Take one look at the biometrics company Cogent to see why investors eyeing the homeland security industry remain lukewarm about the sector, particularly the sluggish IPO market for new stocks.
Cogent, which provides fingerprint identification systems like the one used to nab Lee Boyd Malvo, the teenaged sniper who terrorized the Washington, D.C. metro area in 2002 raised $216 million from an IPO in 2004. It has used some of the cash to purchase Kinetic Systems, another company that provides fingerprint identification technology and to help establish itself as a much envied player in the homeland security biometrics industry. But Cogent’s stock price has dropped steadily from $33 to a 52-week low of close to $13 over the past year, raising skepticism about the current public market for homeland security companies.
“They went out at the right time and their IPO was a great big success, but their stock is not doing so well now,” said Jack Mallon, senior managing director at Mallon Associates, an investment bank specializing in the homeland defense industry. “What does it say? Their timing was perfect.”
Another highly anticipated IPO, that of Scientific Applications International Corp., which provides engineering and consulting services in homeland security, among other areas, has been on hold for nearly a year while the company negotiates a major billing dispute. The delay has caused more than one investor to speculate that SAIC is postponing its deal until the public market improves.
Just seven companies in the homeland security sector have gone public since 2003, raising $1.075 billion in capital, according to a May 2006 report by Morgan Keegan, an investment bank. That’s less, by far, than SAIC’s proposed $1.7 billion issue.
It’s also a small number considering that the total market for homeland security products and services is expected to grow to $170 billion in revenues by 2115, according to the Homeland Security Research Corporation.
While the IPO market remains bland, the merger and acquisition field is booming. At least 52 mergers and acquisitions, valued at $18.8 billion, have taken place in the homeland security industry since 2002, according to a May 2006 report from Morgan Keegan. “The merger mania was one of the most robust in recent history,” Mallon wrote in the most recent edition of his investment newsletter, Mallon’s Security Report.
The top contractors of the Department of Homeland Security provide some evidence for that. General Electric purchased InVision, maker of bomb screening machines for the Transportation Safety Administration, for $900 million in 2004, helping GE become the largest DHS contractor. Apogen Technolgies, another top DHS contractor that provides IT systems and software, was bought for $300 million last year by QinetiQ Ltd., a company partially owned by The Carlyle Group and the British government, but still publicly traded in London.
The largest acquisition in the sector came in 2005, when L-3 Communications purchased the Titan Corporation, a diverse provider of homeland security technology and emergency services, for $2.65 billion.
“Companies out there want to grow internally but also buy competitors so they get scale in a niche,” said Brian W. Ruttenbur, a security analyst for Morgan Keegan and Co.
Interest in the public market remains strong overall, though, analysts say, despite slow growth.
There are at least two stock indices focused specifically on the homeland security marketplace. One, provided by Morgan Keegan, dropped 1.64 percent in 2005, but was up 2.25 percent during 2006 through May. The other (HSX), developed by Cronus Capital Markets, has climbed 2.09 percent this year through June. The S&P 500, comparatively, rose 1.34 percent since the beginning of 2006.
Michael Soni, president and CEO of Cronus Capital Markets, remains optimistic about homeland security spending. “Business at the end of the day is opportunistic, and there is a strong opportunity right now to capitalize on fear.”
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