Capstone Partners. Biometrics. Market Intelligence for Business Owners Q Coverage Report. Investment Banking Advisors

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1 Coverage Report Market Intelligence for Business Owners Q Capstone Partners Investment Banking Advisors BOSTON CHICAGO LOS ANGELES PHILADELPHIA SAN DIEGO SILICON VALLEY

2 Coverage Report MERGER & ACQUISITION ACTIVITY CAPSTONE PARTNERS LLC 200 South Wacker Drive 31st Floor Chicago, IL Ted Polk (312) Lisa Tolliver Director (312) The biometrics industry is highly fragmented and participants serve a market that is projected to grow aggressively in coming years, all of which bodes well for mergers and acquisitions in the space. Large strategic acquirers have been active within the past few years and as the use of biometrics has expanded, so have M&A transactions in the industry. Activity faltered a bit during the recession years, but was not impacted as much as other sectors. The number of transactions reached a new high in 2010, a year that included such watershed events as the sale of Cogent to 3M and L 1 Identity Solutions to Safran. Now, as biometrics make the transformation from government to commercial applications, we are witnessing buyer activity by such mass market names as Apple, Google, Intel and Facebook, all of which have purchased companies in the space within the past year. New implementations of existing technology will present an opportunity for additional corporate transactions as firms looking to add biometric capabilities to their product suites seek proven systems. M&A activity within the biometrics boundaries will also continue, with firms acquiring smaller companies in an effort to build scale and enhance market presence. With rapid growth expected for the industry, private equity groups are also attracted to the space. Firms interested in information technology and government services are both interested in potential deals in biometrics. The fragmentation of the industry is also appealing to private equity groups intent on forming a potential market leader from the combination of several smaller firms. 60 M&A Activity: Industry 50 Number of Transactions Source: Capital IQ, Capstone Partners LLC research Includes M&A transactions in North America and Europe, 2012 data through July 30. Capstone expects increased M&A activity in the biometrics space as the industry grows and matures. The technology is now proven and the market is not as dominated by startups as it was a decade ago, making for an environment ripe for acquisitions. Recent high profile deals, accompanied by rich valuations, are also likely to help to generate further interest for smaller market players. 1

3 MARKET GROWTH ATTRACTS BUYERS The biometrics industry is projected to grow at a 21% CAGR during With such strong growth anticipated, both corporate buyers and private equity groups are looking for opportunities to enter, or expand in, the market. The biometrics market is projected to experience strong growth in the coming years, a fact that is expected to attract buyers and investors to the space. In a study recently published by ReportLinker, the biometrics industry is projected to grow at a 21% CAGR during the period. Other studies show similar growth rates extending through 2017, at which time global revenues are forecast to reach nearly $11 billion. While some of this growth will undoubtedly result from large government contracts going to sizable public companies, smaller biometrics companies are likely to benefit as well. With such strong growth anticipated, both corporate buyers and private equity groups are looking for opportunities to enter, or expand in, the market. Industry growth is being driven by increasing public security requirements and the need for superior security systems around the world, including those concerning Internet & network access and in financial transactions. The biometrics industry has made great progress in the markets of national and homeland security, the military and law enforcement; approximately 59% of industry revenues are generated by the public sector. But the commercial market gaining share in recent years and industry experts believe that targeted commercial opportunities will drive rapid market expansion and represent exciting growth potential for the industry. Declining prices, increased standardization, improved developer toolkits and the increased involvement of established IT and electronics companies will all lead to further penetration of the commercial market. Government mandates and regulations will continue to boost the civil market, while consumer based applications will be wide reaching, from securing personal computers, mobile devices, and physical locations to improving social media experiences, e commerce and time and attendance tools. Growth areas include: Mobile Security: Mobile biometrics are slated to grow dramatically as mobile payment systems will require greater security than devices currently offer. Mobile payment technology is on the rise and biometrics will likely follow. Biometric Passports: While biometric passports have been around for a number of years, their prevalence is increasing. egate implementation is expected to be a main revenue generator for civil and military biometrics markets globally in the coming years. Banking and Financial Services: are increasingly being used to improve security in financial transactions, especially abroad. While the established US financial sector may be more reluctant to adopt this approach to security, overseas growth is likely to be strong. In terms of biometric technologies, fingerprint technology continues to dominate the industry, but iris and face recognition are gaining ground. There are plenty of emerging technologies as well, including DNA, fingernail patterns, gait recognition, vein patterns and skin biometrics. In the coming years, technological advancements should continue to revolutionize the ease of use, accuracy, performance and cost of biometrics, expanding their use in both commercial and government applications. 2

4 KEY VALUE DRIVERS The potential for strategic benefits resulting from mergers & acquisitions in the biometrics industry are impressive. As the biometrics market builds momentum, becoming a recognizable industry participant will be crucial. As a result, companies in the industry will look to build significance through the acquisition of other businesses in the space in order to expand market share and improve market positioning. While strong business fundamentals are important to any business valuation, specific synergies resulting from the application of existing technology to new markets will elicit premium prices in the biometrics industry. Capstone has identified several key attributes of biometrics companies that tend to be sought after by potential acquirers. To the extent that the selling company has these characteristics, these value drivers can generally result in more suitors for the target company, as well as higher offers. Unique Intellectual Property: patents or patentable systems that help to establish a defendable position in the market. While novel technology and proven systems are important, the value of legal protection provided by patents is notable. Recognizable Name & Track Record: in this highly fragmented and rapidly evolving industry, participants with a recognizable name and a track record of success tend to draw a premium in the market. Solid Growth & Profitability: historical financial performance that includes healthy margins that are consistently above industry averages and direct peers. Buyers will consider financial performance on both a historical and pro forma basis. Global Reach: operations and sales overseas, especially in Asia where the use of biometrics is expanding rapidly. With greater foreign than domestic growth expected, buyers will be looking for opportunities in emerging markets. A Diverse Customer Base: marque customer names with minimal customer concentration. The risk associated with dependence on a limited group of customers can negatively impact the value of a biometrics company. Market Differentiation: leading competitive positions in a particular niche, geography and/or service offering. Acquirers will typically consider a buy versusbuild equation when assessing unique competitive capabilities. Executive Strength: strong executive teams that are committed to remaining with the company following a sale. Especially key for private equity buyers, the leaders of the business (in most cases) should be committed to the next phase. 3

5 NOTABLE TRANSACTIONS Transactions in the biometrics industry are primarily focused around strategic synergies and acquisitions that expand the functionality of products through the integration of biometric technology. Recent notable transactions are as follows, with a more inclusive summary of recent deals on the following page. Apple announces plans to acquire AuthenTec (July 2012) Apple has offered approximately $360 million for AuthenTec. AuthenTec provides mobile and network security solutions for enterprise, government and consumer markets worldwide. While uncertainty in Apple s motive behind this transaction remains, it appears to signal a move toward better mobile security and preparation for mobile payment technology and further suggests growth in the mobile security market. Since Apple rarely makes acquisitions, many analysts see this move as potentially shaping the entire mobile device market in coming years, with particular opportunity for other handset and tablet makers to pursue similar transactions. Francisco Partners acquires Cross Match Technologies (July 2012) Francisco Partners acquired Cross Match Technologies in July This transaction is representative of deals in the civil space Cross Match manufactures multimodal identity management systems used in criminal bookings, background checks, government identification and physical access control. Facebook acquires Face.com (June 2012) Facebook acquired Face.com in June 2012 for a purchase price of $60 million. Face.com develops facial recognition software for photo sharing. Facebook saw strategic value in allowing its users, especially through mobile devices, to tag people in pictures more easily to improve user experience. IntegenX acquires SV Corp (April 2012) SV Corp was a wholly owned subsidiary of GE Healthcare Bio Sciences that developed DNA sequencing products. IntegenX s acquisitions of SV Corp strengthened their intellectual property portfolio and helped speed the time to market for their rapid DNA sequencing device. Additionally, IntegenX expanded their product line to include SV Corp s previous offerings. Medbox acquires Prescription Vending Machines (December 2011) Medbox acquired Prescription Vending Machines in December The terms of the deal were not disclosed. Prescription Vending Machines distributes and services a patented biometric medicine dispensing system. MedBox provides products and services for pharmacies, doctors and patients that enhance the convenience of having a prescription filled, shorten the time to start treatment, improve the quality of care and reduce the costs of providing drug treatment. Google acquires Pittsburgh Pattern Recognition (July 2011) Google acquired Pittsburgh Pattern Recognition in July Terms of the deal were not disclosed. Pittsburgh Patter Recognition develops facial recognition technology for images and video. Google did not announce plans or intentions surrounding the acquisition, though the company did note that facial recognition is a core component of many Google features. 4

6 SELECTED BIOMETRICS TRANSACTIONS Enterprise Value EV / LTM Date Target Buyer Target Line of Business ($mm) Revenue EBITDA Pending AuthenTec, Inc. Apple Inc. Computer peripheral fingerprint sensors, identity management and embedded security x Jul 12 Cross Match Technologies, Inc. Francisco Partners Management LLC Jul 12 IDesia Ltd. Intel Corporation Jun 12 Face.com Facebook, Inc. Apr 12 Feb 12 GE Healthcare SV Corp. subsidiary Chromosomal Laboratories, Inc. Multiple technology biometric solutions primarily for government programs. Heart beat identification through personal computers and mobile devices. Facial recognition software used in photo sharing IntegenX Inc. Forensic DNA analysis systems. The Bode Technology Group, Inc. Forensic DNA analysis laboratory. Feb 12 Perceive Solutions Inc. VoiceTrust AG Voice identification and authentication. Jan 12 Icon Time Systems, Inc. Paychex, Inc. Dec 11 Aug 11 Jul 11 Prescription Vending Machines, Inc. Loquendo S.p.A. Pittsburgh Pattern Recognition, Inc. May 11 Genkey Netherlands B.V. PrivID B.V. Provides time clock systems, including biometric based products. Medbox, Inc. Biometric medicine dispensing systems. Nuance Communications, Inc. Speech recognition and synthesis Google, Inc. Facial detection and recognition software. Biocryptic software for fingerprints, iris scans, palm prints and facial images. Apr 11 Florentis Limited Wacom Co., Ltd. Handwriten electronic signature software. Jan 11 Nov Corp. PerSay, Inc. China Sure Water (USA) Inc. Nuance Communications, Inc. Resale/integration of biometric devices in access control, time tracking and data security systems. Vocal identification for financial, enterprise and law enforcement applications Oct 10 Anakam, Inc. Equifax Inc. Identity management utilizing voice biometrics Sep 10 L 1 Identity Solutions Inc. (nka:morphotrust USA, Inc.) Safran SA Identification and credential management. 1, x 22.4x Sep 10 UPEK, Inc. AuthenTec, Inc. Fingerprint security for personal computers x Aug 10 Aug 10 Cogent, Inc. (nka:3m Cogent, Inc.) The Bode Technology Group, Inc. 3M Co. SolutionPoint International, Inc. May 10 Stanley, Inc. CGI Federal Inc. Automated fingerprint identification systems (AFIS) and other biometric solutions x 20.9x Forensic DNA analysis laboratory US government contractor, including biometric systems projects. 1, x 11.6x Apr 10 Retica Systems, Inc. L 1 Identity Solutions Inc. (MorphoTrust USA, Inc.) Develops iris recognition systems. 2.6 Feb 10 Accu Time Systems, Inc. Amano USA Holdings Inc. Develops biometric workforce management tools x LTM = last twelve months; EV = enterprise value Sources: Capstone Partners LLC research; Capital IQ; public filings and press releases Mean x 18.3x Median x 20.9x Harmonic Mean x 16.8x 5

7 CAPSTONE PARTNERS: REPRESENTATIVE TRANSACTIONS Capstone Partners has completed several M&A transactions in which we served as the primary financial advisor to technology companies with a particular focus on the government market. controlling interest has been Notably, Capstone professionals successfully advised Integrated Biometric Technology on its acquisition by L 1 Investment Partners. Integrated Biometric Technology provided electronic fingerprint products and services for use in the applicant fingerprint, time and control, and secure access markets. L 1 Investment Partners is now part of MorphoTrust USA. L-1 Investment Partners, LLC Capstone s experience provides us with insight into the valuable attributes and likely valuation of a target company, the active buyers in the industry and the nuances of transactions in this space. Command System, Inc. initial public offering $82,500,000 FINANCIAL ADVISOR H.P. White Laboratory, Inc. 6

8 THE BIOMETRICS TEAM Ted Polk, (312) Ted is and Head of the Central Region at Capstone, based out of Chicago. Prior to Capstone, Ted ran the corporate finance practice in the Central region for Morgan Stanley Smith Barney s Capital Strategies Group and its predecessor, Citi Capital Strategies. He has over 20 years of experience, having completed strategic sale and recapitalization transactions across a variety of industries. Ted is a frequent public speaker on the topic of business exits and recapitalizations of privately owned businesses. In 2008, Ted was recognized by The M&A Advisor for the Cross Border Middle Market Deal of the Year. In 2009, another of his transactions was recognized as the Middle Market M&A Financing Deal of the Year and in 2011 he was recognized for lead managing the Middle Market Deal of the Year. Previously, Mr. Polk worked at Valuemetrics, Inc. and in the Corporate Banking Group at The Bank of New York. Ted received his BSBA degree from Georgetown University and MBA from the University of Chicago. He is a Chartered Financial Analyst (CFA), a Series 7 and 63 Registered Securities Representative, and a Series 24 Registered Securities Principal. Lisa Tolliver, Director ltolliver@capstonellc.com (312) Lisa has 15 years of experience in the investment banking industry, primarily focused on advising private business owners in liquidity related transactions. Presently, Lisa is a Director in Capstone s Chicago office, supporting the management of the Central Region. Prior to Capstone, Ms. Tolliver worked in the Capital Strategies Group at Morgan Stanley Smith Barney, where she was involved in the evaluation, marketing and closing of numerous transactions across a wide range of industries. Specifically, Lisa has developed expertise within the technology, manufacturing, consumer products and outsourced business services industries. Lisa received her BA on academic scholarship from Illinois State University and is a Series 7 and 63 Registered Securities Representative. 7

9 ABOUT CAPSTONE PARTNERS Capstone Partners LLC is a leading national investment banking firm dedicated to serving the corporate finance needs of middle market business owners, investors and creditors. The firm provides merger & acquisition, private placement, corporate restructuring, valuation and financial advisory services. Capstone maintains various industry specialties including business services, consumer products, education & training, government services, health & medical, manufacturing & industrial, and technology & telecom. The firm also possesses merchant banking capabilities to actively co invest in transactions. Additional information about Capstone Partners can be found at NATIONAL AND REGIONAL LEADERSHIP TEAM NATIONAL NORTHEAST REGION TECHNOLOGY & TELECOM John Ferrara Kevin Jolley David Michaels President, Managing Partner (617) (617) (858) jferrara@capstonellc.com kjolley@capstonellc.com dmichaels@capstonellc.com MIDATLANTIC REGION CORPORATE RESTRUCTURING Eric Williams Brian Davies (215) (617) ewilliams@capstonellc.com bdavies@capstonellc.com MIDWEST REGION Ted Polk (312) tpolk@capstonellc.com WESTERN REGION David Bench (949) dbench@capstonellc.com Capstone Partners Investment Banking Advisors Capstone Partners LLC. All rights reserved.