Even though the Pew Center for the States reported last month that state prison populations dropped last year for the first time in 38 years, there's still no shortage of demand for facilities to house them.

That's why I said investors shouldn't worry about the loss of a couple of contracts by industry leader Corrections Corp of America (NYSE: CXW) or rival Geo Group (NYSE: GEO). Both are still expanding and total prison populations continue to grow.

Yet it might help explain why Geo Group decided to boldly acquire the much smaller Cornell Companies (NYSE: CRN) in a deal valued at $685 million, including the assumption of $300 million in debt. It assigns a 35% premium to Cornell's stock and gives Geo access to juvenile facilities and to a number of new states.

Geo Group is my favored prison operator and the deal looks like a smart one. Cornell's adult secure and community-based operations fit naturally into Geo's U.S. corrections divisions, while the Abraxas youth and family services unit will fold into Geo Care, a behavioral health-care division. It will also mark a return for Geo to juvenile custody, a segment it hasn't operated in since 2007, when its contract with the Coke County, Texas, juvenile justice center was terminated (it does provides maintenance services for the New Brunswick, Canada, youth center).

The combined company will give Geo Group 97 correctional and detention facilities that it will either own or manage, along with 32 behavioral health centers, generating some $1.5 billion in annual revenues. It's expected to save Geo as much as $15 million annually, and promises to add to the prison operator's pro forma 2011 earnings per share.

The acquisition goes a long way toward putting Geo on par with Corrections Corp, a Motley Fool Stock Advisor recommendation, which operates 65 facilities with nearly $1.7 billion in revenues. Yet private prison operators don't necessarily compete so much against each other as with government-operated prisons.

Still, with the merger, the field of possible investments has narrowed markedly, and investors who have issues with private prison operators might need to broaden their view to look at personal security plays. But even there, consolidation has left its mark. United Technologies (NYSE: UTX) closed on General Electric's (NYSE: GE) security division just last month, Broadview Security (NYSE: CFL) (formerly Brink's) was bought out by Tyco (NYSE: TYC) in a deal expected to close later this year, and private security companies with long histories in America have been purchased by foreign security concerns. Wackenhut is a part of U.K.-based G4S and Pinkerton is owned by Sweden's Securitas.

For the rest of us with a mind to capitalize on the burgeoning demand for prisons, Geo Group looks like it has locked up a nifty outfit bringing additional platforms for expansion.

Corrections Corporation of America is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.