For the past couple of years, the electronic security industry has experienced a dramatic surge in acquisition activity that is reshaping the competitive landscape. This frenzy of mergers and acquisitions (M&A) has been fueled by the increasing demand of large-scale growth by buyers and investors.
The seemingly growing supply of “dry powder,” which investors are anxious to expend, has spurred some security business owners to take a closer look at their organizations and consider what their future may hold. They are forced to consider whether the requirement to scale rapidly to offer quickly developing technologies, in a fiercely competitive marketplace, may be beyond their reach or desire.
Generations ago, many “mom-and-pop” businesses relied on a succession plan for their children or key employees. Over the years, these handoffs have occurred less and less, leaving owners reliant on selling their business to a worthy buyer.
As a result, the industry is witnessing significant consolidation, with major players acquiring businesses to expand their market share, diversify their offerings, enhance their technological capabilities and quickly increase their EBITDA.
Factors Affecting the M&A Market in the Security Industry
One motivating force behind the acquisition surge is the escalating consumer demand for new technology in both residential and commercial security solutions. The integration of artificial intelligence (AI), and cloud connectivity into security solutions has revolutionized the industry, enabling the development of more intelligent, responsive and interconnected security solutions.
The fast pace of technology is leaving some businesses behind.
There are frequent press releases touting notable buyers (frequently, they’re consolidators) making acquisitions. Often, the owners were not active sellers, but quickly pivoted to be, once they recognized the “rich” deal terms.
Many of these transactions allow sellers to continue working in the business as the parent company takes over the back-office operations, which are often the pain point for owners. Some mergers and acquisitions allow sellers to have an equity rollover and take a proverbial second bite of the apple, which can be highly attractive to both buyer and seller.
More About Mergers and Acquisitions in Security
It’s an excellent time to take some chips off the table, but seller beware, not every deal is a deal. Today’s buyers are seeking a particular company DNA.
The majority of the private equity firms, national consolidators and known regional buyers have a desired geographic footprint in which they are seeking opportunities. They have a limited appetite for non-commercial business. If the business model and location are attractive, the sources of revenue are addressed.
Part of the recipe includes revenue, including RMR (recurring monthly revenue), generated by contractual services such as monitoring, cloud hosting, managed services and required test & inspections to name a few.
A target EBITDA (earnings before interest, taxes, depreciation and amortization), consistently high profit margins, steady year-over-year growth, historically strong customer retention and similar company cultures are requirements to make it through a buyer’s initial filter.
Buyers are often squeamish when a large percentage of revenue or RMR comes from a small number of top accounts, and they often pass quickly on businesses with fragmented offerings unless those services fill a hole in their current business.
Fire companies are the current desirable business target for many buyers, especially those with a growing number of contractual fire monitoring accounts that include state required inspections.
That said, there is still an active market for well-run residential businesses with contractual RMR from monitoring. They typically receive multiple offers and sell quickly. The residential buyer pool is smaller, but these transactions are typically straightforward, and the purchase multiples are extremely competitive.
For many companies, mergers and acquisitions are a strategic move to achieve rapid growth and market dominance. By acquiring market leaders, competitors or complementary businesses, buyers can quickly expand their customer base and geographic reach.
Consolidators often expand their market position and consider smaller acquisitions once they have established a geographic platform. These acquisitions of smaller, regional players allow larger companies to consolidate their position and gain access to new markets without the time and expense associated with organic growth.
Looking ahead, the trend of consolidation in the security alarm industry is expected to continue. The frothy acquisition activity reflects the dynamic nature of the market while the relentless pursuit of growth is shaping the future of security.
As the industry continues to evolve, these strategic acquisitions will play a pivotal role in driving progress and delivering cutting-edge solutions that meet the ever-changing needs of consumers.
Kelly Bond is a partner at Davis Mergers & Acquisitions Group. She was inducted in the SSI Industry Hall of Fame earlier this year.
