukraine and a pandemic that continues to cause uncertainty around the world, valuations for security companies remain high. According to investment banking firm Houlihan Lokey’s recently published spring 2022 “Security and Safety Industry Update,” TEV (total enterprise value) to EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples for the next twelve months for security products and solutions firms stood at 13x, while companies in the intelligent video and surveillance space were pegged at 12x.
“Given the corporate cash on balance sheets and the amount of dry capital in the sponsor community and financial (private equity) community which is still at an all-time high, you are going to continue to see the deployment of capital and consolidation in the space as sponsors continue to look for even smaller niches and subsectors within larger verticals to invest in,” explains Michael Morabito, Managing Director and Head of Safety and Security Investment Banking at Houlihan Lokey.
So, what exactly is so appealing to investors about the security market? Morabito says the answer can be found in how the industry’s technology is viewed today versus years past, especially with the rise of SaaS offerings.
“If you think about physical security, many, many years ago there was a view of, ‘Hey, are these building product companies?’ Now everybody realizes there is more technology in these businesses than just sheer building products, so a lot of investors that were looking for building products with some of the dynamics around commercial construction or residential construction, started looking at subsegments within building products, some of the technology sectors and stumbled upon physical security and the security space,” he adds.
Supply Chain Concerns
However, despite the tailwinds the industry presently enjoys, there’s no denying the fact that the supply chain crisis has and will continue to have repercussions for all companies in the space for the foreseeable future.
If there was one theme that came out last month’s ISC West trade show in Last Vegas, it was product availability as some vendors are in a much better place than others when it comes to inventory levels and their ability to meet the demands of the market.
Alan Stoddard, President of Cognyte North America, told SecurityInfoWatch.com (SIW) during the show that the lack of available hardware is having an impact on everyone, even companies like theirs that primarily sell software to the market. However, he said that project backlogs have still been few and far between.
“We still do have projects that get slowed down because if they don’t get the hardware, then they don’t need our software,” Stoddard says. “But, for the most part, it has been isolated in terms of how big the project is.”
The biggest challenge Cognyte has faced recently, according to Stoddard, is Covid-related project delays and budget issues, but he believes the industry is finally starting to turn a corner there.
Tom Reilly, President of Commend, said that his company began stocking up on inventory at the very beginning of the pandemic and that for the last two years, they have not suffered any substantial disruption to their operations as a result.
“The one thing that for me was a headache was just pure logistics. Getting stuff from Europe to the states was a moving target,” he says. “Certainly, we had challenges. Freight was expensive, but we were able to navigate that. But now, the latest prices going up in Europe is causing the latest struggle.”
Despite this, investors in the space remain undaunted.
“The area is still very ripe for activity,” Morabito says. “One of the interesting things about this space is this continued convergence of what used to be physical and cyber, but now it is the convergence of physical security with what has been deemed as the proptech space. A lot of security businesses that are tech-enabled are really trying to refer to themselves or position themselves as proptech businesses and this convergence of security and proptech will continue.”
Joel Griffin is the Editor of SecurityInfoWatch.com and a veteran security journalist. You can reach him at [email protected].