'We're at or near historic highs'
SANTA MONICA, Calif.--With Santa Monica Pier a stone's throw away, the organizers of this year's Security Growth Conference kicked things off by painting a rosy picture of the physical security industry--with some dark clouds creeping in at the edges. As the industry grows and consolidates, they said, all signs point to a robust business climate. It's just that the climate is substantially different than traditional norms.
Part of this, said John Mack, founder and chief executive officer of USBX Advisory Services, is because "we're seeing record [mergers and acquisitions] activity in general: $3.2 trillion globally, $1.6 trillion in the United States" in 2006 alone. "We're at or near historic highs," Mack said, "and they're being done with cash, which is a big difference from a few years ago."
This is particularly relevant to Security Growth, as the conference is designed "to allow leading middle-market security company CEOs to network with each other, senior executives from large global companies, and leading players from the investment community." Mergers and acquisitions are USBX's business, and the business of the other presenting sponsors, law firm Mitchell, Silberberg & Knupp and CapitalSource Finance.
In those mergers and acquisitions, private equity from the investment community is playing a larger role than ever before. "Security [mergers and acquisitions are] growing faster than the rest of the market," said Mack, and "private equity is driving the demand." Private equity represented 31 percent of money involved in mergers and acquisition activity, according to Mack, and that is up from 19 percent in 2005 and just seven percent in 2004. "That's an incredible statistic and a huge force driving the market," Mack said.
Thus, his outlook for 2007 is much of the same, though he pronounced himself "a little cautious." Everyone seems to be in agreement that there are "record amounts of money in private equity [and] record amounts on corporate balance sheets," Mack said. "They need to continue to do transactions to justify the multiples they're trading at."
Transactions are also fueled by ready access to debt capital, Mack said, and CapitalSource managing director Bill Polk agreed "it was a historic year for the debt markets" and "things don't seem to be changing; 2007 is like 2006 on steroids--though a meltdown in the Asian markets could change all of that for us."
Here is where some of that caution comes in. "Based on historical terms," Polk said, "the structures and pricing would seem beyond the pale ... the volume seems outlandish, seemingly infinite." However, he said, "the default rates are approaching near bottom lows ... [and] the distressed market is nearly non-existent."
Part of this is because non-banks now make up 75 percent of lenders, up from 30 percent in 1994, and money is less expensive than it's ever been. That means, said Polk, "it's important to understand the kind of lender you're doing business with, so, when the worm turns, as it always does," your lender won't simply flee the situation.
"It's a good time to be a borrower," Polk concluded, "but be careful and know your lender."