International. In 2019/2020 (12-month period from October 2019 to September 2020) the value of mergers and acquisitions fell to US$2.91 billion, a reduction of approximately 12% from the 2018/2019 figure, according to Memoori's annual global report: The Physical Security Business 2020 – 2025.
The average annual value of M&A transactions over the past 13 years was $6.71 billion, and it is estimated that it will take some time to achieve this level of activity again.
M&A data collected by Memoori over the past 18 years shows that the physical security industry has gone through 4 cycles of sometimes exaggerated growth and decline by a number of deals worth billions of dollars in a year, or increased private equity activity or buyers outside the physical security industry.
While over the past 18 years there has been a general upward trend in consolidation within the industry, we have previously experienced volatile changes in M&A activity. The industry underwent a major restructuring during the period from 2009 to 2011 after the 2008 financial crisis. Also around that period a lack of confidence and/or interest on the part of major conglomerates (Security revenues above $1 billion) to commit more investments in the industry and/or some to divest. And more recently there has been a lack of buyers outside the business, particularly Defense and IT.
Private equity has maintained a significant interest in the physical security industry and this year PE companies have acquired 2 security companies investing about $200 million, however, this is a modest sum compared to previous years. Competition has increased and profit margins have fallen in some sectors of the Physical Security business over the past 3 years, but overall it has performed well compared to the industry as a whole. There is still a lot of room for consolidation and the potential for business growth is high over the next 5 years.
In the last 7 years there has been a significant trend for specialized medium-sized companies, previously totally dependent on organic growth, to adopt strategic acquisitions to accelerate growth. These companies are much more focused within each of the 3 sectors (Access Control, Video Surveillance and Intrusion Alarm / Perimeter Protection) and this is having a significant and beneficial impact on the market structure as we have shown in previous years.
The structure of the industry is still very fragmented with hundreds of small businesses finding it increasingly difficult to compete and it seems inevitable that the overall trend line of value and volume of mergers and acquisitions will regain its momentum in the next 5 years, but with more modest growth.
Cross-border acquisitions accounted for 23% of transactions made this year compared to 24% in 2018, 32% in 2017, 48% in 2016, 42% in 2015 and 50% in 2014. For the most part over the past five years. In the one-year period, the main driver has been the need to expand geographical coverage, but this year strategic acquisitions focused on the acquisition of improved technological products and the solution of gaps.
Approximately 73% of the deals involved the acquisition of U.S. companies and the vast majority were internal affairs.
PE (Private Equity) companies have always been drawn to the physical security business and we hope they will find more opportunities now that the pandemic is waning. Over the past two years, around 150 new startups have entered artificial intelligence software for video surveillance and access control businesses. While VSaaS and ACaaS services need to bolster their finances if they want to meet demand growth. They are rapidly burning their venture capital investment cash and IPOs or SPAs could offer the solution.
So, to conclude, 2019/20 hasn't been a particularly positive year for mergers and acquisitions, but considering the industry has had to deal with the pandemic, it's no surprise. The industry is now more confident in the future and there seems to be no shortage of funding to take advantage of future deals.
