Canon Buys Axis, Owns Axis and Milestone

This is the biggest deal in video surveillance ever.

Just 8 months after buying Milestone, Canon is set to buy Axis.

Canon has offered $2.8 billion USD for Axis, a ~50% premium over Axis stock price. Axis' 3 main shareholders, holding 39.5% of the shares, and Axis' board are unanimously supporting the deal so it appears that this will close shortly.

For background information, here is Axis' official statement [link no longer available], Canon official release [link no longer available] and a Swedish business news article.

Axis Struggling

Axis has hit a wall over the past few years, with decelerating growth and no clear plan to deal with (1) the rise of low-cost Chinese vendors and (2) the strengthening of 'end-to-end' offerings like Avigilon. Axis, historically a camera manufacturer, clumsily attempted to strengthen its own VMS while continuing to release a variety of high-end but niche cameras.

Rich Valuation

Despite Axis struggles, Canon is paying a premium for Axis.

Canon is offering over 4x revenue and 45x profits, which is a lot for a company who is trending down into single-digit growth rates.

Indeed, though Axis continued to claim growth would (eventually) be in the 16% - 22% range, we find this hard to believe. And now, with the disruption of this offer and likely subsequent integration into Canon, at least in the short term, Axis will be further hindered.

Canon Nowhere in IP Cameras

Canon has never been a significant player in IP cameras, on any measure. Though they have had an IP camera line for years, it has always been comparatively limited, with a narrow range and no clear differentiators. See our recent test of Canon IP Cameras.

Needless to say, given Axis extremely broad camera offering, this makes Canon a serious factor in the surveillance industry now.

Canon, Milestone and Axis

Clearly, the biggest potential impact is Canon owning both Milestone, one of the biggest VMS providers, and Axis, one of the biggest IP camera developers.

In 2014, when Canon acquired Milestone, the biggest concern was whether Canon was going to package its IP cameras with Milestone's VMS software. Historically, Milestone aspired to be camera manufacturer agnostic. Indeed, Milestone went through extreme pains to assure everyone that Canon would have no influence on them and that there would be a Chinese wall between the two.

Now, it appears Axis and Milestone will be reunited, more strongly than ever. In the late 1990s and early 2000s, Axis and Milestone, just ~50 miles apart, though separate companies, helped each other develop into the significant forces that they are today.

The Canon Axis / Milestone Solution

We fully expect Canon will offer end-to-end solutions of Axis and Milestone, with cross-selling and discounts for buying the package. If Canon does not do this, quite simply, they are fools.

Axis already knew that having a stronger VMS was key to increasing its sales and, clearly, Milestone is a huge upgrade from what they previously offered.

Moreover, as shown by Panasonic's acquisition of a VMS last week, selling a 'solution' is critical to competing with low-cost Chinese cameras. Chinese manufacturers are weakest on the VMS / software side, so packaging a high-end VMS is a key tactic to differentiating against cameras that are far lower cost.

Consolidation and Industry Downturn

For years, pundits have proclaimed consolidation was going to happen. This year, they are right. See the major surveillance industry moves over the past 15 months.

The end of the IP camera growth era is a big reason for this. The easy growth of transitioning from SD analog to IP is now at the tail end and the new trend of analog HD, with its super low costs, is bad for almost all major brands.

Beyond that, no manufacturer has been able to identify a major new growth area, save for Avigilon, who is making a serious run at analytics, having bought VideoIQ and spent nearly $100 million on patents (e.g., 1 and 2).

Can Canon Execute?

Canon has a big job ahead of it, digesting Axis and figuring out what to do with both Axis and Milestone. Both companies long championed the mission of the open platform and working with partners. The transition to subsidiary of a Japanese conglomerate is going to be challenging.

Who Wins / Who Loses?

At some level, Axis (their investors at least) win here. Approving the deal shows the company lacked confidence in its own future. They were already public, they did not need the liquidity nor the cash.

Certainly in the short term, Axis the company, its employees and partners lose here, as they have to deal with the end of being an independent industry leader.

Correspondingly, Axis' key rivals like Hikvision and Avigilon, stand to gain from the inevitable slowdown, confusion and concern that these acquisitions entail.

Longer term, it will depend on what Canon does, but we sadly suspect that Axis and Milestone's days innovating are mostly behind them, even if Canon can generate more profits from the two.

And poor Genetec, now the last major independent surveillance manufacturer. One has to think they are the #1 target for consolidation next, which might make them rich Genetec, in short order. [Update: Genetec has released a statement on the deal.]

What Do You Think?