Protecting Your Critical Assets - Acquistions within Security

Broad-based growth in the security industry will be a function of, and primarily driven by, elevated risks of crime, terrorism, and improving economy, and technological innovation. With that said, some markets will grow disproportionately. These markets include electronic security systems, private security services, and information security.

According to a study by The Freedonia Group, U.S. demand for electronic security systems will advance 8% annually through 2012. Access controls, including biometrics, will experience the greatest gains spurred by innovative developments, which decrease costs, while improving overall implementation and execution. Our research indicates that within this market, other segments will stand to benefit as well. These market segments include burglar and fire alarms, automotive security, closed-circuit television, and electronic article surveillance. All of these segments will benefit as the economy rebounds.

U.S. demand for private security services, according to Security Solutions, is expected to rise 5% annually through 2012. This is based in part on perceived risks of crime, and the fact that many local and state governments are facing budget shortfalls, which lowers expectations of public safety services. Security consulting, integrated systems, and guarding are expected to be among the fastest growing segments.

Interestingly, a number of security guard companies have improved their earnings over the course of the economic recession, as customers expanded their security detail to contend with the increase in crime during demanding economic times. Furthermore, as is the case with other types of outsourced services, commercial customers looking to focus on their core strengths, as well as decreased costs, are eliminating in-house security guards and instead seeking to contract security guard service companies to fill the void. There are a number of reputable private equity groups with investments in the security guard segment. This list includes the Audax Group, The Blackstone Group, Pegasus Capital Advisors, and Windpoint Partners.

A study by Research and Markets entitled, "Federal Information Security Market Forecast", projects demand for vendor-furnished information security products and services by the U.S. federal government to reach $10 billion by 2013. Well-funded cyber criminals, including cyber terrorists, data protection requirements, and Congressional scrutiny over the lack of secure systems will drive profitability. However, our understanding is that earnings will increase for not only government service providers, but across the information security market as a whole.

Below is a sample of some recent transactions in the security industry:

• Kratos Defense & Security Solutions, Inc., a National Defense, Information Technology, Assurance, and Security Solutions provider, acquired Gichner Holdings, Inc. a design, engineering, manufacturer, and integrator of tactical and other shelters, products, solutions, modular containers, subsystems, and support equipment for the U.S. military, its allies, and leading defense prime contractors.


• McAfee, Inc., a security technology company, acquired Trust Digital, a provider of mobile management and security software


• Trustwave, a provider of on-demand data security and payment card industry compliance management solutions, acquired Breach Security, a Web application firewall vendor


• GTCR, a private equity group, acquired Protection One, a provider of monitored security services


• Sentry Security, a provider of security solutions for homeowners and businesses, acquired Schaumburg Security services, a full-service alarm company


• ASG Security, an electronic security company, acquired Encompass, a provider of loss prevention, integrated, and convergent security solutions


• Universal Protection Service, a division of Universal Services of America and a provider of security services in the U.S., acquired ProGuard Security Services, Inc., a provider of security guard services.


• Symantec, a software company, acquired VeriSign, Inc., a provider of Internet infrastructure services

2010 may be a strong time for business owners in the security industry to contemplate sale. The industry is fragmented, and consolidation is expected to occur in the near to medium-term. Additionally, companies that have an appealing produce niche, or have a blue chip distribution and customer base, are attractive to investors. Companies with these characteristics are perceived as somewhat recession-resistant, and as such, are highly sought after.

The overall environment may be particularly ripe for sellers in the security industry, for the following reasons:

• Increased terrorism on a global scale heightens public perception of the importance of, and need for, security maintenance, which tends to be a relatively high priority, even in times of a weak economy.


• Currently, private equity funds are infused with cash, and they are in need of finding investment opportunities, because of expiring time horizons


• The capital gains rate is expected to increase at the start of 2011, eventually reaching around 24%, and sellers may benefit substantially by "beating" this rise in cost


• In the next few years, as "baby boomers" seek to retire from their businesses, the number of companies for sale is expected to rise exponentially, and especially over the next five years, this change will shift the current "seller's market" to an environment far more advantageous to buyers


• Finally, strategic buyers are actively acquiring smaller firms as part of their strategy for growth, which is especially pertinent in an economy that offers little prospect for organic expansion

Our firm is enthused and excited about the security industry, and we are in constant contact with excellent buyers in this segment.

Scott Sims, M&A Analyst
DouglasGroup.net

Douglas Group has authored:
"Ripe: Harvesting The Value of Your Business"
"Cashing In! Selling Your Company for Maximum Price"