Special Report

The Europeans have staked their claim to a booming $100 billion security market in the United States and in doing so, are dramatically changing the face of the security industry. Stockholm-based Securitas set the stage for this European-U.S. acquisition enthusiasm, according to investment banker Jack Mallon, managing director of New York based Mallon Capital. The trend began in 1999 with Securitas’ $385 million acquisition of Westlake Village, Calif.-based guarding company Pinkerton. At the time Securitas showed $6 billion in security sales; Pinkerton, $1 billion. Securitas followed the Pinkerton buy with a series of other acquisitions: Burns International Services in Chicago, First Security in Boston and American Protective Services in Oakland, Calif. Last year, a Securitas rival, Group 4 Falck, based in Copenhagen, plunked down $570 million to buy U.S.-based Wackenhut Corp., a guarding and corrections company in Palm Beach Gardens, Fla. Along with those acquisitions from Europe - all of them guard companies - there have been dozens more European security companies crossing the Atlantic to capture a share of the U.S. security market - British guarding companies Securicor and Reliance Security; Germany’s Bosch and Siemens and others including Assa Abloy, Rentokill and Chubb. It’s a market that glittered with growth potential even before 9/11. The U.S. appeal, the European advantage But the U.S. conversion goes beyond creating bigger and bigger companies and efficiencies through consolidation. The more subtle shifts have to do with an approach to doing business that results in greater profit margins, better training and inevitably the offerings of more products and services under one roof. For now, the European companies are ahead of the curve, and analysts and investment bankers expect they’ll keep the advantage. Leading the guard U.S. security companies offer their European counterparts a way to grow that they no longer have in the saturated European market. The U.S. security market is the largest in the world, representing more than 50 percent of the total global market, according to Mallon. The U.S. market is still growing and is expected to grow even more with the increased expectations for security since 9/11. “This is the biggest market, and it’s the richest market,” says Timothy Dimoff, chief executive officer and president of SACS Consulting in Akron, Ohio, a security consulting firm. “We’re big in size and big on spending the bucks,” Dimoff says. Americans have come to expect security everywhere, he says, where they work, live, shop, play and go to school. “We’ve learned to like it; we’ve learned to expect it; and we’re demanding it,” Dimoff says. The American attitude in favor of security that Dimoff describes became even more pronounced after 9/11. “They were sitting on a silver mine,” says Dimoff. “Now they’re sitting on a gold mine.” What European companies saw was demand and the opportunity. European security executives noted that the U.S. market was splintered with several large security companies and also many small and mid-sized companies. “If you want to be a major player in security, you have to have a presence in the U.S.,” says Mallon. “The U.S. companies were vulnerable and so the Europeans scooped them up.” It doesn’t surprise Gregory Bortz that many of the mergers and acquisitions among security companies have occurred with European companies buying American counterparts. Bortz, an investment banker and senior vice president of Lehman Brothers’ Business and Professional Services Group, notes that pure-play security companies in Europe were trading at much higher rates than similar U.S. companies from the 1990s to today, paving the way into the U.S. market. Moreover, notes John Mack, chief executive officer of USBX Advisory Services, the exchange rate for the Euro versus the dollar, effectively gave the Europeans a 15 percent discount on any U.S. acquisition. “The stocks of the European companies were higher valued and they could use the stock as currency to play the M&A game,” says Mallon. “The p/e (price to earnings) multiples on some European security companies were in the 70s while the U.S. security giants were weak because of tepid earnings.” Today, those multiples have dropped to 20s rather than 70s, but European companies remain in a position of strength on the acquisition front, and the European security firms are bent on growing. They’ve outgrown their own home markets and need to look overseas for growth, says Bortz. Moreover they are looking to grow, not only in size, but to round out their security portfolios - to offer one-stop shopping. One of the not-so-hidden goals, says Dimoff, is to eliminate competition. Once they establish extensive security offerings, “they now have the ability to control the pricing, delivery and marketing,” he says. Consolidation with a difference When U.S. companies acquire other U.S. companies, the similarities in business processes and corporate culture help the merged company get on with business quickly. When the merger is between a European company and an American one, the assimilation is more complex and usually takes more time and effort. “When there is a domestic acquisition and subsequent consolidation of operations, the companies would have more synergies and be able to eliminate duplicate overhead and expenses,” says Mallon. “In the case of cross-border acquisitions, one would customarily have to retain the existing administrative structure and have less opportunity to cut overhead costs.” Currency exchange plays a critical role in cross-border deals, says Mack of USBX. “It is important to investigate hedging strategies so sharp swings in the currency market don’t hurt profitability,” he says. Beyond currency, there are tax, liability and environmental issues that are likely to be more complex in an international deal. Peter Ribinski, president and chief executive officer of Bosch Security Systems, the German-based conglomerate that bought Rochester, N.Y.-based Detection Systems, including its Radionics division, in January 2001 and later acquired camera company Philips CSI, says the decision to buy is always a strategic one for Bosch. It’s a strategy designed to expand Bosch’s international presence while acquiring a piece of the security business that folds well into its existing mix. Bosch works hard to avoid redundancies, Ribinski says. In turn, the company is not forced to announce layoffs following an acquisition as many acquiring companies often do. Bosch looks to acquire products and competencies it does not have, says Ribinski. Until the Detection Systems acquisition, for instance, Bosch did not have a motion detector component of the security business. “It was a perfect fit,” says Ribinski. Vive la difference! By many accounts, European security companies take a focused approach to business that results in higher profit margins than those of their U.S. competitors. They also offer top-notch training that justifies higher billing rates for security personnel, says Mallon. Mallon predicts the European companies will strive to boost their bottom lines in the United States and perhaps raise the overall margins of the U.S. guard companies. Bortz from Lehman Brothers agrees. “By and large, they’re more disciplined,” he says. He adds that European companies tend to pay personnel better as well as charge customers more for products and services. “They train better,” says Bortz, “and by training better, they provide better service and can charge more.” North American companies tend to compete purely on price, says Bortz. Bosch’s Ribinski says his company also employs strict guidelines in making acquisition decisions. “We’re careful in evaluating our business opportunities,” Ribinski says. “If something looks tempting, we will walk away from it - even if it’s a big deal - if it doesn’t contribute to the bottom line.” ‘A few bumps’ In spite of the European firms’ attention to quality and the bottom line, acquisitions in the United States have not been trouble free. Mallon mentions what he calls “a few bumps in the road:” - U.K.-based Securicor, the company that in 2000 bought the passenger screening and guarding operations of Argenbright for $185 million, suffered a blow when Argenbright came under fire for alleged screening deficiencies at the time of the 9/11 terrorist attacks. The company lost millions of dollars and faces a host of liability lawsuits. - Securitas had some operational problems in its efforts to consolidate its Pinkerton, Burns, First Security and American Protective Services acquisitions. It has been unable to generate the profit margins in the United States that it has in Europe. - Since 9/11 the U.S. government is requiring that aviation security be performed by companies with 75 percent U.S. ownership and 75 percent U.S. representation on their board of directors. There’s also a slight tendency for corporate security directors to tilt toward U.S. companies, since 9/11. - European security companies don’t have the high-flying stocks they used to have and so do not have as much of an edge in the acquisition game. What’s next? Dimoff predicts now that many of the larger national companies have been acquired, European companies - and U.S.-based ones, too - will go after the larger regional companies. “I think they’re eyeballing them right now,” he says. “That’s going to be their next target.” Companies that are primarily guard companies will seek to acquire an electronics piece, he says. They’ll look to buy installers, providers and systems integrators. “There’s a tremendous push right now to grow electronics,” Dimoff says. He adds that security firms prefer to buy an established operation because “you can start making money the first day.” Plus the prospect of recurring revenue from maintenance and service contracts that can be part of the revenue stream for many of these companies is very appealing. “It’s going to get heavy in the next couple of years,” predicts Dimoff. “Once it starts, it’s really going to go fast.” The stage is set for more acquisitions, agrees Bortz. The U.S. market remains fragmented with more than 5,000 participants, many of which are small private firms with less than $1 million in revenue. The bottom line, says Bortz, is that European companies will either compete with U.S. companies or acquire them. He suggests that either way, U.S. companies must build a business strategy with the European factor in mind. While European company stocks have settled and the financial climate has cooled, Bortz expects acquisitions activity will continue and European companies will be at the forefront, he says. Bosch, for one, is eyeing a possible acquisition, but Ribinski would not name the company or its location. Bosch is keen on growing its market share in the United States, Europe, Latin America and Asia, he says. Neither Borzt nor Mack expect major U.S. acquisitions of European firms. But, Mallon, who is based in New York City, recently opened an office in Dusseldorf, Germany, anticipating mergers and acquisitions activity from both sides of the Atlantic. “I don’t think the U.S. security industry should necessarily surrender,” says Mallon. “There’s ebb and flow in commerce. The game isn’t over. The game keeps changing; the players keep changing.” European consolidators - Securitas - services include security guards, alarm systems, cash transit, systems integration - Group 4 Falck - services include security guards, alarm systems, cash transit, fire services - Chubb Plc - services include security guards, access control / CCTV, cash transit, fire protection - Assa Abloy - services include locks, security doors, smart cards, biometrics - Siemens - services include alarm systems, access control, systems integration, fire safety - Bosch - services include alarm systems, access control / CCTV, fire detection, trace detection