3M Corp. [MMM] this week agreed to acquire Cogent Systems [COGT], a provider of biometric software matching systems and hardware, for $430 million, complementing its current capabilities in credential issuance and document capture and authentication technologies.
3M says it will pay $10.50 per share for Cogent, an 18 percent premium above the $8.92 closing price of the company’s stock price last Friday. Cogent’s stock price on Monday closed at $11.09, up $2.18, or over 24 percent, from Friday’s close, indicating that investors believe a sweeter deal for the company may be forthcoming from another bidder.
Indeed, Benchmark Company analyst Josephine Millward says in a note to clients that she is “surprised” by the deal price because it values Cogent at less than the minimum earnings multiple of comparable acquisitions in the homeland security and defense sector.
“We believe that it is possible for other bidders to emerge due to Cogent’s leading technology and strong competitive position in the biometrics and secure identity market,” Millward says.
Cogent, which has 500 employees, had nearly $130 million in sales last year and net income of $32.5 million.
Cogent’s growth driver is its biometric software matching capability, primarily for fingerprints, which it sells to the Department of Homeland Security for the US-VISIT program, state and local law enforcement agencies, and international governments and agencies.
The company has also developed handheld fingerprint capture devices for law enforcement, enabling officers in the field to capture prints to search against a criminal database in short order. The company has also developed a handheld multimodal biometric capture and search device called the Fusion which it has been trying to sell to the United States military.
In the biometric software matching arena Cogent’s key competitors are France’s Safran Group and Japan’s NEC Corp. In the handheld biometric device market for military customers L-1 Identity Solutions [ID] is the leader.
3M has document reader and authentication technology and provides systems integration capabilities for credentialing and issuance. The company has the contract to provide an end-to-end solution for Arkansas drivers’ licenses and produces Panama’s national ID card. 3M also provides security materials such a laminates to protect against counterfeiting and tampering.
3M pegs the global biometrics market at around $4 billion, saying it is projected to grow at more than 20 percent annually. The company says the pending deal will open doors for it in the law enforcement community.
“Adding Cogent Systems’ products to our business strengthens our product portfolio and services in high security credential issuance and authentication systems and position’s 3M’s business in law enforcement applications,” says Mike Delkoski, vice president and general manager for 3M’s Security Systems division. “It also expands our reach into access control and other commercial ID and authentication applications.”
3M says the acquisition, which is expected to close in the fourth quarter of 2010, would be dilutive to its earnings per share by around 9 or 10 cents for the 12 month period after the deal is completed. Given Cogent’s strong cash position, the aggregate value of the acquisition is $943 million.
Stream of Deal Activity
The proposed purchase of Cogent is the latest in a series of ongoing deals that are consolidating the security space. Last year Safran acquired the homeland protection business of General Electric [GE]. Additionally, Science Applications International Corp. [SAI] late last year acquired a passenger vehicle scanning system from Spectrum San Diego and this month purchased Reveal Imaging Technologies, a developer and producer of automated explosives detection system for checked bags at airports. And FLIR Corp. [FLIR] in August agreed to acquire ICx Technologies [ICXT], a producer of surveillance and detection products for homeland security, defense and commercial applications.
On top of this recent deal activity, L-1 has been on the market all year. Benchmark analyst Millward, citing industry sources, says that Safran may announce a bid for L-1 any day. However, L-1 this week says it reached an agreement with its creditors to extend the deadline until the end of September for a relaxation of its debt covenants, giving the company another month to find a buyer.
Morgan Keegan analyst Brian Ruttenbur views L-1’s announcement as “negative sign in regards to how the [sale] process is proceeding.” He believes that L-1 will still get a deal done but not at “a significant premium.”
3M says that Ming Hsieh, founder and CEO of Cogent, will remain with the company after the deal closes. Cogent will become part of 3M’s Security Systems division.
Cogent’s financial advisors on the deal were Credit Suisse and Goldman Sachs. 3M was advised by J.P. Morgan.