Two Methods for Success in Analytical Security

The nature of security threats changes from crisis to crisis, averted or not. Staying nimble is a necessity in the analytical security industry: companies must respond quickly to develop technologies to counteract new threats. Government funding, which many security companies depend on, is uncertain. In this article, IBO explores two recent responses to the uncertainty of doing business in analytical security. Both approaches are epitomized by recent transactions. Later this year, Smiths GE Detection, the joint venture between GE Homeland Protection, a business division of GE Security, and Smiths Detection, a unit of Smiths Group, will begin operations (see IBO 1/15/07). In January, ICx Technologies acquired the biomolecule sensor firm GHC Technologies. In the first case, we have a joint venture between two giants with a long history of acquisitions as one strategy for diversifying technology. In the second case, ICx is a smaller company whose origin lies in diversity from the beginning. The activities of these companies take place against a background of earlier acquisitions by companies in analytical security. In March of last year, L-3 Communications acquired CyTerra Corporation, an advanced sensor manufacturer, and SafeView, a maker of millimeter-wave systems and portals (see IBO 3/31/06). GE Security acquired Ion Track, a manufacturer of trace detection products, in 2002 (see IBO 9/30/02) and InVision, an explosives detection system firm, in 2004 (see IBO 3/15/04). Smiths Detection acquired eight companies between 1999 and 2006. According to Keith Butler-Wheelhouse, president and CEO of Smiths Group, the joint venture is based on technology and revenue synergies. In the words of A. Louis Parker, president and CEO of GE Security, “[i]f you look at it from an industrial perspective, this is a marriage that is perfect.” Addressing possible readings of the joint venture as a sign of GE Security’s desire to abandon that sector of its business, Steve Hill, Global Public Relations leader for GE Security, responded that “nothing could be further from the truth. We see it as an opportunity for us to work with another one of the leaders in this space to do much more than we could do by ourselves.” Smiths Detection and GE Security previously worked together to provide baggage screening for Dubai’s airport. The joint venture unites two sets of product lines that overlap in some areas and complement in others. Both companies have a wide array of offerings that employ ion mobility spectrometry (IMS) to detect chemical- and explosive-based threats, and both manufacture Raman-based chemical identifiers. Smiths Detection brings a number of biothreat sensor-based products to the joint venture, including the Bio-Detector, which uses immuno-ligand assay chemistries, as well as the Bio-Seeq and Mail Sentry, which use PCR technology. Smith Detection’s 2002 purchase of Heimann Systems (see IBO 10/15/02) gives the joint venture a full complement of direct transmission x-ray systems that can scan anything from baggage to cargo, as well as a line of explosives-detecting x-ray systems. Smiths Detection also has a line of millimeter-wave imaging products. GE Homeland Protection adds x-ray diffraction through its Xylon series and computed tomography (CT) through the CTX series to make a strong combined lineup of x-ray-based explosives detection systems. The joint venture will offer a complete package in respect to the Transportation Security Administration’s (TSA) requirements for baggage screening at airports. Before the joint venture, only L-3 had x-ray systems approved by the TSA for screening levels 1, 2 and 3. In the US, all checked bags must be screened by CT, under level 1 clearance. Smiths GE Detection will be able to supply x-ray screening for all three levels. While the US is the driving force for regulations in baggage screening, the rest of the world is adopting similar standards. According to Mr. Butler-Wheelhouse, “CT systems are . . . mandatory at all international airports in the US, and we expect that technology to become specified and mandatory in Europe.” According to Mr. Parker, similar screening requirements are, or will be, in place throughout in Asia and development in that area will be a major market for the joint venture. Obviously, broadening markets and product offerings is a fundamental means of facing challenges in the industry; the joint venture is a perfect example of this strategy. GE Homeland Protection has also demonstrated the successful execution of these strategies, as well as others, in the development of its Secure Registered Traveler (SRT) kiosk. The kiosk incorporates a nuclear quadrupole resonance (NQR) Shoe­Scanner, an explosives trace detector and biometric technology. The ShoeScanner, recently approved by the TSA, allows passengers to keep their shoes on during screening. The kiosk represents one way of handling the problematic nature of government funding: sidestepping it entirely. The SRT kiosk was privately funded and intended for use by private companies, such as Verified Identity Pass Inc., which runs a Registered Traveler (RT) program. RT programs allow prescreened members to bypass airport security lines. Currently a handful of airports participating in RT programs. The kiosk is also an example of the trend towards technology integration. GE Security combined QR Sciences’ NQR technology with IMS obtained through its Ion Track acquisition, and used internally-developed biometric technology. GE Security also accessed internal technology for the development of the CTX 9000, its most advanced CT baggage screener. “The latest version of the CT scanners was developed by our GE Healthcare business, which is a leader in CT in the healthcare industry,” explained Mr. Parker. Given the importance of bringing a product to market quickly, Mr. Parker appreciated the speed with which the SRT kiosk was delivered: “The team did a great job. That’s a perfect example: from idea to working commercial prototype in 10 months.” IBO spoke with Hans Kobler, the CEO of ICx Technologies, which was formed two years ago as the conglomeration of analytical security concerns originally brought together in a venture capital portfolio. Mr. Kobler explained the strategy that ICx has pursued: “We went out to buy a number of technologies to round out the missing holes and ever since have been working very hard on an integrated effort to turn those technologies into effective solutions.” Clearly, this pace of acquisition has been rapid (see table), and the company already has a broad range of products on the market. ICx has a contract with the Department of Defense (DoD) for a combined explosives/radiation detector designed to detect dirty bomb threats; the product, currently being tested by the DoD, will combine the technologies of ICx Radiation and ICx Nomadics. ICx, through its ICx Radiation division, has a contract with the Department of Homeland Security to produce a second-generation radiation detector. The company also partners with larger firms. ICx Radiation designed and manufactured the Interceptor, a networked radiation detector and identifier, for Thermo Fisher Scientific. While ICx is engaged in a similar pattern of acquisition as other large firms, part of the company’s strategy lies in letting its subsidiaries thrive. Mr. Kobler sees a virtue in acquiring a variety of companies while maintaining the autonomy of ICx’s divisions: “[o]nce you have to coordinate between five or 10 different companies—or in a large company, between the divisions of the same company—you hit a lot of different interests that are not aligned, a lot of bureaucracy takes over, and people just don’t work that well. We put great effort into making sure that that’s not the case.” While being small has its advantages, Mr. Kobler stated that ICx’s subsidiary companies previously “suffered the same problems that many small, underfunded companies suffer: they were the best thing since sliced bread that nobody ever heard about and people were very reluctant to give them larger contracts because they were too small and, you know, you don’t give a $100 million contract to a $10 million company.” Mr. Kobler said that ICx’s organization and contacts have helped the smaller companies under its umbrella. Despite the stability that comes from a diversity of products, ICx is neither immune to the pressures of market dynamics nor the dilemma of which technologies to develop. As Mr. Kobler said, “you’re facing some very long sales cycles sometimes [and] a tradeoff that government also faces—that they have to decide—should they go for the exciting technologies, which is a riskier bet for anybody to take, or should they go for a tried and trusted company that might not have all of the capabilities?” When asked about coming developments in technology, Mr. Kobler said he was “fairly certain that we will see a shift . . . [a]way from the highly people-intensive screening methods to cheaper, more effective, better-networked sensors that are out there that give you better coverage.” Future acquisitions and partnerships within the industry will be influenced by this underlying technological need. As Mr. Kobler elaborated, “We’ve been patching up a lot on short notice following the attacks of 9/11, but the government realizes that the technology solutions that are out there are not adequate. . . I think we’ll see a lot of partnerships between more traditional security firms and advanced technology firms and you might see some M&A activity going out. So there should be some interesting times ahead.”

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