To say that 2019 was an impactful year for the security industry would be an understatement. As in years past, the market saw its fair share of mergers and acquisitions (M&A) among both vendors and integrators. Two of the industry’s stalwart video surveillance brands, Pelco and Panasonic, were sold to private equity firms, while Convergint, ADT Commercial and Allied Universal continued to increase their footprint in the commercial integration space with a slew of different acquisitions.
Aside from M&A, there were also several other developments that will likely have widespread ramifications on the industry for years to come. Chief among them is the Trump administration’s ongoing trade war with China and the blacklisting of Hikvision and Dahua. Though direct impacts from the tariffs levied on Chinese goods have been somewhat muted thus far, many industry analysts believe that could change if a trade agreement between the countries is not reached soon, given the sheer number of security product components impacted.
On the residential side of the market, DIY solutions continue to proliferate and change the dynamics of the business; however, most analysts remain optimistic about the state of the industry and the opportunities that await integrators who are willing to embrace change.
“Demand is at an all-time high for integrators – the economy is strong and capital market conditions are favorable,” 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.
As we look back at 2019 and ahead to 2020 and beyond, here are the three biggest trends that analysts say are impacting the security industry and integration businesses in particular:
1. Consolidation Continues
Commercial
One of the biggest trends in the industry in recent years has been increased consolidation among integrators. On the commercial side, Convergint, for example, has acquired more than 30 different companies since the beginning of 2015, while ADT has purchased at least a dozen firms since 2017 – all of which have been rolled into the “ADT Commercial” umbrella announced at ISC West 2019.
While these two companies have been among the busiest on the M&A front, they were certainly not alone in 2019. Looking to broaden its suite of services beyond manned guarding, Allied Universal acquired Dallas-based super regional Securadyne Systems in April, followed by three more 2019 tuck-in integrator acquisitions (Midstate Security, Shetler Security and Advent Systems) – all forming the company’s new Technology Services Division, headed by Securadyne founder Carey Boethel.
Allied Universal, like Securitas before it – which acquired Diebold several years ago to create its own electronic security services division – points to the trend of companies looking to become a one-stop shop for end-users looking to staff their guard services while integrating technology solutions. Another example in 2019 would be distributor Cook & Boardman Group’s April acquisition of integrator A3 Communications.
“In the enterprise space, which is where (we) operate primarily, (the one-stop shop concept) is very common; in fact, it is the norm not the exception,” Boethel told us in an exclusive interview at the September GSX show. “Customers understand and appreciate the virtues of having a service provider that can provide a number of different solutions.”
Despite this accelerated pace of M&A and the number of regional and super-regional integrators being brought under the umbrella of large national and multi-national firms, industry observers say that the industry remains highly fragmented and will remain ripe for further consolidation in 2020.
“Commercial-centric M&A seems to be on an uptick, and I believe it will continue,” says Peter Giacalone, President of Giacalone Associates, an independent security consulting firm. ”It is obvious through my experience and some public statements that the money is starting to focus more on the commercial side and moving away from residential markets. With lenders and private equity shying away from residential while remaining bullish on the industry, I believe you will see more deals on the commercial side both through M&A and maybe some new entrants.”
Edmonds says the numerous acquisitions made by Convergint, ADT and others has also led to good valuations for companies which is likely to continue resulting in further industry M&A. “With additional domestic and international players pushing to get in the market and favorable capital market conditions for commercial companies, we expect to see continued strong M&A active in 2020,” he adds.
Though there are fewer independent integrators providing service to the industry today than there were just five years ago, Jon Cropley, a Senior Principal Analyst for Video Surveillance at IHS Markit, concurs that the market remains highly fragmented; in fact, IHS estimates that 15 largest integrators only accounted for about 15% of global revenues in 2018.
“Many merger and acquisition deals are done to gain a physical presence within a geographic or vertical market. This is a major reason why companies such as ADT and Convergint Technologies have been making acquisitions of a high number of small regional companies,” Cropley says. “There is plenty of room for further consolidation in 2020.”
Additionally, demand for integration services is only expected to grow exponentially in the years ahead. The total market for security system integration (design and consultancy, installation, maintenance, and security equipment), according to IHS, is estimated to have been worth $73.6 billion in 2018 and is forecast to grow to $103.4 billion in 2023.
According to Jim McHale, Managing Director of Stockholm-based market research firm Memoori, integrators realize that to stay competitive they need to “up their technology to meet the expectations” of end-users but many simply don’t have the financial means to do so which has subsequently led to the increased M&A activity the market is currently experiencing. McHale agrees with Giacalone that private equity dollars will continue to flow into the commercial side of the industry and that more integrators will engage with these firms in 2020.
Residential and Smart Home
Integrator consolidation in the residential (and small business) space in 2019 peaked in June, when Vector Security acquired Nashville-based ADS Security – a company which itself has acquired more than 30 different alarm firms across the Southeast since 2014.
In addition to DIY and major disruptive companies entering the residential security market (more on that in our second trend), one transaction made in the summer of 2019 has turned some heads, and it may signal the beginning of a new approach to integrator consolidation.
In August, Presidio Investors announced a $75 million private equity investment that merged 15 independent smart-home design-build firms to launch a national network of luxury technology integrators called Bravas LLC. Each of the 15 independent business owners – in this case, mainly A/V and smart home integrators – retained a major stake in the merged company.
“To have an investment platform operating as one national brand changes the way business is done in our industry,” Ryan Anderson, owner of Kansas City-based Elevated Electronics and CEO of Bravas, said in a statement. “We are stronger together, sharing local and national resources that shape our ability to accelerate growth and improve the homeowner experience.”
The August 2019 merger of SnapAV and Control4 was another major consolidation in the smart home space.
Vendors and Distributors
While there continues to be a vibrant market for M&A among integrators, the same cannot be said of product manufacturers. According to McHale, Memoori’s most recent report on the market revealed that in 2019, spending on mergers and acquisitions actually fell their lowest recorded levels since 2003.
As mentioned, the two major changes in the video surveillance space were the acquisitions of Pelco and Panasonic by private equity firms. Additionally, Qognify started 2019 by completing its acquisition of OnSSI; and Alarm.com acquired OpenEye. Motorola and FLIR made notable tuck-in acquisitions, but overall activity paled in comparison to previous years, when ownership of companies like Axis Communications changed hands.
In access control, ACRE stayed busy, following its late 2018 acquisition of Open Options in April by buying RS2 Technologies; ASSA ABLOY acquired LifeSafety Power; and Sargent & Greenleaf was acquired by a private equity firm.
Finally, in a story that will be spilling into 2020, a bidding war for Anixter is happening right now between a private equity firm and rival distributor WESCO. (UPDATE: As of Jan. 14, WESCO has won the bidding).
2. Major Disruptors Wrestle Away Market Share
While it was once thought that DIY systems would serve as a boon to the entire industry – including traditional alarm dealers – some of these new market entrants are now doing what many initially feared and are actually taking potential customers away from smaller integrators.
“Over the last few years, newer entrants like Comcast, Ring, Nest and SimpliSafe have expanded the residential market, but have also taken some business from incumbents,” Edmonds explains. “Market pressure from new entrants and strong competition for high growth from many large private equity-backed residential players have resulted in higher customer acquisition costs and pressure on other performance metrics. Strategic buyers and potential new investors have been cautious, depressing residential valuations and dampening M&A activity.”
With lenders and private equity shying away from the residential side of the industry, Giacalone says it could crate a paradigm shift for some integrators. “For some companies it won’t be a great shock, for others it could be devastating,” he says. “Many companies are reliant on their lenders and focus on exit valuations. It appears we are in the midst of an adjustment that will narrow the field on lending and possibly reduce the valuation models. For those who live life and manage their businesses on the edge, this could be painful.”
In a presentation at ESX in June, Michael Barnes, founding partner of Barnes Associates, a St. Louis-based consulting and advisory firm that specializes in the security alarm industry, said their research now shows that smaller companies, which still comprise 47% of the market, are losing ground to larger regional and national firms.
“(Smaller companies) have slowly been losing share, while big regional players and big national players are actually growing faster than the industry and thus are gaining share,” Barnes told attendees. “I have been hesitant to predict that in the past, because as soon as I felt like I could say that it is happening, we would have a couple of years where it changed. I don’t think that’s the case anymore.”
In addition, Barnes said that margins are down across the industry due not just to pricing pressures but also due to the addition of various services on top of the industry’s bread and butter – monitoring. “It used to be that the industry was predominantly monitoring, and it had a 60% margin,” Barnes said. “If you added any other recurring revenues into the stream at something below a 60% margin, it drags it down. That’s what is happening in the industry – we are seeing a lot of added services that alarm companies are capable of doing, and they are bundling it into the recurring revenue; but we are not seeing any evidence of material price discount.”
Despite the potential being there for a tech giant like Amazon or Google to develop a technology that cannot be matched by traditional alarm company, Barnes says he does not yet foresee them putting traditional alarm companies out of business. “If Google comes out with something, I feel like Alarm.com or Resideo or some combination of players will be able to match them, either in terms of scale or capability,” he said. “There may be ebbs and flows where a big player has some advantage for a while, but I still have a lot of confidence in the distributors and manufacturers in the industry, and their ability to match any capability.”
That said, Amazon Ring especially made inroads in the smart home market in 2019 that have people in the traditional alarm industry worried. Starting at CES 2019, Ring introduced a variety of new sensors and a smart lighting platform that make it easier for homeowners to monitor for smoke, carbon monoxide, flooding, freezing temperatures, intruders and more; but the products directly targeting traditional integrators were just getting off the ground.
At Amazon’s September product launch, it unveiled the Ring Retrofit Alarm kit, which enables homeowners to add the Ring Alarm product to an existing alarm panel – essentially a DIY takeover kit for the systems originally installed by either a residential alarm company or the original builder.
“Coupled with Amazon’s powerful brand and marketing strength, Ring has significant opportunity to convert a slice of the older alarm system market into their long-term ring of security strategy,” consultant George De Marco, Managing Partner of DECO Ventures and Chairman of the Electronic Security Expo (ESX), told us at the time.
Ring wasn’t finished. The company also introduced a full DIY offering for small business customers called Ring for Business, which is a specialized combination of Ring Alarm and video doorbells to form what the company calls “an affordable alternative to traditional systems.”
As more and more of this type of activity proliferates, not only does it make traditional residential integrators fearful, but it is frightening investors as well – which may be the reason for an appreciable slowdown in M&A in that sector. “Capital markets are saying they aren’t so sure they want to get into the alarm industry,” Barnes admitted. “(They say) ‘You guys are about to get blocked’ or ‘You’ve got Google and Amazon coming into this space’ or there will be technological disruption. They say the wheels are about to come off for this industry. I have literally sat through conversations with people who control billions of dollars, and they tell me this.”
While Barnes does not agree with those concerns, the DIY solutions are certainly creating strain for many integrators. “Small alarm companies looking to sell their business aren’t saying that Google is eating their lunch, or they are losing subscribers to DIY,” Barnes said. “What we are hearing is, ‘I’m a little bit scared, and I’m awful tired.’ It is just hard to be competitive and many are finding it is not easy to stay on the leading edge of what’s going on in the industry.”
Aside from the effect on integrators, the vendor side of the market has also seen some activity based on the competition posed by major technology disruptors – most notably the decision by United Technologies to shut down long-time security brand Interlogix by the end of 2019, and Lowe’s shuttering its Iris smart home platform.
3. U.S. Government Activity
From tariffs to trade wars to outright government shutdowns, much of the news and decisions coming out of Washington in 2019 have had a decidedly negative effect on the security integration industry. And while there has been some headway in ongoing trade negotiations between the U.S. and China, decisions on that front made in 2020 could have far-reaching impacts for the security industry in the future.
In a span of just 18 months, SecurityInfoWatch.com and Security Business covered the expansion and contraction of tariffs on Chinese-made goods that either directly or indirectly affected the security industry no less than 10 different times. To say that these fees and general uncertainty has not hurt the security industry from an economic perspective would be naive.
“We certainly have been incurring costs related to tariffs,” Alarm.com CFO Steve Valenzuela admitted on the company’s most recent earnings call. “We have been absorbing some of those, and we have been able to pass some of that on. We still take a cautious view on tariffs, (because) we don’t know when the next tweet is going to come out.”
Besides the tariffs imposed thus far by the U.S. on Chinese goods, the Trump administration has also singled out Hikvision and Dahua, the world’s two largest providers of video surveillance equipment, for additional sanctions that are already affecting integrator margins. In August, a ban that prohibits the installation of products from the companies in federal installation officially went into effect. Just two months later, the U.S. Department of Commerce, citing alleged human rights violations, placed the companies, along with 26 other governmental and commercial entities, on a blacklist that prohibits U.S. companies from exporting products to them.
Though products from these companies can still be sold to customers in other vertical markets, McHale says integrators may need to look elsewhere for suppliers should the concerns expressed by government spread to other sectors. “There should be no problem in sourcing video surveillance products that can offer quality and high performance, but (integrators) may have to pay a little more,” he says. “Since they are all in the same boat, they should be able to pass on the additional cost.”
Cropley adds that the move by the administration against Hikvision and Dahua certainly “adds complexity to the sourcing decision” for integrators. “It means that integrators need to stay on top of political decisions which could affect their supplier relationships,” he says.
Because they provide good value for what they produce, Giacalone says that many integrators are standing by Hikvision and Dahua, at least for now. “It appears that they are all maintaining their ground through this period – believing that this will come to fruition soon,” he says. “What we are experiencing may just be a blip on the screen when we look back.”
Another casualty of the trade war that simply cannot be overlooked in a recap of 2019 is the fate of security manufacturer Aventura Technologies after it was shut down in November by the FBI, which arrested seven of the company’s executives for allegedly claiming their products were made in the USA, when in fact they were manufactured in China and sold for use in U.S. government projects.
Additionally, at this time in 2019, integrators who serve the government market faced major uncertainty during the longest U.S. government shutdown in history. Beyond the closure of National Parks and federal offices, in some cases, contractors were not able to maintain contact with government procurement, security and IT personnel needed to initiate or continue work on security projects.
Joel Griffin is Editor-in-Chief of SecurityInfoWatch.com. Paul Rothman is Editor-in-Chief of Security Business magazine.
