Homeland Security Industry Growth through Consolidation

Homeland Security Firms Evolve and Expand Product Portfolios

By: Ann-Marie Fleming
February 2006

In early February, President Bush presented his fiscal year 2007 budget request for the Department of Homeland Security (DHS). The request for $42.7 billion indicates a 6 percent increase in funding from the 2006 budget.

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Elaborating on the priorities of the FY 2007 budget request, Secretary of Homeland Security Michael Chertoff explained in a recent press conference, “The budget focuses on strengthening our initiatives in protecting our borders, increasing our preparedness, expanding our intelligence gathering and sharing, and improving maritime and transportation security.”

This bodes well for companies operating in this arena, in particular those with technology surrounding surveillance, detection and identification products to assist in meeting the needs of border, port and transportation security and overall homeland security readiness.

Defense sector correspondent James H. Smith in his weekly column, "The Defense Market Report"(exclusive HDS feature), explains, M&A activity continued to be the strategic weapon of choice for companies wanting to move decisively into desirable market niches. Top acquirers used M&A activity to drive their top lines far past the levels achievable through organic growth alone. With an estimated US$38 billion in worldwide M&A activity in the aerospace and defense sectors, 2005 was a very good year. And the current year also looks promising.”

As the homeland security industry continues to establish itself as a long term market, many anticipate M&A activity to become more prevalent. Scott Sacknoff, manager of the SPADE® Defense Index (AMEX: ^DXS) describes, “The homeland security market is ripe for consolidation. With so many companies offering single solutions and products, we can expect a number of acquisitions in the homeland security market in the coming years as firms seek to offer a portfolio of security options under one roof.”

Building product portfolios has become a necessary strategy for many firms working to address the growing needs within the homeland security arena. Dore Perler, CEO of Sense Holdings, Inc (OTCBB: SEHO) explains, “Today's terrorist activities are a global religious and political phenomenon encompassing a broad spectrum of national security threats. These threats range from a lone aggressor covertly gaining access to a national infrastructure asset, all the way to a organized large-scale conspiracy by a number of well-financed suicidal fanatics. The ubiquitous utilization of Improvised Explosive Devices (IED) introduces a particularly difficult challenge to security forces throughout the world. The only effective way to simultaneously confront all of these security threats is by the intelligent application of high technology.”

“Sense believes that the solution to this problem requires the mass-deployment of security systems integrating Radio Frequency Identification (RFID), Biometric Identification and Micro Electromechanical Sensors (MEMS). These Sensors, or electronic noses, are designed to detect infinite amounts of explosives, chemical warfare agents (CWA), biological warfare agents (BWA) and last, but not least, narcotics. Sense is dynamically involved and committed to the development, integration and deployment of all of these technologies,” concludes Perler.

Sniffex, Inc. (OTC.PK: SNFX), a developer of a lightweight handheld distance weapon and explosives detection device explains their strategy for being able to expand their offerings, "As the expenditures for homeland defense continue to grow, the customers that we sell to through our worldwide Representative network are asking for more and more products to sell to their existing customer base. There is a huge demand around the world for products and services that can be used as a tool in fighting terror and crime. We believe that if one or our Representatives is selling Sniffex, they should be selling every other great tool in the arsenal of products and services for fighting crime."

Technest Holdings, Inc (OTCBB: TCNH) has been focused on diversifying their product base for many years to be able to target a variety of the nation’s security needs. As Robert Tarini, CEO of Technest describes, "Although significant progress has been made against terrorism in the foreign arenas of Iraq and Afghanistan by our combat troops, many security problems remain unresolved domestically here in the US, in our cities, federal infrastructures and borders. Many of these security problems will be solved by innovative technologies that can be delivered by fast and nimble companies with the ability to address multiple problems through a portfolio of solutions such as Technest Holdings.”

As the definition of homeland security has shifted to the concept of global security, the diversity and complexity of security and defense needs continues to grow. As a result, companies have had to evolve and expand with many firms understanding the strength of being able to solve multiple needs through further R&D of existing products and by adding new technology to their portfolios through partnerships, mergers and acquisitions.

Ann-Marie Fleming
Ann-Marie Fleming completed her MBA in the United States, where she attended Webster University. She also holds an Honors B.A from the University of Toronto. She has over fifteen years of experience within the financial industry to include retail banking and brokerage, investment banking, and mortgage brokerage within the United States and Canada, with a firm background in corporate research.

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