USBX reports heavy merger activity

Let us have a big round of applause for Santa Monica, California-based USBX Advisory Services. The research analysis firm has released its Year-End Security Update 2006 report, and there is something in it for everyone, with seperate reports on market segments including alarm monitoring, video surveillance, biometrics, and explosives detection. Well written and with comprehensive coverage and profiles of dozens of emerging firms — many, of course, our readers have heard about right here at HSDW — the USBX report can be considered this week’s must read for the homeland security set. Space constraints prevent us from covering the entire 92-page report, but we provide a few highlights below:

BULLETS

Mergers and Acquisitions: “Security M&A continued its explosive growth, up more than 50 percent from last year,” USBX reported, and “We expect consolidation activity to grow steadily into 2007.” The company notes high levels of interest from large cap technology companies. “Acquirers in the government sector have suggested to us that they will employ aggressive acquisition strategies to stake their claim in the burgeoning Homeland Security market.” Among the companies to pay attention to are IBM, which spent over $4 billion this past year in acquistions, Cisco (twenty-one M&A transactions last year), and EMC (ten acquisitions). Private equity players such as Carlyle, Golden Gate, Veritas, and Francisco were all major players as well.

Video Surveillance: According to USBX, the $7 billion video surveillance market is currently growing at 20 percent per year, with much of the expansion due to the switchover from analog to digital technology. “We think this area will be one of the hottest areas of growth in the security industry,” USBX reported. “We see a need for bundled solutions across multiple vertical markets, as opposed to standalonevideo surveillance applications.” Moreover, says USBX, “We think everything is in place for an intense period of consolidation over the next year. We expect a significant M&A announcement to be made within the next three months and fully expect more transactions to occur this year.”

Explosives Detection & Sensor Security: With DHS spending rising, and with needs more clearly articulated than in previous years, USBX reports “that we are in the early stages of an investment cycle that will improve how the US detects, responds and secures against both natural and organized threats.” Among the best growth areas, USBX says, are for carry-on baggage screening devices. As with the video surveillance industry, “M&A overtures and rumors continue to float about in the industry, and we expect to see some key deals in the carry-on baggage scanning and personnel-screening markets.” One problem to keep in mind, however: according to the report, gross margins have been a problem for integrators in this market. “Budgets will have to continue to loosen for more effective integration projects to take place.”