At the end of 2017, industry analysts said the biggest activity in the security integrator space was on the residential side of the industry, with several large and impactful players entering the market. In fact, 2017 saw the official entrance of Google, Amazon, T-Mobile, Best Buy and Bell Canada into the home security market.
Residential security remained in the headlines in 2018 – Amazon solidified its presence in the home security market via the Ring acquisition and offering, Hellman & Friedman purchased SimpliSafe and AAA Northern California, Nevada and Utah acquired SAFE Security; however, on the whole, the M&A attention seemed to shift to the commercial side of the business.
The year 2018 was hardly a quiet one on the commercial M&A front; in fact, the security service provider arena may have seen the most activity, with some of the industry’s biggest players getting even bigger via acquisition. “There was definitely stronger interest in 2018 in commercial security companies, including integrators, from both strategic (investors) and private equity firms,” says Henry Edmonds, President of The Edmonds Group LLC, a specialized investment bank focused on recurring revenue businesses with a particular emphasis on the security alarm, the PERS industry and related verticals.
“Interest remains strong in the security industry from both strategic and financial buyers,” agrees John Robuck, Managing Director of the Security Finance lending practice within Capital One Bank's Commercial and Specialty Finance business.
One of the biggest splashes from private investment came in February of 2018, when the Private Equity Group of Ares Management announced its acquisition of Convergint Technologies. The ball started rolling from there, with the newly financed Convergint acquiring nine different companies in 2018 – many of which held an annual presence on our Fast50 list of fastest-growing integrators. Convergint tucked in integrators in both the U.S. and abroad, including AlphaCorp, Astrec Security, Integrators Australia, Acess Control Technologies, Commercial Systems Group, Integrated Security Solutions, SI Technologies, and Firstline Security Integration.
“Over the last 10 years, Convergint has shown the way, and in the last two years they have acquired more than 20 companies to establish a footprint across the globe,” says Jim McHale, Director of U.K.-based market research firm Memoori. “We know of no other independent SI that has this stature across the western world and covers virtually all the technical services in buildings.”
ADT also posted multiple commercial acquisitions, led by its November purchase of Red Hawk Fire & Security for more than $317 million – an acquisition that pushed ADTs projected commercial revenue to 25 percent of its overall business. “Commercial security is one of the core pillars of ADT’s growth strategy,” ADT President and incoming CEO Jim DeVries said after the Red Hawk acquisition.
Since Aug. 2017, ADT has acquired seven other commercial integration companies, including Aronson Security Group (ASG), Access Systems Integration (ASI), ACME Security Systems, Protec Inc., MSE Corporate Security and Gaston Security.
Securitas Electronic Security (SES) also made headlines in 2018 by purchasing the Kratos Public Safety and Security division from Kratos Defense & Security Solutions for $70 million.
“Security Integrators (SIs) in the U.S. have adopted strategic acquisitions as a major part of growing their businesses,” McHale says. “They have sped up the process in recent years, and it is long overdue for the technology challenges that SIs are now meeting – which requires scale to finance. The minimum size to operate is growing exponentially.”
Is more consolidation of the biggest security integrators coming in 2019? Oliver Philippou, Security Technology Research Manager for research firm IHS Markit expects that in the future, merger and acquisition activity will focused on larger deals. “Tier 1 and 2 security systems integrators will be able to offer both a physical geographic presence but also an element of cybersecurity and/or cloud based managed services,” he explains.
“We expect to see continued strong acquisition activity in 2019,” adds John Mack, EVP of Investment Banking firm Imperial Capital.
2019: A Good Year to Sell?
When it comes to positioning for a sale, the coming year again looks like a good one for commercial integrators, while residential-focused firms may see less interest.
“Sales of larger traditional professional residential alarm businesses have declined in the last two years as private equity buyers have been less in evidence and strategic acquirers have not filled the gap,” Mack explains. “The one notable exception was the acquisition of Safe Security by AAA NCNU (where Imperial Capital represented the strategic buyer). Challenges with ADT stock performance since their IPO early in 2018 and Ascent Capital’s difficulty in refinancing their debt have also had negative impact on potential buyer’s interest in the sector.”
“The traditional (residential) security offerings and even professional services have been trumped by DIY over the past few years, but there are signs consumers are now again looking toward professional services,” adds HIS Markit’s Blake Kozak. “As a result, perhaps 2019 could be a good year; however, 2020 or 2021 may be the peak years to sell before another shift occurs.”
In the meantime, commercial looks ripe for further activity. “Rising interest rates and other factors sometimes cause an upward or downward effect on activity,” explains Peter Giacalone, President of Giacalone Associates, an independent security consulting firm. “In the case of our industry, this could be a factor effecting some acceleration in M&A. Independents may move toward earlier divestiture and larger organizations may view this as a buying opportunity in the integration sector specifically. We have a few groups with a rich appetite for domestic and international expansion while having many independents seeking to capitalize through efficient mergers or acquisitions.”
Adds Robuck: “With the continued support of equity and debt capital markets, the market should continue to be strong for well-performing businesses; however, companies that have poor performance metrics will struggle to get the desired valuations. The financial, collateral and legal due diligence bar is very high as increasingly sophisticated capital providers enter the space.”
Partnering with the Residential Behemoths
Instead of residential M&A activity, most analysts believe 2019 will be the year of the partnership when it comes to residential security integrators. In fact, ADT may have kicked off the trend by announcing its formal partnership with Amazon – taking its technology partnership beyond simple “Alexa integration” with its platform.
According to ADT, the company worked closely with Amazon to integrate “Alexa Guard” with the Pulse security system and professional monitoring. With Alexa Guard enabled on an Amazon Echo device, Alexa will notify a customer if she detects the sound of smoke alarms, carbon monoxide alarms or breaking glass while the customer is away. These notifications, called Smart Alerts, are delivered to a customer’s smartphone to let them know which sound was detected, and provide an audio clip of that event.
“The partnership didn’t surprise me at all – I believe it was smart, both on the part of ADT and Amazon,” Giacalone says. “Amazon has a track record of succeeding by spreading their wings with many affiliations. As far as ADT, they understand the opportunity of partnering with a well-oiled machine such as Amazon. It makes sense for both organizations.”
In terms of more security companies forging partnerships, Kozak points out that Vivint has already partnered with Google to offer free Google Minis while working to create tighter integrations for thermostats and in-home Wifi (Google Wifi). “Vivint did this about three months before ADT+Amazon,” Kozak says. “I would expect other security companies to announce similar partnerships in 2019.”
Mack agrees, saying he expects to see “many different kinds of partnerships between traditional service providers and technology companies with the very substantial growth in smart home technology and services.”
2019’s Challenges and Opportunities
According to Capital One’s survey of residential and commercial integrators at the recent Honeywell Connect 2018 conference, one-third of security professionals surveyed indicate that keeping up with the pace of technology is the biggest business challenge for the coming year.
“System complexity and the ability to efficiently service such an account base can be difficult to manage,” Robuck says. “Technology may pose a threat to certain segments of the market; however, it can also present a significant opportunity. For example, video monitoring services, managed access control and sensor-informed managed services sectors are all experiencing a tremendous amount of growth.”
Additionally, the survey of more than 100 integrators identified customer attrition (25 percent) and decreasing margins (24 percent) as other top concerns facing the security integration industry. On the competitive landscape 66 percent still view national, local and regional security providers as their primary competition, while DIY and self-monitored systems (16 percent) are seen as less of a competitive concern.
Analysts cite other opportunities, including the Building Internet of Things (BIoT) and cloud-based offerings. “SI businesses will need to consolidate faster to meet the technology challenges that are now being introduced to create…fully autonomous buildings,” McHale says. “That will require acquiring expertise through merger and acquisition and/or strategic partnerships. Today, the business of integrating all the technical services in buildings largely belongs to SI’s, but there is an army of IT-orientated businesses also getting involved in the BIoT.”
Adds Edmonds: “The biggest opportunity is for integrators to migrate to more of an RMR-based model, particularly through cloud-based offerings. The companies that move in this direction will become much more valuable and more attractive to investors.”
Beyond those opportunities, the growing cybersecurity services market presents what analysts say is the greatest business opportunity for security integrators in 2019 and beyond. “The biggest opportunity for security integrators in 2019 will be the opportunity to grow their businesses with the addition of cybersecurity-related services as well as the complete secure integration of myriad IoT technologies being implemented with companies across the spectrum,” Mack says.
IHS Markit agrees, predicting that cybersecurity services will be of even more importance in 2019 than in previous years. “A number of integrators have focused on acquisitions for this market in recent years – ADT acquired Datashield; Honeywell acquired Nextnine Ltd.; Convergint acquired Cybis; and Prosegur’s most recent acquisition of Cipher,” Philippou says.
With so much opportunity on the horizon, 2019 is shaping up to be both exciting and profitable for security integrators. “I see great opportunity on all fronts, and I still stand that traditional companies need to pay more attention to a variety of DIY solutions and engage instead of pushing back,” Giacalone says. “This exists in both the residential and commercial sector. I look forward to a bullish 2019 for the industry.”
