Bold highs and lows color security industry’s recent M&A history
The $16.5 billion deal between Johnson Controls and Tyco International in 2016 was the highlight of a record-breaking mergers and acquisitions year for the physical security industry and is sure to have a significant impact on the wider Building Internet of Things (BIoT) business. But despite the size of this M&A deal, its impact on the structure of physical security business figures to be much less.
Data taken from the 8th edition of our annual Memoori report, “The Physical Security Business: 2016 to 2021,” shows that in the last 16 years the industry has endured a roller coaster ride of activity with four distinct peaks and troughs during that time span, with 2016 reaching its zenith as a total of $19.73 billion in M&A business was realized.
The report shows a general upward trend in industry consolidation over the last 16 years, but as we also show in the report, the structure of the physical security industry is still very fragmented being comprised of hundreds of small companies that are finding it increasingly difficult to compete. It seems inevitable that the general trend line for mergers and acquisitions value and volume will continue an upwards trend over the next five years. In particular, we expect many major western players in the video surveillance industry will realize that to improve their competitive edge they will need to quickly increase the scope and scale of their solution to help fight off larger Chinese video manufacturers who are capturing huge market shares in developed markets of the world through extremely aggressive pricing strategies western manufacturers find difficult to match without cutting margins to the bone.
In our recently published blog, “Redefining Business Video Surveillance Models to Meet New Challenges,” we do show there are solutions to ensure survival for western manufacturers, including enhanced specialization and ultimately moving out of manufacturing and into system supply. However, the only realistic solution to ensure a vibrant mainstream business is to increase their scale and that can only be achieved through acquisition and merger. If the next two years are not filled with a flurry of mergers and acquisitions in the Western world’s video surveillance camera business, the industry is destined to be controlled by two Chinese manufacturers, Hikvision and Dahua, assuming that politics does not become part of the equation.
Before we review some of the recent M&A histories across the total physical security manufacturing industry, it would be remiss to not confirm that Access Control and Intrusion/ Perimeter Protection market sectors have not been under the same pressure from Chinese suppliers.
History shows that the value of deals increased threefold during the period 2000 to 2007. In 2006, M&A declined by 16 percent as the industry settled a bit compared to the two previous years of hyperactivity by the major companies.
2008 saw a fall of 30 percent in the value of deals completed compared to the previous year. The last quarter of 2008 was down by 50 percent over the same period in 2007. This decline in activity continued in the 1st three-quarters of 2009 but the volume by the number of deals increased. The fall in activity was initially caused by the credit squeeze and a lack of capital finance, which first became apparent in August 2007. The financial meltdown that followed resulted from a fear that the recession would not be short and shallow. It is interesting to note that the M&A activity among major companies fell off in 2008 before the financial meltdown.
M&A activity was reignited in the last quarter of 2009 thanks to UTC’s acquisition of GE Fire and Security for $1.82 billion making this the largest deal in the previous five years and in one transaction transformed the consolidation process back to growth. In 2009, the total value of deals grew by approximately seven percent to $4.583 billion.
The two years that followed were very active with 2010 growing by 76 percent and two percent in 2011 when transactions peaked at $9.847 billion. Activity declined over the next three years and by 2014 it had fallen to $4.33 billion. A smaller number of financially lucrative deals among security monitoring and major physical security companies coupled with the decline in external deals from the Defense and IT Communications businesses accounted for this roller coaster of rapid growth and subsequent decline.
M&A activity increased to $5.7 billion in 2015, but this was still less than the $6.2 billion realized 10 years prior. Nevertheless, this proved to be an important year for M&A, as the world’s leading manufacturer of IP network cameras, Axis Communications, was acquired for $2.8 billion by Canon and Kaba Holdings and Dorma Holdings merged in a major access control vendor union. These two mega deals accounted for more than 80 percent of the total value of acquisitions that year.
In September of 2016, Johnson Control and Tyco International merged and created a $30 billion revenue company. Technically it is a merger with the new stock being proportionally based on the market valuation of each company at the time of the announcement. However, in practice, it is an acquisition with Johnson Control taking over Tyco, a registered company in Ireland in what is called an inversion deal. Tyco is one of the world’s leading suppliers of physical security and fire safety equipment and its market valuation at the announcement was $16.5 billion -- the largest industry deal we’ve tracked since we started monitoring M&As in 2000. This deal has, of course, distorted the whole picture of M&A in 2016. The total value of deals in 2016 was $19.73 billion making it almost three and a half times larger than 2015. However, the number of deals transacted in 2016 was 27 compared with 38 in 2015.
This year will prove to be a peak in value of mergers and acquisitions that are very unlikely to be reached again. We are expecting to see an average compound annual growth rate (CAGR) of 4.48 percent from 2015 to 2021 if trends follow the historic cycle of decline and growth during this period.
But we certainly do expect to see at least two big mergers between the largest western video surveillance manufacturers over the next two years, with the objective of achieving the kind of scale that will make them serious competitors to Hikvision.
About the Author: James McHale is Managing Director, Owner, and Founder of Memoori, a consultancy company based in London providing independent market research, business intelligence and advice on Smart Building technologies.
