Security Investor Bulls Trample the Bears

Publicly traded security companies continued positive performance for the second straight year, even outperforming major U.S. market indexes. Robust M&A activity spurred growth and consolidation in 2010, with more of the same projected in the coming year.

[IMAGE]11972[/IMAGE]Private equity was very active in 2010, with such notable buyers transacting as Veritas, Carlyle Group, Francisco Partners, GTCR Golder Rauner, Cerberus, Warburg Pincus and Sun Capital. For example, almost all remaining public pure-plays in the alarm monitoring space — Protection One, Monitronics, Protect America, Central Security, Broadview and Sonitrol franchises — ended the year changing ownership. Veritas was on the sell  and buy sides, exiting integrator/services provider DynCorp (sold to financial player Cerberus for $1.5 billion) and re-entering the C3ISR/Threat Detection market via its $500 million acquisition of PerkinElmer’s detection assets. Many smaller financial buyers are also pursuing sector deals and making inroads to consolidate some of the more fractured subsectors.

Technology Trends to Consider
There will be several burgeoning technological trends to keep watch on in 2011. Among them Internet-based (or “cloud”) computing, converged services, biometric autonomous recognition and multifactor threat detection.

The proliferation of cloud computing is a blessing and a curse, allowing massively increased computing, hosting and communications options for security and other uses. At the same time it will also create increased risk exposures. Consider: Ponemon Institute, a research firm that focuses on data security and privacy, surveyed IT departments and found more than half the respondents felt that using the cloud for even nonfinancial business information was too risky.

Secure use of the cloud reduces computing costs and greatly enhances functionality. Rather than shy away from the inevitable, there will be companies that continue to successfully embrace cloud computing and build application and service models around its use.

Converged services, like those developed for green or smart environments, are rapidly taking hold as an attractive service model for customers. Integrating control of lighting, security, access control, energy, communications and/or other functions is a huge opportunity aggressively being pursued by legacy heavyweights such as United Technologies Corp. (UTC), Johnson Controls, Schneider Electric and Siemens. Newewcomers like Cisco, RightCrowd and FacilityONE are also making their presence felt.

Whether the project is in a new Leadership in Energy and Environmental Design (LEED) Platinum development or retrofitting an existing plant, converged services models accelerate customer return on investment (ROI) and generate long-term cost savings. Winners will determine ways to profitably bundle services and products, in nonproprietary forms, to deliver customers a best-of-breed menu that can be up- or down-featured. Smaller players with best-in-class products or services can play here via partnerships, alliances or joint ventures.

Autonomous recognition for biometrics is just gaining traction
as it relates to market penetration. Multiple smaller players have attempted platforms, but larger integrators and tech players will drive biometrics’ rapid and ubiquitous market penetration. For instance, research firm Freedonia Group forecasts biometrics-enabled access control to rise from today’s 22 percent market penetration to more than 50 percent market penetration by 2019.

Multifactor threat detection is here. The combination of smart sensors, smart video and smart detection form factors crossing multiple technologies is growing in appeal and affordability. Layering detection methods (search, video, sensor, portal, etc.) with more robust affordable technologies delivers a truly secure environment.

Integrating these diverse products and hierarchies should mean good business for integrators. Technology providers addressing standoff, radiation and iris platforms should gain velocity during the coming year. Homeland Security Research Corp. recently noted that homeland security spending for standoff explosives detection systems is forecast to grow by more than 40 percent by 2014.

The ultimate question surrounding the sector is who will pay for the products/services, new technologies and requisite integrations? The federal and state budgets are stretched to the breaking point, and tax revenues cannot continue to support ever-rising spending levels.

Still, stimulus programs, mandatory infrastructure expenditures and increased security regulations and compliance monitoring suggest the money will come. Either way, serving the large government market is the playground of titans. Smaller companies generally fare better focusing on commercial market customers or acting as subcontractors to primes when dealing with government contracts.

Market Niches to Focus On
Specific end markets viewed as attractive for growing security revenues during the coming year are health care, energy, mass transit and shipping/logistics. In every case, there are compelling reasons both the public and private sectors will sustain continued and/or increased security spending.

In the case of health care, regulation and stimulus monies continue to support security sector investment. Health-care providers and related suppliers showed increases in their budgets during the past couple of years and will likely continue to do so.

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