Based on mergers and acquisitions (M&A) data collected over the last 17 years on the physical security industry, our annual report shows a general upward trend in consolidation of the industry over this period, with four cycles of rise and fall sometimes exaggerated by a number of billion-dollar mega deals.
In 2017, industry M&A was valued at $6.213 billion, which looks like the start of a new wave of growth. The structure of the industry is still very fragmented with hundreds of small companies finding it increasingly difficult to compete. It looks inevitable that the general trend line of value and volume of M&A will continue upwards over the next five years.
There is also a need for the leading western players in the video surveillance industry to go for scale and quickly. M&A is the most appropriate strategy to achieve this. The reasons for this are twofold: to fight off Chinese manufactures that are now much larger and are winning share in developed markets and also to meet the longer term trend of commoditization of IP network cameras.
Although industry M&A in 2017 was only one-third of the $19.73 billion realized in the previous year, if we take out the Johnson Controls-Tyco merger, then it’s almost double the size by value and 30 percent more by number of deals than in 2016. We forecast that 2018 will be the start of a new wave of growth that will reach $7.85 billion by 2022. To achieve this, it will require a number of billion dollar deals and, based on past history, these will distort the picture on an annual basis but the trend line will be a gradual increase in M&A activity over the next five years.
The 2017/2016 deals over $100 million that we believe will strengthen the physical security business include:
- Flir’s acquisition of Point Grey Research a leading developer of machine vision cameras for use in industrial, retail, scientific, traffic, mapping, and other advanced imaging applications, for approximately $253 million in cash.
- Advent (Oburthur’s) acquisition of Safran’s Card Systems and Identity divisions for $2425 million. Advent International, a global private equity fund, acquired Oberthur Technologies in 2011. The fund’s objective is now to bring together Safran I&S with Oberthur Technologies to create a global player in the domain of identity technologies strongly rooted in France.
- Gemalto’s purchase of 3M’s identity management business for $850 million. There are three key components included in 3M’s portfolio that will become part of Gemalto’s Government Programs business: the biometric offerings that came to 3M following the Cogent acquisition, a document reader line and 3M’s internal secure identity materials business. Together the three areas generate $215 million annually.
- FLIR Systems’ acquisition of Prox Dynamics AS, a developer and manufacturer of nano-class unmanned aerial systems (UAS) for military and para-military intelligence, surveillance, and reconnaissance applications, for approximately $134 million in cash.
- HID Global’s purchase of Mercury Security, an OEM supplier of controllers and management software for physical access control for an estimated $250 million.
- Vivotek. one of the largest remaining independent video surveillance manufacturers, has received an offer to become majority owned by Delta Group, a Taiwan-based conglomerate. Delta Group generates $8 billion in annual revenue and is one of the 20 largest companies in Taiwan.
- Bain selling Uniview to Hangzhou Jiaozhi Technologies Co., owned by China Trans Info, a publicly-based company with a $2.5 billion market capitalization. The price paid for Uniview was $535.5 million. We assume that Bain would have approached/invited a number of western companies to make a bid. This could have been the moment for a foreign manufacturer to seize the opportunity to both build up scale and get established in China, the largest single market in the world for video surveillance equipment.
Cross border acquisitions accounted for 32 percent of the deals carried out this past year compared with 48 percent in 2016, 42 percent in 2015 and 50 percent in 2014. Therefore, the motivation to extend geographical coverage declined significantly in 2017. Acquisition was driven by the need to acquire leading technology and innovative products.
Public equity will continue to dominate the M&A scene for the next few years for many of the larger players are sitting on substantial cash reserves. Private equity has in the past been a major source of funding for acquisitions but since 2012/13 it has declined. In addition, their interest in acquiring physical security companies has tapered off, but as we have shown, Advent acquired Safran’s identity Management division this year and Bain sold Uniview for a substantial profit.
Most players in the business believe that it is too fragmented and consolidation will be needed to meet the challenge of commoditization. There is even some talk of the top 10 companies taking a market share of 90 percent of the total market by 2023. We think that this is unlikely. However, video surveillance could well be dominated by no more than 10 players within the next 10 years.
The two Chinese market leaders, Hikvision and Dahua, have made significant inroads into the western video surveillance market and they are very ambitious to build on this. Could this drive them to merge or acquire leading western security manufactures? They have not been tempted so far but if the “race to the bottom” does not achieve their objective of rapidly gaining very substantial market share, then they are likely to spend on acquiring their western competitors.
For more information about our report, “The Physical Security Business 2017 to 2022, Access Control, Intruder Alarm & Video Surveillance,” click here.
