M&A outlook: The good, the bad and the ugly

Sorry about the classic movie reference – cue that epic western movie theme music now please – but this year will be remembered as one of the most challenging in American history, and the security industry has not been immune, with the impact of this past year being felt in all facets of the industry, certainly some more than others. The 2020 M&A market, in particular, has had some wild activity. Just in the last six months alone we have seen some big deals, most notably:

• Allied Universal-G4S
• Securitas-FE Moran
• Brinks Home Security-Select Security
• Alarm.com-Shooter Detection Systems
• ADT-CellBounce
• ACRE-Razberi
• ADT Commercial-Percepta Labs
• Johnson Controls-Qolsys
• Motorola Soluitions-Pelco

The good

While the commercial SMB space probably took the greatest hit from COVID in 2020, the commercial systems integrator M&A market, in general, will continue to be active in 2021, according to John Mack, executive vice president, co-head of investment banking with Imperial Capital.

“I think you will continue to see companies like ADT Commercial, Allied Universal, Securitas, Prosegur, Convergint, for example, continue to use M&A for growth, so I think you will see good activity in the commercial M&A space [in 2021],” said Mack, noting that he is seeing “significant interest” in the commercial side of the business.

“If you look at the Securitas and FE Moran transaction, that is indicative of that trend, as there is a lot of interest – and at reasonable valuation multiples – on the commercial side of the business,” Mack explained. “With FE Moran, it was a hybrid alarm and systems integration business, so it was a meaningful security integration business alongside a commercial alarm company with no residential business whatsoever. That profile, it turns out, is quite attractive.”

He continued, “There just aren’t that many pure-play commercial alarm companies in the market so you will not see a lot of deals, but you will continue to see transactions in the commercial integration space, in general, and you may see deals in the alarm space at more attractive valuations when the business has a meaningful commercial base.”

The bad and the ugly

While valuations on the commercial side of the business are getting more attractive, the outlook is not as rosy on the residential side of the business, and it looks like consolidation will continue into the first half of 2021 as alarm companies that have struggled will be forced to sell, including many that are backed by larger investment companies and banks.

“The amount of regular way M&A is substantially reduced because the valuations are way down, so anybody that has a business that is performing well doesn’t want to sell right now because of the low valuation dynamic,” noted Mack. “We are going to continue to see a meaningful amount of distressed transactions in the first six months of next year. The preponderance of these struggling alarm businesses are going to be forced into transactions in the first six months of next year because of just the nature of restructurings that goes on with these deals. So, there are a bunch of deals that are going to hit the market in that six-month period, and you will see a flurry of deals but they will not be at attractive valuations.”

Let’s hope 2021 is a big rebound year for the country and the security industry as a whole! Cheers to the New Year and new beginnings!