Memoori’s 3rd annual report The Physical Security Business in 2011 shows that some $1.178 billion accounting for 12% of total investment in acquisitions in the last 12 was made by companies from the Defense and IT related industries.
In addition Venture Capital and Private Equity Groups acquired 6 companies investing some $3.605 billion; including Bain Capital’s purchase of Securitas for $3.26 billion This follows on from an active campaign in 2010 of companies external to the business seeking to become a part of it. So what is it that attracts them and conversely why are not more existing players grasping the opportunity to rapidly build up growth through acquisition? Or are they not so sure about the future of their industry?
The security industry has performed well during the last 2 years despite poor economic trading conditions and it has proven to be a robust and agile business. This has attracted companies from the Defense and IT related industries, (much larger, profitable high growth businesses) to enter the security business where they can see opportunities to leverage their technical expertise.
Defense companies already have some products that can be applied to the industrial and commercial security market such as thermal cameras, night vision and specialist software for command and control centers. They see an opportunity to leverage their expertise as there is a heightened global awareness of the need for more sophisticated security from terrorist attacks almost everywhere in the world.
Defense companies clearly see it as a growth opportunity for they have in the last 12 months acquired at least 7 security companies. These included BAE Systems (2 deals), ManTech International (3 deals), and Kratos Defense Security Systems (2 deals). For the full year of 2010, we recorded 8 acquisitions made by Defense companies including Flir, L3 Communications, General Dynamics, BAE Systems, Safran and ManTech International.
The last deal recorded was in February 2011. It is too early to draw any conclusions from this lull in activity, but we expect that these companies and others will extend their exposure to the security market over the next 5 years.
They have so far acquired companies that can make a contribution to applying their thermal cameras and night vision technology and see a growing market for their command and control systems in the public sector. We expect them over the next few years to turn their attention to systems integrators that are service focused, such as the Kratos purchase of Henry Brothers.
Cisco was the first company from an IT background to buy into the security product manufacturing business but they have yet to make an impression on it. Their entry into the IP Camera market 4 years ago sent shock waves through the industry with most of the pundits fuelling the belief that this company was about to take over the IP Video market.
It now appears that the motivation for entering the business with this special unit is to generate sales for network infrastructure products. Video surveillance’s ability to drive networking demand and network sales is seen as very valuable. For every $1 in surveillance sales, Cisco estimates ~$5 in total network infrastructure sales (switches, routers, firewalls, etc.). The unit now offers network video surveillance products that work on their networking devices and will expand their core business.
From September 2010 to August 2011 we have identified 4 transactions where players from the IT industry have acquired security companies whilst in 2010 we identified 6 acquisitions with IT / Communications and Security companies involved in acquisition deals.
The last transaction was made in November 2010 so yet again the passion for security companies from those outside the industry could to be declining. The main driver for IT related companies is the growing demand for convergence of security and the business enterprise.
IT Convergence with many technical infrastructures in buildings does present an opportunity to deliver total solutions and this gives them product differentiation. This is where their interest lies. Security in all its guises is increasing being handled by the CIO in most large companies and that again gives them an opportunity to get involved if they so wish. The second driver is the growing need to integrate physical security with logical security to mitigate the risk of cyber and physical security attacks.
The physical security industry will benefit from both the technical expertise that these new players will bringing to the business and their strong finances.