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TrendBiometrics M&A activity reaches new heights

Published 9 November 2010

The value of transactions in the security sector during September was the highest ever recorded for a single month during the last three years; in the biometrics sector, the noteworthy deals include the sale of L-1 Identity Solutions to Safran; BAE’s acquisition of L-1’s intelligence services group; Safran’s acquisition of Motorola’s Biometric Division and purchase of an 81 percent share in GE Homeland Protection; and 3M’s acquisition of Cogent

The value of transactions in the security sector during September was the highest ever recorded for a single month during the last three years.

Acquisition transactions in September were 25 percent up on the same period in 2009 (which, incidentally, was the highest number recorded in that year). Consolidation activity for the first nine months of this year far exceeds the same period in 2009. It may well be that 2010 will besetting a new record.

Allan McHale, director of Memoori, writes that most of the majors (including Honeywell, Schneider, Siemens, Johnson Controls, Bosch, and UTC) have yet to seal a deal this year. He expects that the pace of consolidation experienced in the third quarter will continue into the last quarter of 2010.

Here we will highlight some of the main activities in the biometrics sector.

Sale of L-1 Identity Solutions: the big story

The sale of L-1 Identity Solutions to Safran and BAE is the big story right now. Safran acquired L-1’s biometric and enterprise access businesses and BAE its intelligence services group (“Safran in Talks to acquire most of L-1 Identity Solutions Inc.,” 20 July 2010 HSNW).

 

L-1 has been on our acquisition target list for some time and, not surprisingly, this company — only formed in 2006 — went for a tidy sum.

In truth, L-1 probably needed a little more time to fully digest the many acquisitions made in its short life, but revenues fell in the first half of 2010 and debt was mounting up.

Nevertheless, Safran has been happy to pay a large premium (more than double its expected 2010 EBITDA). The last annual public accounts showed a debt of $470 million against only $645 in annual revenues (as well as a negative profit margin).

The most recent 10k does look a lot better, but L-1 is highly regarded with a significant share of this growing business. This acquisition is not going to have much impact on the commercial market. So far this year, this sector has accounted for only 3.5 percent of current sales,” McHale writes, adding: “This acquisition will strengthen Safran’s presence in the identification sector of the security business, particularly in the US Homeland Security market.”

Active buyer of U.S. security companies

Safran has been a very active buyer of U.S. security companies over the last two years. The company has acquired Motorola’s Biometric Division and taken an 81 percent share in GE Homeland Protection for a cool $580 million (“GE sells its Homeland Protection business to Safran for $580 million,” 27 April 2009 HSNW).

 

The combined activities of Morpho and L-1 would have generated 2009 pro forma sales to U.S. customers of more than $700 million. The new group is going to be a very formidable competitor that will likely take the long term view on growing this business.3M acquires CogentYet another major deal in biometrics and identification management systems these past few weeks is 3M’s announcement of an agreement to buy Cogent (the biometric products manufacturer) for $943 million (“Cogent, 3M clears legal hurdle,” 12 October 2010 HSNW).

McHale notes that the official press release suggests that when you “back out” what Cogent has in cash, it is really only a $430 million outlay, but the most recent 10k only shows $272 million in cash and investments.

Cogent supplies finger, palm, face, and iris biometric systems for governments, law enforcement agencies, and commercial enterprises. It is best known for selling its solutions to the U.S. and foreign government agencies and law enforcement concerns.

Cogent looks like a pretty healthy concern, except that its performance significantly declined in the first half of this year compared with 2009.

The company delivered $7.7 million in net income on $49.8 million in revenues for the first six months of 2010 for a 15.5 percent net margin. That was on revenues down 20 percent on the same period last year.

In 2009, 54 percent of Cogent sales came were due to DHS, and that figure has fallen to just 25 percent in 2010.

McHale notes that assuming that the final buying price was only $430 million, and that this year the company realizes revenues of $100 million, then it will have paid a 4.3 exit sales multiple (a hefty premium for a company that has one client accounting for more than 50 percent of its sales).

3M has a solid reputation for being a well-managed company that knows its business well. It must believe that Cogent represents an excellent fit within its own security operation.

McHale writes that the operation already has a very significant safety and security business with revenues around $3 billion a year, and boasts $3 billion in cash to play with — so why not spend it on a business area currently achieving revenues of £4 billion and growing at 22 percent CAGR?