This is part 3 of a 4 part blog series reflecting on the 2016 safety and security landscape. In Part 1, we looked at the escalating threat landscape, its history and evolution. In Part 2, we took a closer look some of the shifting security dynamics for corporations. In this Part 3, we look at the M&A landscape and who the most active acquirers were. To download the full white paper, visit our Knowledge Center.

Buoyant Acquisition Activity in the Sector

2016 was a strange year for M&A. Globally, the first three quarters of the year were incredibly quiet. However, acquisition activity increased significantly in October 2016 and the year ended as the third best deal year on record, posting $3.9 trillion in deal value.

Our sector, being companies that manage and protect people and assets, proved highly resilient in 2016 despite substantial global uncertainty driven by Brexit, shifting sands with China and geopolitical changes in the US. In our sector, there were over 354 exits, with cyber-security targets accounting for 41% of the acquired companies.

However, IPOs in our sector continued their spiral towards irrelevance, displaying less than 3% of total exits (11 in total). As a result, most investors no longer speak of IPOs as a certainty or an aspiration, with many investors needing to be convinced of strategic exit viability before investing. Despite this, many entrepreneurs have not received the memo with almost half of the entrepreneurs we saw in 2016 touting an IPO as a viable exit path for their companies.

The universe of liquid safety and security stock is also shrinking. In 2016, although 11 companies in the sector went public, a further 19 public companies were either acquired by other corporates, or privatized with private-equity backing. Accordingly, to gain safety and security exposure there is renewed interest in private sector opportunities. 

Acquirers Are Not the Usual Suspects

2016 also demonstrated the vast ocean of active acquirers. Once the domain and purview of the traditional enterprise solutions providers, the field of acquirers of safety and security businesses is now significantly broader. Sure, the larger players are still there, but so are utility companies, services businesses, private equity players, even other emerging technology companies looking to plug capability gaps and further differentiate themselves from their competitors. Consequently, 2016 saw over 287 unique acquirers of companies in the sector, many acquiring the sector for their first time.

Of the 22 companies that acquired more than one company in the sector last year, the most active was Cisco, which like competitor Oracle, showed their renewed in decision support solutions. Acquisition activity in cyber-security was led by later-stage private technology companies, private equity and utilities. We are particularly interested in the newly formed joint venture between BC Partners and Medina Capital (and others) that in November 2016 entered into agreements to acquire 5 companies (3 of them with cybersecurity implications) for $2.8 billion (the transactions completed early 2017). Given the staggering growth in the sector, and the now commonplace, but devastating ransomware attacks, particularly on small and medium-sized businesses, we expect to see more private-equity led digital security consolidations in 2017 and 2018 to meet this need.

We also observed the consolidation in physical security (particularly monitoring services) continue in 2016, although technology integrators, Intel and Convergint also aggressively acquired emerging physical security innovations. Transaction Surety (being technologies that increase the reliability and accuracy of commercial transactions) is currently the smallest, and quietest, sub-sector, although we anticipate increased activity in 2017 as emerging tech reaches maturity. 

We expect this dynamic of non-traditional acquirers to continue in 2017. However, in 2017 we expect to see the continued consolidation in physical security solutions. We also expect a number of digital players to start to add more "physical world" monitoring solutions to their portfolios as clients increasingly seek fewer but more trusted service providers. We also expect 2017 will show a significant number of "roll-in" and "acqui-hire" acquisitions from early stage tech providers in the cyber-security market, as early stage capital sources becomes more cautious about point solutions. Finally, we expect that 2017 will mark a turning point for risk management and decision support acquisitions, driven by increasing complex business and regulatory environments, as solutions providers seek to become smarter about how they manage and meet more globalized risks and regulations.

To download the full white paper, visit our Knowledge Center.

About The Analysis: Our research leverages AlphaPrime’s proprietary data warehouse, Charlotte’s Web™, that tracks thousands of companies that protect people and assets. This particular analysis was conducted in February and March 2017. Charlotte’s Web™ is the result of hours of painstaking research: from our first analyst (and the data warehouse’s namesake) Charlotte Kwon, to Matteo Cuda, Emma Yunqi Li, Nathan Coen and Marc Bove who have contributed to its data reserves over the years. We remember and remain enormously thankful.

About AlphaPrime: In an increasingly complex and dangerous world, threats to people and assets are escalating in diversity, frequency and magnitude. The need and ability to anticipate and respond to these threats is essential and universal.AlphaPrime invests in companies that address this need, that protect people and assets. It’s not part of what we do, it’s everything we do.