Security Industry Monitor March 2014 For additional information on our Security Team, please contact: John E. Mack III Co-head, Investment Banking Group Head of Mergers and Acquisitions (310) 246-3705 [email protected] Michael McManus Managing Director, Investment Banking Group (310) 246-3702 [email protected] PLEASE SEE IMPORTANT DISCLOSURES ON LAST PAGE About Imperial Capital, LLC Imperial Capital is a full-service investment bank offering a uniquely integrated platform of comprehensive services to institutional investors and middle market companies. We offer sophisticated sales and trading services to institutional investors and a wide range of investment banking advisory, capital markets and restructuring services to middle market corporate clients. We also provide proprietary research across an issuer’s capital structure, including bank debt, debt securities, hybrid securities, preferred and common equity and special situations claims. Our comprehensive and integrated service platform, expertise across the full capital structure, and deep industry sector knowledge enable us to provide clients with superior advisory services, capital markets insight, investment ideas and trade execution. We are quick to identify opportunities under any market conditions and we have a proven track record of offering creative, proprietary solutions to our clients. Imperial Capital’s expertise includes the following sectors: Aerospace, Defense & Government Services, Airlines & Transportation, Business Services, Consumer, Energy (Clean Energy and Traditional Energy), Financial Services, Gaming & Leisure, General Industrials, Healthcare, Homebuilding & Real Estate, Media & Telecommunications, Security & Homeland Security and Technology. Imperial Capital has three principal businesses: Investment Banking, Institutional Sales & Trading and Institutional Research. 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Security Industry Monitor Table of Contents Table of Contents Section I Executive Summary ............................................................................................................ 5 Defining the Security Industry 7 Macroeconomic Overview 9 Equity Performance and Valuation 10 M&A Snapshot 13 Public Debt and Equity Offerings Snapshot 14 Registered Direct and Private Placement Snapshot 14 Bankruptcies Snapshot 15 Security Industry Transactions Outlook 15 Physical Solutions Overview 16 Identity Solutions Overview 16 Information Security Overview 17 Section II Physical Security Sector .................................................................................................. 19 Sector Outlook and Commentary 21 M&A Review and Outlook 42 Notable Middle Market Transactions 42 Registered Direct and Private Placement Snapshot 44 Public and 144A Debt and Equity Offering Snapshot 44 Bankruptcies 45 Section III Identity Solutions Sector ............................................................................................... 47 Sector Outlook and Commentary 49 M&A Review and Outlook 70 Notable Middle Market Transactions 70 Registered Direct and Private Placement Snapshot 71 Public Debt and Equity Offering Snapshot 72 Bankruptcies 72 Section IV Information Security Sector .......................................................................................... 75 Sector Outlook and Commentary 77 M&A Review and Outlook 90 Notable Middle Market Transactions 90 Registered Direct and Private Placement Snapshot 91 Public Debt and Equity Offering Snapshot 92 Bankruptcies 92 Section V Appendix ........................................................................................................................... 95 Comparable Companies 97 Valuations—Security Industry Companies 100 Disclosures ................................................................................................................................. Last Page March 2014 3 Security Industry Monitor [This page intentionally left blank.] 4 March 2014 Security Industry Monitor Table of Contents Section I Executive Summary March 2014 5 Security Industry Monitor [This page intentionally left blank.] 6 March 2014 Security Industry Monitor ExecutiveTable of SummaryContents Executive Summary Defining the Security Industry Our Security Industry Monitor primarily focuses on and discusses the dynamics affecting the industry’s major sectors, as well as key developments and transaction trends. According to the results of a recent study released by a leading industry trade organization, ASIS International (its first major study in nearly a decade and the largest industry report since the Hallcrest report in 1990), and the Institute of Finance and Management (IOFM), the U.S. security industry is a $350 billion market (versus our estimate of a $280 billion market at the end user level). The majority of the market consists of private sector spending ($282 billion) followed by federal government spending on homeland security ($69 billion). The major reason for the difference in the ASIS report and our industry estimate (at the user level) is that ASIS fully accounts for all homeland security (including Department of Defense (DoD)) spending, noted above, and we only provide for $4 billion of products and services sold to homeland security-specific users. According to ASIS, over 400 security industry executives participated in the survey. Within the physical security sector, we discuss the need for a more meaningful conversation at the highest levels of clients’ organizational chart to communicate the security industry’s potential contribution toward efficiency, cost, and business process improvements. We discuss the increasing global demand for security equipment and the expansion of the security industry. Government agencies are increasingly leveraging communications intelligence and investigative solutions to gather evidence and generate actionable intelligence, thus reflecting the need to make sense of unstructured data from multiple sources. We expand our writing to discuss the challenges facing the integrators, the state of the home automation (post Google-Nest acquisition), and residential security monitoring industry, the convergence of access control and electronic locks, including the potential use of Blutooth Low Energy and Near Field Communication (NFC). With new and innovative technologies expanding the home services suite of offerings, users are able to see and hear their monitored premises from a remote device. We highlight this fast moving industry, and look at the historical trading ranges of select security companies based on Steady State Net Operating Cash Flow, along with why this metric is widely used and valid. The public emergency response sector has received much attention from recent events (e.g. Sandy Hook school shooting, Boston Marathon bombing), and we examine its various components, ranging from “Safe City Programs” to Mass Notification Systems (MNS) to wireless infrastructure to Physical Security Information Management (PSIM) systems. We complete this segment by discussing the security officer industry and the trends within it. Within the identity solutions sector, we highlight identity and access management in the cloud, and the complexities which have risen. We discuss new developments in biometrics technology, particularly in fingerprint, which may overcome many of the real world deployment challenges and could drive broader adoption by commercial and institutional customers. Anti-counterfeiting and other relevant case studies are also highlighted. Within the information security sector, we discuss the escalation in the volume and sophistication of attacks, which is driving broad-based market demand for more effective security solutions beyond traditional, signature-based defenses. The sector gained particular attention recently with one of the largest and most publicized data breaches in history at national retailer Target in December 2013. This breach impacted a substantial portion of the American public and made news headlines, elevating security from an “IT” problem to a strategic issue for the executive leadership and boards of numerous consumer-facing organizations. This attack was a major topic at this year’s RSA March 2014 7 Executive Summary Security Industry Monitor Conference in February 2014, one of the premier annual industry events, which saw strong expansion in attendance to approximately 30,000 people, up from 24,000 in 2013. In this monitor, we highlight several of the key themes at the conference, as well as emerging trends and challenges for the sector. We additionally discuss the details of the Target breach, which demonstrated the security challenges facing large organizations with complex IT infrastructures—even those with top-tier defenses. We also highlight increased prioritization of cybersecurity by the federal government based on details of the President’s budget request for FY2015. We particularly note significant expansion of the EINSTEIN3 and Continuous Diagnostics and Mitigation (CDM) programs which aim to provide ongoing situational awareness to protect federal civilian agencies and “.gov” networks. We also discuss the strong momentum of industry consolidation, with two major transactions since the beginning of the year. We anticipate further strategic acquisition activity over the coming quarters, as larger technology companies and security vendors seek to integrate new security technologies and to achieve early penetration of emerging categories. Across