Security Solutions M&A Activity Has Continued At Elevated Levels Through 2022
The Security Solutions sector has reached an inflection point in 2022 as participants have become increasingly dependent on automation technology to deliver mission critical solutions to commercial clients. With in-person interactions resuming, businesses have enforced strict physical security protocols with heightened requirements for advanced video surveillance, fire & life safety, and access control systems. The rising awareness surrounding physical security measures has contributed to an unwavering merger and acquisition (M&A) market and soaring sector revenue. By 2030, global Security Solutions revenue is projected to reach $510 billion through a compound annual growth rate (CAGR) of 9.4%, according to Market Research Future.1 North America has dominated the space, accounting for 42% of the global market share in 2021, demonstrating the continued viability of onshore markets.
Technology is having a profound impact on the Physical Security sector by both contributing to improved safety while also driving growth opportunities for innovative market leaders.
Heightened Private Equity Interest Upholds Security M&A Activity
Security Solutions M&A activity has continued at elevated levels through 2022 despite economic headwinds. With 181 transactions announced or completed in full year 2022, sector deal flow has slightly trailed the record volume in 2021 (194 transactions). While the general M&A market has cooled from 2021’s frenzy, the Security Solutions sector has exhibited no signs of slowing, with strategics and sponsor-backed businesses competing for quality assets to fortify margins and keep up with mission critical demand. Of note, private equity add-on deals comprised 40.9% of transactions in 2022, an increase of 4.3% from 2021 and 15.7% compared to 2020. The rise of private equity in the Security Solutions sector can largely be attributed to abundant levels of dry powder ($1.2 trillion as of June 2022) deployed to non-cyclical assets. In addition, the recent volatility in the public markets has driven private equity firms to prioritize scale and proven financials when pursuing acquisition targets, encouraging sponsor-to-sponsor engagements.
Security Solutions M&A transaction EBITDA multiples in the sector have averaged a robust 10.2x from 2020 through 2022, outpacing the Business Services industry average of 8.3x EV/EBITDA during the same period. Sector participants exhibiting a steady income stream with healthy customer bases in high-growth segments, such as Fire & Life Safety and Video Surveillance, have become desirable targets, propelling valuations as buyers secure defensible assets.
Fire & Life Safety M&A Market Continues to Expand
The Fire & Life Safety segment has increasingly been the focus for acquirors in the Security Solutions sector, accounting for 40.3% of Security Solutions M&A targets in 2022. Despite recent economic uncertainty, strategic and financial buyers have aggressively bid for segment players providing mission critical products and complementary services. Notably, The Carlyle Group (Nasdaq:CG)-backed Sciens Building Solutions has continued its M&A spree from 2021, completing 10 acquisitions in 2022. Headquartered in California, Sciens' consolidation strategy in 2021 namely focused on expanding its regional presence by acquiring private fire suppression businesses in California and Nevada. Since The Carlyle Group's platform investment closed in December 2021, Sciens has broadened the scope of its targets with the acquisitions of Fire Alarm Control Systems in Texas (August, undisclosed), Anchor Fire Protection in Pennsylvania (June, undisclosed), Absolute Protective Systems in New Jersey (April, undisclosed), and West Fire Systems in New York (March, undisclosed). These transactions exemplify a highly utilized programmatic approach to M&A in which a buyer completes multiple mid-sized deals per year to strengthen geographic presence. Capstone expects middle market M&A activity in the Fire & Life Safety segment to continue at an expeditious pace with a high level of investor interest in programmatic roll-up opportunities that increase market share in fire-prone regions, bolster workforces, and remain compliant with stringent state and federal fire codes.
Video Surveillance Modernization Attracts Healthy Buyer Interest
The Video Surveillance segment comprised 24.3% of sector M&A targets in 2022, accounting for the second-most active segment behind Fire & Life Safety. This has largely been attributed to the introduction of modern features in video cameras, increased adoption of body-worn cameras in high-risk markets, and rapid transition from analog surveillance to internet protocol (IP) cameras. Segment players with bundled hardware and software monitoring offerings have particularly piqued buyer interest as acquirors look to leverage in-house hardware, firmware, and software development capabilities across IP networks.
In a recent example, leading communications and analytics provider Motorola Solutions (NYSE:MSI) acquired U.K.-based Calipsa for an enterprise value of $40 million in April 2022. Calipsa's scalable platform enables businesses to optimize video surveillance through artificial intelligence (AI)-powered analytics that verify alarms and detect tampering of cameras in real time. Calipsa's software can be integrated with existing IP camera networks or with new hardware, depending on the client's current security system. "We believe AI, spanning from the edge to the cloud, is driving the future of video security. With Calipsa, we can rapidly extend our intelligent analytics across any video security solution and support the accelerating trend of enterprises using cloud technologies to enhance safety and security," said Greg Brown, Motorola Solutions CEO and Chairman, in a press release.2 Calipsa marks Motorola's fifth Video Surveillance acquisition in 2022, with nearly $5 billion deployed in accretive acquisitions since 2015, according to the company's most recent investor presentation.3
High-Risk Markets Drive Video Surveillance Demand
Societal changes arising from the pandemic—more remote work, fewer security guards, growing commercial vacancy, and a dramatic increase in crime—have contributed to the heightened demand in the Video Surveillance segment. As a result, global Video Surveillance segment revenue reached $43.9 billion in 2021 and is projected to expand at a CAGR of 10.9% through 2030, according to Emergen Research.4 While pandemic-induced challenges have continued to fortify segment revenue, the following end markets have experienced elevated security risks with the return of in-person interaction, further driving demand for video surveillance products and services:
- Education - The Education market, comprised of K-12 and higher education schools, accounted for 56% of U.S. physical security equipment spending in 2021 ($716 million), according to Security Industry Association.5 This includes revenues generated by sales of video surveillance, access control, and intruder alarm equipment. Education providers' adoption of IP cameras has produced significant revenue opportunities for segment participants as the installation, maintenance, and monitoring of video surveillance systems has been extended to school-related sporting events and transit vehicles. Notably, Gatekeeper Systems (TSX:GSI), a provider of video surveillance hardware and software products, captured nearly 40% of its revenue ($10.2 million total as of August 2022) from school bus installations, according to the company's August investor presentation.6 Gatekeeper plans to continue marketing to school districts across the U.S. as there are more than 17 million unaddressed traffic violations per year involving school buses.
- Healthcare - Healthcare organizations have increasingly bolstered security measures with cloud-based video surveillance systems as healthcare workers were four to five times more likely to be a victim of aggravated assault than any other occupation in 2021, according to the Occupational Safety and Health Administration (OSHA).7 While the presence of security cameras often acts as a deterrent for workplace violence, overcrowded medical centers have necessitated cloud-based solutions to scale video security across facilities and integrate with access control systems. The heightened demand for scale and interoperability has positioned full-service installation providers serving the Healthcare market as prime acquisition targets for regional players. This has been demonstrated by Silver Peak Partners-backed Beacon Communications' acquisition of Comtel Systems Technology in April 2022 (undisclosed). Prior to the transaction, Beacon operated exclusively in the Midwest, installing critical communication systems for clients in the Healthcare, Government, and Education verticals. The acquisition of Comtel added California to Beacon's coverage territory and broadened its suite of healthcare security installation services to include video surveillance hardware, cloud-based video management systems (VMS), and access control equipment.
- Public Safety - In June 2021, the U.S. Department of Justice announced that federal agents are required to wear body cameras when executing arrest warrants or searching buildings. Following the mandate, many local police and fire departments, corrections facilities, and private security providers also adopted body and vehicle-mounted cameras to accurately record potential confrontations and ensure accountability. Axon Enterprises (Nasdaq:AXON) has dominated the U.S. market for body-worn cameras as it became the primary supplier to police departments in New York City, Phoenix, and Miami in 2019, according to the company's most recent investor presentation.8 As a result of these contracts, Axon's annual revenue rose 27% year-over-year (YOY) in 2021 to reach $863 million. Axon's most formidable rising competitor is Motorola, which bolstered its profile in the vertical with the acquisitions of WatchGuard ($271 million) and Edesixp (undisclosed) in 2019. Motorola's roll-up strategy has continued into 2022 with the acquisition of Videotec in May for an enterprise value of $22 million. Videotec's critical infrastructure and vehicle-mounted cameras are expected to enhance Motorola's Public Safety division as they look to gain a stronger foothold in the U.S.
- Transportation & Logistics - At the onset of the pandemic, supply chain disruptions nearly halted the transportation of goods in ports, warehouses, and distribution centers. To optimize efficiency at transfer points, security protocols were dismissed creating a vulnerable environment for logistics operators. Subsequently, only 80% of trucks in the U.S. were inspected prior to departure in 2021, with losses from cargo thefts amounting to $158 million, according to Security Magazine.9 Video surveillance systems have been increasingly utilized by logistics providers to inspect vehicles for safety, theft prevention, and load capacity—protecting participants' bottom lines. In a recent example, Sarnow Food Group, a national food and beverage distributor, partnered with Digital Watchdog in early 2022. Through the partnership, Sarnow now has remote access to video surveillance footage from its 80,000 square foot New York warehouse which is stored on Digital Watchdog's VMS, according to a press release.10 The added surveillance has enabled Sarnow to improve overall employee performance, shipment tracking, and cost savings.
- Travel - While COVID-19 concerns continue to curtail travel spending, pent-up demand and pandemic-driven lifestyle changes have encouraged the resumption of corporate and leisure travel in the U.S. Notably, the number of U.S. airline passengers in 2022 reached 755 million, surpassing 2021 levels by 30%, according to the Transportation Security Administration (TSA).11 As air travel has normalized, advanced airport surveillance has become pertinent to protecting passengers and faculty with heightened revenue opportunities for providers serving this segment. Identiv (Nasdaq:INVE) has recently captured a significant portion of its revenues through airport and terminal offerings, with 62% of its Q3 2022 revenue derived from video intelligence and access control solutions at these locations, according to its December investors presentation.12 Over the next five years, Identiv estimates a 23% CAGR in revenues generated by airport and terminal video security installations, demonstrating a strong outlook for participants in the space.
To discuss the trends above, provide an update on your business, or learn about Capstone's wide range of advisory services and Security Solutions M&A knowledge, please contact us.
Market Research Future, "Security Solutions Market," https://www.marketresearchfuture.com/reports/security-solutions-market-2481, accessed August 15, 2022.
Motorola Solutions, "Motorola Solutions Acquires Calipsa," https://www.motorolasolutions.com/newsroom/press-releases/motorola-solutions-acquires-calipsa.html, accessed August 15, 2022.
Motorola Solutions, "August 2022 Investors Presentation," https://s25.q4cdn.com/634367110/files/doc_presentations/2022/08/Investor-Overview-FINAL-AUGUST-2022.pdf, accessed August 16, 2022.
Emergen Research, "Video Surveillance Market," https://www.emergenresearch.com/industry-report/video-surveillance-market, accessed August 16, 2022.
Security Industry Association, "Physical Security Vertical Market Assessment: K-12 Education," https://www.securityindustry.org/report/physical-security-vertical-market-assessment-k12-school-security/, accessed August 16, 2022.
Gatekeeper, "August 2022 Investors Presentation," https://www.gatekeeper-systems.com/wp-content/uploads/2022/08/GSI-Investor-Presentation-Aug-202264.pdf, accessed August 16, 2022.
Occupational Safety and Health Administration, "Healthcare Workplace Violence," https://www.osha.gov/healthcare/workplace-violence, accessed August 16, 2022.
Axon Enterprises," August 2022 Investors Presentation," https://filecache.investorroom.com/mr5ir_axon/334/AXON_Investor_Deck_August_2022.pdf, accessed August 17, 2022.
Security Magazine, "Video Management Systems Increase the Bottom Line and Optimize Security in Logistics," https://www.securitymagazine.com/articles/95717-video-management-systems-increase-the-bottom-line-and-optimize-security-in-logistics, accessed August 17, 2022.
Digital Watchdog, "Case Study - Sarnow Foods," https://digital-watchdog.com/success-stories-details/?q=Sarnow-Foods, accessed August 17, 2022.
Transportation Security Administration, "TSA Checkpoint Travel Numbers," https://www.tsa.gov/coronavirus/passenger-throughput, accessed January 3, 2023.
Identiv, "December 2022 Investors Presentation," https://www.identiv.com/filesimages/investors/presentations/INVE%20IR%20Presentation%20-%20December%202022.pdf, accessed January 3, 2023.
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