Credentialing/ID Solutions segment equity performance was strong, finishing the year at approximately 80% of 52-week highs; as a whole the segment averaged a 32% stock price appreciation over 2011. Valuation levels lead the industry, averaging gains of 30% to more than 50% depending on the metric. Zicom was the biggest winner and Precise Biometrics
the largest loser, as measured by equity valuations. Industry margins were stable with an average of approximately 15%; De La Rue enjoyed a margin pickup exceeding 20%.
The Large Cap/Defense Primes segment enjoyed strong price appreciation with stocks up an average of 32% and posted the best segment value retention, finishing the year with prices at 93% of their 52-week highs. In part, this was likely a function of the “flight to quality” notion but as well this group did a lot of balance sheet “tuning” (repurchasing shares and issuing material amounts of debt). Foreign players Safran and Singapore Technologies were the biggest winners with equity value increases exceeding 47%. France’s Safran also showed very strong margin gains delivering EBITDA growth of 16%. Overall sector multiples rose modestly and the large cap universe continues to deliver.
Safety/Protection improved materially compared to 2011; equity values were up an average of 32%. Revenue multiples rose while EBITDA multiples were mixed. Federal Signal was the segment’s big winner given its 12% sales increase and 38% margins improvement. In contrast, Lakeland continues to be at the bottom of the segment struggling to deliver satisfactory performance.
For Security/Defense Integrators, revenue multiples declined but EBITDA multiples rose. Segment stocks held onto gains, finishing at 84% of yearly highs vs. 72% for 2011. Segment performance was heavily influenced by CSC, which delivered at 69% stock price gain. Cairo and Unisys were down by 11% or more. Segment margins were relatively unchanged, but more trended negative than positive.
The Diversified Security Large Cap segment (now that ADT has split from Tyco Int’l) experienced sound multiples expansion during 2012 and segment stocks rising an average of 10%. Depending on outcomes, this year the spun-out Ingersoll Rand (IR) security business may be added to this segment. As a group, this segment issued lots of capital and did some M&A. Honeywell finished with a leading 17% increase in margins and Stanley won with 6% sales growth.
M&A Activity in Review
Chalk up 2012 as an interesting year, mostly due to the absence of game-changing deals. Aside from UTC closing its acquisition of Goodrich, the vast majority of sector M&A was strategic yet rather small in comparison to prior years. Corporates were consistently present, effecting tuck-ins and add-ons, while private equity and hedge funds were also active. In an unpleasant twist, activist investors have again found their way into the sector, putting pressure on companies including Intermec, ADT, Esterline, Oshkosh, among others. In the case of Intermec, the initiative was successful with the business being sold to Honeywell for about $690 million. Other large deals included the Comverse/Verent merger, valued at $1.5 billion, Apax taking Garda private for $1.1 billion, and 3M’s acquisition of Ceradyne for $1 billion.
As mentioned, smaller deals were numerous with strategic and financial buyers aggressively pursuing assets: Francisco Partners bought Smith’s 39% interest in CrossMatch for $78 million; Lockheed sold 100% of Savi to LaSalle Capital for undisclosed terms; and UTC sold RedHawk to Comvest for undisclosed terms. UTC was active as both a buyer (e.g. snapping up FreightWatch) and seller. FLIR was also an active buyer and seller, spending about $46 million to acquire Traficon and $60 million for Lorex, while also selling SensIQ.
Serco was more active as a seller than a buyer, divesting one of its risk consultancies for more than $200 million. ASSA ABLOY and G4S were big acquirers of small guarding and investigative platforms. A new name entered the industry in 2012 with Apple buying AuthenTec, a mobile security company, for approximately $400 million in cash. Large defense primes were comparatively quiet as a result of being hamstrung by sequestration. Hopefully this constraint will be resolved during the first half of 2013, allowing primes and other defense industry players back into the security-centric M&A landscape.
Spin-offs seem to have made a comeback. L-3 spun Engility, then Tyco spun ADT. Now SAIC is spinning off its government services/enterprise IT platform, and Ingersoll Rand has announced it will spin off its security assets. This will be an important area to watch in 2013 as deals may follow.
Some of the major M&A players from 2011 continued their activities in 2012, such as UTC, Kratos, Siemens, Schneider Electric, etc. But, as mentioned, the defense players appeared generally less aggressive pending some addressing of sequestration. Also, aside from the standout Apple/AuthenTec deal and Cisco’s never-ending appetite for sector technology, many tech-centric buyers were absent during 2012 — no IBM or HP deals were to be seen.
E&P Differentiated in 2012
While 2010 and 2011 seemed more about the next great technology and how that might position the developer/acquirer going forward, 2012 appeared more muted and the deals were more near-term strategic. Frequently, the go/no-go decision was driven by “how will this impact our near- to intermediate-term earnings and profits [E&P]?”
While the big deals often involve game-changing technology or business mix considerations, oftentimes smaller deals are viewed as to how they will help in the shorter term or with segment/geography address. A good example was The GEO Group’s acquisition of Municipal Corrections Finance (neutral impact on 2012 earnings and accretive going forward), and G4S’ acquisition of Vanguarda to expand its Brazilian footprint with needed service offerings.
That said, the entire cloud issue looms and its relevance increases. During a forum earlier this year, it was suggested that the cloud will be a ubiquitous security concern for the foreseeable future. Cyber security investment is rapidly dwarfing capital invested in other security and defense growth platforms. The trend is likely to continue until the market can readily identify clear winners and losers. Case in point: VMware spent more than $1.5 billion on acquisitions in 2012, exceeding the value of the largest observed pure security deal!
Walter Bailey is a Managing Director of Pickwick Capital Partners, LLC (a registered broker/dealer) and Secure Strategy Group, LLC (a sector-centric consultancy), focusing the majority of his time on the security and defense industries. He can be contacted at (917) 209-7707 or firstname.lastname@example.org.
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