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Security Solutions M&A Update – January 2024
Security Solutions M&A Remains Stable Amid an Evolving Economic Backdrop
The Security Solutions M&A market remained robust in 2023, surpassing the previous year's performance despite economic fluctuations. Fragmentation within the sector, particularly in the systems integrator segment, drove a wave of consolidation led by private equity-backed buyers. Residential market participants also attracted interest due to strong demand from homeowners, while commercial players benefited from increased construction value, boosting demand for industrial surveillance capabilities. Favorable equity market returns and a cooling inflationary environment have set an optimistic tone for strategic buyers in 2024, signaling continued growth in the sector's M&A landscape.
Inflationary pressures eased in recent months, with core personal consumption expenditures (PCE) rising 3.5% YOY in October 2023, nearing the U.S. Federal Reserve's target of 2%. This trend, coupled with robust equity market returns, buoyed confidence among Security Solutions participants. Allegion, a leading Access Control provider, reported a significant increase in net earnings per share (EPS) in Q3 2023, indicating positive growth momentum. Allegion plans to pursue strategic acquisitions focused on access technology and Software-as-a-Service (SaaS) businesses to capitalize on its strong financial performance.
Construction Spending Supports Industrial Surveillance Demand
The construction sector's sustained spending, particularly in private nonresidential projects, drove demand for security solutions in the commercial end market. Rising construction values necessitated enhanced jobsite security to mitigate costly delays, fueling demand for surveillance services. Notable acquisitions, such as ASSA ABLOY's purchase of CrewSight, underscored the industry's focus on construction jobsite security solutions.
Similarly, the residential market witnessed increased adoption of video surveillance products in response to rising package theft incidents. Smart home security providers capitalized on this demand by offering comprehensive security services, including package detection and professional monitoring. Companies like Arlo Technologies achieved substantial growth in annual recurring revenue (ARR) through subscription-based security services, highlighting the potential for recurring revenue models in the sector.
Despite broader market challenges, Security Solutions M&A activity remained strong in 2023, with a notable increase in transactions compared to the previous year. Private equity buyers dominated the market, targeting fragmented segments like Fire & Life Safety for consolidation. Add-on acquisitions were prevalent, accounting for a significant portion of deals as sponsors looked to enhance portfolio companies' market share. Pye-Barker Fire & Safety and Marmic Fire & Safety were among the key players driving consolidation through tuck-in acquisitions.
Security Solutions M&A Outperforms Prior Year Through Elevated Add-on Activity
Valuations in the Security Solutions sector remained robust, with purchase multiples averaging 13.0x EV/EBITDA in 2023, significantly higher than the previous year. The median enterprise value for M&A deals also saw a substantial increase, reflecting strong investor confidence in the sector's growth potential. Looking ahead, 2024 is poised to be another promising year for Security Solutions M&A, driven by continued market consolidation and favorable economic conditions.
In the public market, companies in the Security industry experienced varied performance. While certain players like Arlo Technologies and Alarm.com saw significant stock price gains, others like SoundThinking and ADT faced challenges. In the Cybersecurity sector, Crowdstrike and Rapid7 emerged as top performers, enjoying substantial stock price increases, while Everbridge and Tenable struggled to maintain momentum. Overall, the Security industry's outlook remains positive, with opportunities for growth and consolidation on the horizon.
Valuation Outlook for Security Solutions M&A Looks Bright Heading into 2024
Valuations within the Security Solutions sector remained resilient year-over-year (YOY), even amidst a slowdown in the broader M&A market. In 2023, purchase multiples averaged 13.0x EV/EBITDA, showing a significant improvement from the 2022 average of 8.1x EV/EBITDA.
Moreover, the median disclosed enterprise value for M&A deals in the Security Solutions sector surged by 105% YOY to $61.5 million, up from $30 million. This represented a notable outperformance compared to the median enterprise value in full-year 2021, which witnessed a high valuation environment across most M&A markets. Additionally, valuations for Security Solutions transactions in the middle market remained robust in 2023, averaging $70.3 million versus $50.1 million in 2022. As the macroeconomic environment strengthens and valuations continue to rise, 2024 appears poised to be a significant year for M&A activity in the Security Solutions sector.
In the realm of public market performance, companies within the Security industry, especially in Cybersecurity, showcased positive momentum throughout 2023. The Hack ETF, for instance, delivered a total return of +33.6% through mid-December, surpassing the +20.9% return of the S&P 500. While ESF Equity, LP’s Physical Security index lagged behind the S&P 500, individual stocks in both the Physical Security and Cybersecurity sectors displayed robust growth. Here are some notable performers:
Top Performers: Physical Security
- Arlo Technologies (NYSE: ARLO): The home security system developer saw its stock price surge by 168.4% to $9.42 per share by December 12, 2023. A strong earnings release in Q1 2023 propelled a significant increase in its stock price.
-Alarm.com (Nasdaq: ALRM): The alarm monitoring service provider experienced an 18.7% year-to-date increase in its stock price, reaching $57.93 per share by December 12, 2023. Strong Q2 2023 earnings, including a substantial year-over-year increase in net income, contributed to this positive performance.
Laggards: Physical Security
-SoundThinking (Nasdaq: SSTI): The public safety solutions provider witnessed a 26.5% decrease in its stock price year-to-date, closing at $24.88 per share by December 12, 2023. Turbulence stemming from a controversial contract with the City of Chicago impacted the company's performance.
- ADT (NYSE: ADT): The home security provider's stock price declined by 29.1% through December 12, 2023. Challenges related to its Solar segment, including an adjusted EBITDA loss and non-cash goodwill charge, contributed to this decline.
Top Performers: Cybersecurity
- Crowdstrike (Nasdaq: CRWD): The cloud-delivered endpoint protection provider witnessed a remarkable 137.3% increase in its stock price year-to-date by December 12, 2023. Strong revenue growth and doubled adjusted net income in fiscal Q3 2024 contributed to this positive performance.
Rapid7 (Nasdaq: RPD): The cybersecurity solutions provider saw its stock price rise by 67.5% through the year, ending at $51.35 per share by December 12, 2023. Solid financial results in Q3 2023, including a notable increase in annual recurring revenue and customer base expansion, drove this growth.
Laggards: Cybersecurity
- Everbridge (Nasdaq: EVBG): The software security manager experienced a 24.6% decrease in its stock price year-to-date, closing at $19.34 per share by December 12, 2023. Factors such as a net loss in Q1 and ongoing stock price decline contributed to this underperformance.
- Tenable (Nasdaq: TENB): Although its stock price increased by 11.7% through December 13, 2023, Tenable's performance fell short compared to other players in the cybersecurity market. Cybersecurity businesses with similar market capitalizations exhibited higher year-to-date returns, highlighting Tenable's underperformance in 2023.
To discuss key trends driving top-line growth for sector players, provide an update on your business, or leverage ESF Equity, LP's expertise in Security Solutions M&A, please reach out to us. We're here to assist you in navigating the market and achieving your objectives in the Security Solutions sector. Contact ESF Equity, LP today to explore how we can support your goals and provide tailored solutions to address your needs.