Inside Look: Why Security Companies Saw Stocks Drop in 2015
Publicly-traded electronic security companies had mostly dreary returns during 2015, ending a six-year run of outperforming the S&P 500.
The S&P 500 had double-digit gains for the past three years prior to 2015's decline.
Small Integration Firms Outperform the Big Boys
Large system integration companies posted positive gains in local currencies in 2015, albeit in the mid-single digits. It was the smaller, privately-held companies that specialize in IT skills and customer experience that outperformed the larger publicly-traded firms. Imperial Capital estimates there are about seven such companies that are currently growing about 20% a year in the North American market.
By comparison, Tyco Integrated Security and Stanley Security Solutions posted revenue growth that was essentially flat as both companies concentrated on better margins, and better clients, at the price of raw revenue growth. Noteworthy, these firms have international businesses and their numbers are skewed by currency exchange given the strength of the dollar against other currencies.
2015 M&A ACTIVITY IN REVIEW
- Allegion acquired SimonsVoss for $227 million
- Battery Ventures acquired NICE Systems’ physical security business unit (PSBU) for $100 million
- Canon acquired Axis Communications for $2.8 billion
- Dean Drako (Eagle Eye Networks) purchased Brivo Systems for $50 million
- Elbit Systems acquired NICE Systems’ cyber and intelligence division for $158 million
- FLIR Systems acquired DVTel for $92 million
- Monitronics acquired LiveWatch for $67 million
- Securitas agreed to acquire Diebold’s North American electronic security business for $350 million
- Wendel agreed to acquire AlliedBarton Security for $1.67 billion
Still more deals were consummated with undisclosed terms. Included:
- Apollo Global Management acquired Protection 1 and ASG Security
- Guardsmark was acquired by Universal Protection Services
- HID Global acquired Quantum Secure
- Panasonic acquired VideoInsight
Diebold’s North American security integration business – which is being acquired by Securitas for $350 million – was estimated to have grown between 5% and 10% in 2015. It was the fastest growing division at Diebold (NYSE: DBD). Selling off its systems integration business signals Diebold’s decision to concentrate on core competencies in providing services and ATMs to financial institutions while outsourcing security services to Securitas.
Securitas’ deal for an electronic security business is viewed as evidence of a growing trend in the industry. Larger, traditional guarding firms are looking to also offer integration services in order to compete for business by combining the use of guards with technology. Securitas had been falling behind its competitors, including Prosegur (PSG.MC), G4S (LON: GFS) and others, by remaining essentially a guard company.
It is a trend that can be likened to the consolidation reshaping the video surveillance industry where some manufacturers aim to provide end-to-end solutions. Securitas and other similar firms are vying for end users, such as large enterprises and property managers, to provide video surveillance, intrusion, access control and related services, to complement their guarding portfolio. A one-stop shop of sorts.
Video Sector Suffers Margin Squeeze
Imperial Capital estimates the video surveillance equipment market, excluding services, grew to about $13 billion in 2015. That bested 2014’s performance by about $1 billion.
Overall, equipment unit pricing grew in the low- to mid-teens, which was below the 20% mark that some industry watchers expected. Due to price pressure from Chinese manufacturers, the industry experienced mid to high single-digit growth in revenue, which ultimately hurt valuations. Axis Communications (OM: AXIS) was among the only video surveillance stocks to perform well during the year – it was up about 35% – mainly due to its acquisition by Canon.
Offsetting considerable investor concerns over changing market shares and pressure on gross margins is the increasing amount of consolidation among higher-end manufacturers and software companies that are gunning to boost their value proposition for enterprise customers. Imperial Capital refers to the move toward the one-stop-shop model – supplying video management software, analytics, storage, cameras and other appliances – as “the collapse of the horizontal market.” Among transactions in recent time to illustrate this tectonic shift in the video surveillance industry: Panasonic buying VideoInsight; Canon’s deals for Axis and Milestone Systems; FLIR Systems’ DVTel buy; Vicon merging with IQinVision; Avigilon acquiring ObjectVideo’s intellectual property; plus purchases by Tyco, Bosch and others.
RELATED: Axis Communications Acquires Citilog for Traffic and Transportation Video Monitoring
It is a shift that is likely to be welcomed by the majority of specifiers, architects and especially integrators who gain a more straightforward way to install solutions.
Another major trend in video is the improvements in economics of Security as a Service (SaaS) models for small-to-medium businesses. For example, note the acquisition of Brivo, the leading cloud-based access control company, by Dean Drako, the CEO of Eagle Eye Networks, a SaaS-based video company.
Access Control Performance Sees Slight Gains
In one of the security industry’s bigger developments in 2015, Kaba agreed to merge with privately-held Dorma Holding to create a top-three player in the door hardware and access control equipment market with revenue topping $2.1 billion. Kaba shares promptly jumped as much as 19%, the most since 2000, on news of the transaction. The combined company, dorma kaba Holding AG (DOKA.S), ranks as the second-largest access control player in the Europe, Middle East and Africa (EMEA) region, behind only ASSA ABLOY (OM:ASSA B), according to IHS.
Overall, sector stocks were essentially flat in 2015 following the previous year’s strong performance led by ASSA ABLOY. The conglomerate continues to grow at a low single-digit rate internally as it continues to acquire companies at a fairly fast clip to beef up that growth.
ASSA ABLOY’s HID Global business drew attention from market watchers when its president and CEO, Denis Hébert, quietly departed the company with no official announcement. It seemed a clear indication that the Mothership was not pleased with the rate of growth at HID, which is a technology leader in the ID solutions market.
Allegion (NYSE: ALLE), considered the second-largest provider of locks and access control systems in the world, posted slightly higher stock performance as investors continue to observe two factors: the potential for increased adoption of wireless locks and ID sensors in new construction, and an expected increase in margins in 2016 and 2017 in Europe.
Allegion was created in 2013 when Ingersoll-Rand (IR) spun off its commercial and residential security businesses into one publicly-traded company. Those seven companies had never been integrated and were barely profitable as a whole.
Today, however, Allegion is beginning to prove its mettle on Wall Street. The company’s purchase in 2015 of SimonsVoss, a premier provider of wireless locking systems, is viewed as a catalyst to better assimilating the seven pieces that became one. Allegion’s valuation somewhat lags behind ASSA ABLOY, but its stock continues to perform reasonably well given market’s expectations for a rosy 2016 and 2017.
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About the Author
Rodney Bosch, Senior Editor
Although Bosch’s name is quite familiar to those in the security industry, his previous experience has been in daily newspaper journalism. Prior to joining SECURITY SALES & INTEGRATION in 2006, he spent 15 years with the Los Angeles Times, where he performed a wide assortment of editorial responsibilities, including feature and metro department assignments as well as content producing for latimes.com. Bosch is a graduate of California State University, Fresno with a degree in Mass Communication & Journalism. In 2007, he successfully completed the National Burglar and Fire Alarm Association’s National Training School coursework to become a Certified Level I Alarm Technician.
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