Wave of acquisitions adds missing pieces to key players
22 March, 2011
A pruning back of industry players has been under way in recent months, as three key companies in the biometrics and identity space have given in to acquisition deals.
Within a period of a month and a half, L-1 Identity Solutions was acquired by Safran, L-1 competitor Cogent Systems was picked up by 3M and HID Global’s parent company Assa Abloy announced plans to buy ActivIdentity.
A competitive landscape has created an environment ripe for such transactions in the space, says Joel Fishbein, an analyst with Lazard Capital Markets in New York. “We think the identity space and biometrics is going to be very large and growing fairly robustly over the next three to five years as government entities in particular look to secure their borders through the means of biometrics,” he says.
The consolidations also give firms a chance to use a larger organization’s resources to expand their products.
“I see this happening with a lot of the smaller organizations. They have some good technology, but they don’t have the reach a Safran or a 3M would,” says Dilip Sarangan, industry analyst for Frost & Sullivan. “So it is an opportunity for a larger organization to come in and take the technology, improve it and create a better market for biometrics.”
L-1 boosts Safran holdings
In the largest of the three transactions, Stamford, Conn.-based biometrics firm L-1 Identity Solutions agreed to be acquired by Safran, a French aerospace and defense systems company that is active in the biometric space through its subsidiary Morpho. The merger, announced in September, would give stockholders $12 per share in cash, or $1.6 billion, inclusive of outstanding debt. L-1 provides biometric identity products to businesses, federal agencies and local and international governments.
Safran will acquire L-1 following the sale of L-1′s intelligence services businesses to BAE Systems in a separate transaction valued at $296 million.
L-1′s intelligence services businesses include SpecTal LLC, Advanced Concepts Inc. and McClendon LLC, which are expected to have combined revenues of $234 million in fiscal year 2010. The BAE transaction is expected to close in the fourth quarter of 2010.
The remainder of L-1′s business–Secure Credentialing Solutions, Biometric and Enterprise Access Solutions and Enrollment Services–will transition to Safran. These businesses are expected to have combined revenues of $486 million for the 2010 fiscal year.
Safran will integrate L-1′s operations into its subsidiary, Morpho, a leading provider of biometric and secure ID solutions for homeland security and other high security sectors.
Integrating L-1 into Morpho will increase Safran’s holdings significantly in this area, Sarangan says. “Morpho produces a lot of technologies that L-1 does, but L-1 has a bigger reach in the U.S. market,” he explains. “So it gives (Safran) an opportunity to get more brand recognition in the U.S.”
Safran vastly expanded its foothold in the U.S. market in 2009, when the company acquired 81% of GE’s homeland security business. The L-1 merger will enable Safran to get into the technology side as well. “It helps them in building more comprehensive and integrated solutions (adding) biometrics into other security technologies,” Sarangan says.
Still, there are regulatory risks involved in the acquisition, New York investment firm Morgan Joseph wrote in a report on L-1. “We recommend that investors lock in gains at the open because we think that the downside risk from regulatory approval, while not great, does outweigh any upside potential,” the report stated.
Morgan Joseph lowered its rating of L-1 from “buy” to “hold,” citing the unlikelihood of a higher bid for the company and the risk from required regulatory approvals.
3M/Cogent deal contested
In another move on the consolidation front, officials announced in August that 3M would acquire Pasadena, Calif.-based Cogent Systems for $943 million, or $10.50 per share.
So far the deal hasn’t been well received by analysts. Fishbein, who tracks Cogent for Lazard Capital, says 3M’s offer greatly undervalued Cogent, which could have demanded at least $12.50 per share, or $1.1 billion. A Lazard report estimates Cogent’s fair market value at $15 per share, or $1.3 billion.
“I think they did their shareholders a disservice by selling out at such a low price,” he says. “They took a low-ball offer, in our opinion.”
Apparently shareholders thought so, too. Between Aug. 31 and Sept. 16, nine plaintiffs filed class-action lawsuits against Cogent, its directors and 3M. Three suits were filed in Delaware Chancery Court and six were filed in the California Superior Court for Los Angeles County.
On Oct. 6, the Delaware court denied a shareholder motion to block the acquisition, according to a Lazard report. The suit alleged that Cogent failed to consider a “preliminary, non-binding indication of interest” at $11 to $12 per share from NEC before accepting 3M’s proposal. NEC has not been in communication with Cogent since it accepted 3M’s offer per court proceedings, the report states.
Meanwhile in California, the six have been consolidated, and the court stayed the cases until Nov. 2. Lazard believes the pending lawsuit won’t stop the acquisition. 3M stated the allegations are without merit. Because of the risk of further legal review, Lazard downgraded its rating of Cogent to “hold” from “buy.”
Legal wrangling aside, Fishbein believes the acquisition positions Cogent to compete better in a global environment. “(Cogent) should be better under 3M’s reign because 3M has a lot more marketing muscle and a lot more scale from a company perspective,” he says.
The acquisition gives 3M a new technology platform to sell. Cogent provides finger, palm, face and iris biometric systems for governments, law enforcement agencies and commercial enterprises.
3M already has an ID management business that includes border management products; document manufacturing and issuance systems for IDs, passports, and visas; document readers and verification products; and security materials, such as laminates, to protect against counterfeiting and tampering.
“Adding Cogent Systems’ products to our business strengthens our product portfolio and services in high security credential issuance and authentication systems and positions 3M’s business in law enforcement applications,” says Mike Delkoski, vice president and general manager, 3M Security Systems Division, in a statement. “It also expands our reach into access control and other commercial ID and authentication applications.”
Cogent had about $130 million in 2009 revenues and employs about 500 people.
Physical, logical unite
In a transaction that’s being viewed as a marriage of physical and logical access power players, HID Global in October announced that parent company Assa Abloy would acquire ActivIdentity for $162 million, or $3.25 per share. The transaction is scheduled to close in December.
Assa Abloy of Sweden is a global leader in locks and access control equipment. HID a world-leading manufacturer of proximity and contactless access control cards, card readers and solutions for the security industry.
ActivIdentity, with $62 million in 2009 revenues, provides solutions for digital identity assurance. The company is headquartered in Silicon Valley, Calif., and employs more than 200 people worldwide.
ActivIdentity will become part of Assa Abloy’s HID Global business, and ActivIdentity products will provide the foundation for HID Global’s logical access offering.
So the addition of ActivIdentity’s authentication and credential management technologies to HID Global’s Identity and Access Management business is expected to yield a more diverse portfolio of converged access offerings.
“The idea that has started to surface is how can you converge those so that at the end of the day, you would have one credential that would permit you access to a building and to your networks. It would substantially cut down on support costs,” says Frederick Ziegel, an analyst with Petoskey, Mich.-based Blue Water Capital Markets who tracks ActivIdentity.
ActivIdentity had already been working on the convergence concept for awhile, having previously partnered with security systems manufacturer Hirsch Electronics and physical security provider Lenel Systems International. “I think what this acquisition puts in place is more substance to that whole concept,” Ziegel says.
The acquisition comes at a time when, according to Ziegel, the federal government and the Department of Defense are beginning to mandate converged solutions for physical and logical access.
“The DOD by far has the biggest deployment of smart cards, which coincidentally happen to have been supplied to them by ActivIdentity,” Ziegel says. “So their whole idea is to have a single credential enable some DOD personnel to be able to go from building to building and from network to network without having to worry about carrying around a pocket full of credentials or a pocket full of passwords. There’s an enormous cost savings to all of that.”
ActivIdentity has already received some orders for physical logical access from a few federal clients, including the Lawrence Livermore National Laboratory, Ziegel says. “I think this is going to drive a pretty big market over the next few years,” he says.