Biometric Research Notes: Consolidation trend expected to continue in biometrics sector
Over the past two years, the biometrics industry has undergone increasing consolidation, as larger players acquired smaller firms, enabling the acquirers to complement and integrate their businesses with new technologies and capabilities.
In October 2010, 3M acquired Cogent for US$10.50 per share. The transaction had an aggregate value of almost US$1 billion. Through the purchase, 3M obtained Cogent’s Automated Fingerprint/Palmprint Identification Systems, or AFIS, that enables customers to capture fingerprint and palm print images electronically, encode prints into searchable files, and accurately compare a set of fingerprints or palm prints to a database containing potentially millions of prints in seconds.
The purchase allowed 3M to diversify its customer base to include more government, law enforcement and commercial enterprise clientele. With approximately US$130 million in revenue in 2009, Cogent Systems, based in Pasadena, employed approximately 500 people. The company had operations in Ohio, Virginia, Austria, Canada, China, and the United Kingdom.
Cogent became part of 3M’s Security Systems Division, complimenting identification and authentication solutions from 3M which 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.
In July 2011, French defense contractor SAFRAN SA closed the acquisition of L-1 Identity Solutions for a total cash amount of US$1.09 billion, the equivalent of US$12 per share. L-1’s businesses, which included the following biometric and identity management solutions: access control, secure credentialing and enrollment services; generated sales exceeding US$450 million in 2010.
L-1 joined SAFRAN’s existing security Morpho business, which was renamed MorphoTrust. The combined firm is partly managed as a proxy structure, thus providing appropriate protection for U.S. national security. The run-rate operating cost synergies represent approximately US$30 million per year, and were expected to be fully realized within 18 to 24 months after closing.
The acquisition drove up SAFRAN’s security business sales to approximately US$1.8 billion in 2010. The combined company had a total of more than 7,200 employees of which 2,200 are in the United States.
AuthenTec specializes in offering content and data protection, access control and strong fingerprint security on mobile devices. Through the acquisition, Apple will obtain many of the foundational technology patents for fingerprint biometrics, along with a broad patent portfolio consisting of 200 issued and filed patents in the United States. Previously, Apple paid US$20 million to use AuthenTec’s patented area fingerprint sensors and modules. AuthenTec shipped more than 100 million fingerprint sensors for use in PCs and in over 15 million mobile phones.
Further, the firm has nearly US$70 million in sales, with 64 percent of its revenue coming from its fingerprint and other smart sensors and the rest coming from network and mobile system security solutions. While acknowledgedly a small firm, the AuthenTec deal handed its shareholders a 57 percent premium over its regular trading price.
Investment advisor Louis Basenese’s expectation is that another wave of consolidation will take place targeted at smaller pure-play biometric companies.
There are not many publicly traded firms in the space, but the two firms he targets for purchase in the mid-term by larger multinational companies include Aware (Nasdaq: AWRE) and ImageWare Systems (OTC: IWSY).
Based on precedent transactions within the industry, conservative expectations are that sales transactions will total at least a three-times revenue multiple. This makes many of the small number of publicly traded companies a solid investment to hold.
What the Biometrics Research Group has observed is significant consolidation of the biometrics industry, where a few large multinational firms, who are actively pursuing government, as well as commercial applications, have acquired many small companies. We expect this trend to continue.
Biometric Research Notes provides forward-looking and systematic data about the global biometric market, allowing industry stakeholders to calculate political, economic and investment risk.