Security industry consolidation: What you need to know

Guest commentary
Monday, August 1, 2005

Security continues to garner the attention of investors and corporations alike, as witnessed by the flurry of activity in the industry in 2004 and 2005. The influx of capital from both the private and public sectors has driven valuations of security companies to soaring levels. Meanwhile, mergers and acquisitions also continue to play a significant role as strategic investors and corporate consolidators compete for increasingly scarce security assets, thereby raising transaction multiples to historic levels. This highly competitive environment is creating unique opportunities for security companies to raise capital or sell their businesses to bigger players who are racing to capture market share and access new channels.
Without a doubt, the flood of investment activity in the security industry is also fueling a synergy of security products and service providers and the integration of technology. More so than ever, installers and integrators need to understand the changing dynamics in the capital markets in order to make smart security purchasing decisions.
With so much emphasis being placed on the security of physical and informational assets, corporations are elevating security to a top business priority.
Spurring this movement is the fact that end users are seeking cost savings through integrated solutions and demanding more automated security systems. As a result, companies like GE, Honeywell, United Technologies and Schneider Electric are vying for strategic add-ons in the middle market that will give them a total solution. Other large companies and consolidators are searching for acquisitions that enable them to offer end-to-end security solutions.
Private equity investment is also prompting the integration of a very fragmented industry. Because most companies still rely on separate fire, alarm, access control, HVAC, video surveillance and other security systems--none of which are networked or interoperable--the demand for solutions that integrate these disparate systems is rapidly expanding. So, what does this mean for security systems decision makers?
Post acquisition integration of physical security product companies is creating interesting opportunities for providers to offer better access and capabilities to the enterprise. With tighter integration of security product offerings, these companies will be able to provide end-to-end solutions that increase their footprint in the market as well as the diversity of their product platforms. For buyers, this means more comprehensive capabilities and the possible cost savings through interoperable solutions.
Integration brought about by the acquisition of physical security product providers by companies in adjacent markets may also provide end users with expanded options from a single provider. United Technologies' acquisition of Lenel Systems should provide users with better access to industrial controls and building systems. Likewise, Schneider Electric's acquisition of Andover Controls creates a new synergy that combines power distribution products with physical security and building automation offerings.
The industry is already beginning to see the convergence of traditional IT network security with security systems and services, which have historically operated independently. Case in point, WFI's acquisition of three independent security systems integrators has enabled this systems engineering and network services provider to establish a national capability. Similarly, Honeywell 's acquisition of Novar is an example of how this diversified technology manufacturing leader is increasing its depth in the intelligent building systems market.
Bottom line--before you make your next security purchasing decision, start thinking about how this booming M&A landscape will impact you.


Paul Talley is vice president and head of the security and defense practice group for Cascadia Capital, a national investment bank. He can be contacted at