How security tech vendors grow and diversify through acquisition

There are ways to grow a business other than investing in existing assets and finding new customers.

The physical security sector has witnessed a steady flow of M&A activity in recent years and there's no sign of it abating. Keen to exploit growing demand for end-to-end solutions, some of the industry's biggest beasts have snapped up brands in adjacent industries to broaden their portfolio. Intrusion alarm specialist Pyronix, for instance, was acquired by Chinese video surveillance giant Hikvision in April 2016.

By acquiring a British-based company, Hikvision brings huge foreign investment to the UK. It also allows Hikvision to provide solutions beyond video surveillance for their clients. FLIR, a world leader in the development of thermal imaging infrared cameras, paid around £134m in cash to acquire the developer behind the world's smallest drone in December 2016.

Prox Dynamics uses FLIR's Lepton micro thermal cameras on one of their 18-gram sized drones. The acquisition also allowed FLIR to extend its airborne sensor product line.

The acquisition of Tyco's Security Solutions and Fire Protection by Johnson Controls was seen as a way to create synergies with both companies experiencing a sharp drop in share prices

Building solutions giant Johnson Controls' acquired Tyco's Security Solutions and Fire Protection in a £20m deal in January 2016. With both companies experiencing a sharp drop in share prices, and Johnson Controls' suffering from the sudden end of China's building boom, the merger was seen as a positive move to create synergies.

Most recently, Motorola Solutions acquired Canadian video surveillance developer Avigilon in a deal worth US£1bn. The all-cash deal gives Motorola a foothold in a video surveillance market central to mission-critical environments - like oil and gas, transportation, utilities, manufacturing - and smart, connected cities. Over in the cybersecurity world, antivirus software firm Symantec has made countless purchases, in a range of sectors from cyber security training to identity theft protection.

Why companies acquire companies

Companies can acquire businesses in order to diversify and reduce their dependence on existing revenue streams.

Alternatively, they might merge to gain a deeper market penetration in key areas of operation. Horizontal mergers involve the acquisition of a direct competitor, which is a much quicker route to growth than acquiring customers and growing revenues. A vertical merger, by contrast, involves buying out a supplier or distributor to boost the efficiency and lower the cost of managing its distribution/supply chain.

What businesses are ripe for acquisition?

Growing a security business through acquisition can help companies build a diverse portfolio and capitalise on opportunities presented by emerging technologies in a rapidly growing marketplace.

There are many aspects to consider when determining whether a business is ripe for acquisition. Firstly, look out for undervalued companies with low market valuations. This often means the company is under-performing, sometimes because it lacks investment rather than a strong business model.

Once a new owner injects some much-needed capital, the company's potential can be realised. A company could also make for an attractive acquisition target if it does not currently use its assets to maximum effect. Another important consideration when buying a security business is ensuring the takeover company has a strong, steady cash flow.

Look for small long-term debt and plenty of cash on the balance sheet. Buyers should also look for product or service specialisation in areas where your company is lacking and from which it could benefit. It's often cheaper for companies to acquire a given product or service than developing it from scratch.

In some cases, the management team of the acquired company are indispensable and kept on board after a merger.

End-to-end solutions

There is a growing demand for end-to-end security solutions, which integrate technologies onto the same network so they can communicate with one another and be managed centrally from the same software. Therefore, many big security and fire companies snap up smaller businesses in adjacent markets in a bid to become end-to-end suppliers. This means customers can buy most or all of their hardware through a single brand rather than dealing with separate vendors.

The appeal of a one-stop, single point of support - especially when it's a large, heritage brand like Honeywell or Johnson Controls - undoubtedly has a powerful appeal.

How to make an acquisition

Each merger and acquisition is unique and negotiating the right deal structure and valuation of a target company is seen as an art as much as it is a science. Once an acquisition candidate has been selected, the buyer company should draft a detailed acquisition proposal that sets out acquisition objectives. This plan should include how the takeover will be financed, relevant industry trends and market growth, criteria for evaluating the target company, and a timescale for deal completion.

Depending on the size of the buyer company, it could be worthwhile to put together an acquisitions team dedicated to finding potential takeover targets and overseeing a successful merger. Pricing the deal takes into account the costs of integrating the acquisition into the buyer company's operations and the proposed benefits of the merger. The suggested purchase price must be broken down in detail to show how it was calculated and how the acquisition will be funded.

Initial contact with a prospective takeover company can be initiated directly or through a corporate financier.

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