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Imperial Capital

ADT to acquire Devcon Security for $148 million

ADT looking for more acquisitions
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07/31/2013

BOCA RATON, Fla.—The ADT Corp. announced this morning that it plans to acquire Devcon Security from Golden Gate Capital for $148.5 million. The deal—ADT’s first major acquisition since spinning off from Tyco International last fall—brings 117,000 accounts and $3.6 million of RMR. The transaction is expected to close in early August, Naren Gursahaney, ADT CEO, said during an investor call today.

Google’s Nest buying Dropcam

The $555 million deal brings Google into the home security market with a DIY product, but what about the privacy of customers’ connected home data?
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06/23/2014

PALO ALTO, Calif.—First, Google got into home automation early this year with the $3.2 billion buy of smart thermostat and smoke alarm maker Nest Labs. Now, Nest is buying startup Dropcam, which makes video cameras that stream video to a user’s computer or cellphone. The deal gives Google an entrée into home security.

Interface raises $115m

Installations for new retail customer with 8,000+ locations begin this month
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06/04/2014

ST. LOUIS—Interface Security Systems, an integrator that offers physical security with managed network solutions in a bundled service, has raised $115 million to fund growth that includes adding an important new retail customer.

Google’s Dropcam security push and Apple’s smart home “big play”—should security companies be worried?

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Wednesday, May 28, 2014

Recent news reports say that Google may buy startup Dropcam, which makes video cameras that stream video to a user’s computer or cellphone, as a way to get into home security. And The Financial Times has reported that Apple is soon expected to make a “big play” into the smart home, launching a new software platform that will allow users to control security systems and home features such as lights directly from their iPhones.

Should security companies be worried? Not really, according to a report today from Imperial Capital, a New York-based full-service investment bank.

If the Dropcam report turns out to be true, it would mean Google is adding a security component on the heels of its entrance into home automation with its recent $3.2 billion purchase of Nest Labs, maker of smart thermostats and smoke alarms.

But the report, authored by Jeff Kessler, Imperial Capital’s managing director of institutional research, said it doesn’t believe the Dropcam purchase would have a negative impact on security companies or other pure play home automation companies, like Control4.

The reason, it says, is that “security companies generally are not participants in the do-it-yourself (DIY) market and do not target particular groups that may be interested in such products (e.g., college students, young professionals living in high rises).” Also, the report said, although “Dropcam could be a good entry product for those that do not understand or are not familiar with security products, it does not replace the security, home automation, and customer service capabilities which the likes of ADT or Control4 provide, and nor do we believe that it wants to.”

What about the potential Apple smart home/security play?

The report says: “We wonder if Apple will open up its “big play” to allow a broad base of installers, service, and responders to interact with it, or will it be another closed end system, in which the homeowner, or more likely the apartment owner, can check on what is going on at home on an Apple iPhone, and then have the responsibility of “making the call” to police or health responders based on what they have just seen on the iPhone. Another uncertainty is if the police would trust this system, or would law enforcement be more likely to respond to a more familiar source that has verified the same incident.”

The report summarized by saying that while the new developments are exciting and will be particularly attractive to those who don’t own homes, the lack of professional monitoring is a drawback.

“Remember, these monitoring stations (to be accredited) have to show that their average time to make a decision to dispatch or not to dispatch is less that 30-35 seconds, have tremendous redundancy, and can typically be trusted. We simply do not believe that Apple users will get that service.”

In fact, the report says that these DIY products could indirectly help professional security companies by introducing a younger generation to the idea of home security/home automation, which could lead those customers to “potentially switch to a larger, more powerful, and more comprehensive platform in the out years.”

Alarm.com, a leading provider of interactive security services, also weighed in to me on the new developments involving Google and Apple.

That Vienna, Va.-based company stressed that security is the backbone of the smart home and noted that professional monitoring is a key differentiator, but said security companies need to make sure homeowners know that.

"The key purchase driver for home automation is security.  We see this in both consumer surveys and purchasing trends," Alarm.com said, in a statement.

Also, Alarm.com said, the announcements "validate the popularity of a growing range of connected devices and services. Security dealers should tap into this underlying consumer demand by aggressively marketing and selling a complete range of connected home technologies with professionally monitored security at its core."

 

Kessler examines future of Monitronics

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Wednesday, May 14, 2014

Good news for Ascent Capital, the parent holding company of Monitronics, according to a recent research report conducted by Imperial Capital’s Jeff Kessler. The takeaway is that the monitoring company’s Q1 2014 earnings—$484 million in revenue, EBITDA of $321 million—were consistent with estimates and the company is “not experiencing impact from the entrance of cable/telcos."

As a result, Imperial Capital is maintaining the outperform rating and one-year price target of $94, about 43 percent above the company’s recent share prices, recorded in the report at $65.80.

The share price is being impacted currently by skittishness surrounding the big new market entrants, referred to as a “false negative perception about the competition from cable/telcos.”

“We believe that Ascent remains fundamentally strong and is not seeing any slowdown as a result of cable/telcos entering the security space,"  the report says.

As far as the new competitive landscape, Kessler believes traditional security companies remain Monitronics’ primary competitors. He also envisions something of a schism taking place between traditional large security companies and the newcomers who established themselves first in other industries.

The former, according to the report, will continue to command their share of business in the market for critical life safety systems, while the latter will bring to market more of a “home services,” lifestyle-focused package. The report said that existing skepticism about the “commitment to service” of the cable/telcos could hinder their ability to gain share from the largest security providers.

Kessler’s report was extremely thorough, full of many fascinating prognostications about not just Monitronics but the industry at large. Needless to say, a lone blog post can hardly do it justice. Here’s a sample sentence from the report that certainly piqued my interest:

“We believe smaller, undercapitalized security companies who do not have the capital to install Alarm.com or iControl wireless interactive systems may face real competitive threats.”

The report also touched on the implications of the enormous advertising budgets of the new market entrants, as well as the positive effects of Monitronics’ acquisition last August of Security Networks.

ADT to acquire Protectron for $500 million

Imperial Capital’s John Mack: Agreed upon deal is ‘far and away’ the largest deal for ADT as independent company
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04/30/2014

BOCA RATON, Fla.—In what will be its largest acquisition as an independent company, ADT has agreed to acquire Canada-based monitoring giant Protectron in a $500 million deal, giving the company another 400,000 customers north of the border.

ADT goes after small business

Orbegoso: Opportunity is significant; only 50 percent of small businesses have monitored security
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04/14/2014

BOCA RATON, Fla.—ADT is going after small business with targeted offerings for specific vertical markets, the first of which it launched on April 10.

ADT’s move into commercial security, fire

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Wednesday, March 26, 2014

Will ADT move into the larger commercial security market when its non-compete expires with Tyco?

I contacted ADT to see if I could talk to someone about it. Cheryl Stopnick, director of dealer communications, responded, and told me that ADT's not going to discuss business plans at this time.

They may not be discussing plans, but it certainly seems like they’re making them.

Right now ADT does commercial security for small businesses, which ADT defines as those businesses that are 7,500 square feet or less. ADT and Tyco came up with that definition when ADT spun off from Tyco. At that time it entered into a non-compete agreement with Tyco Integrated Security. That agreement expires Sept. 30, 2014.

As Luis J. Orbegoso, president of ADT’s Small Business Unit, said during a Dec. 6 investor call (according to seekingalpha.com), the “ADT brand has supported not only small businesses but also medium and enterprise businesses for almost 140 years. And our current definition of a small business as a location that is 7,500 square feet or less is somewhat arbitrary and not necessarily a true reflection of the market. It was actually the result of our non-compete zone improvement with Tyco, which expires in 10 months.”

Orbegoso knows commercial security. He joined ADT in 2013. Before that he was with UTC for five years, where he led the commercial security business (though I think he held a few titles while he was there, which seems to be the norm for the security folks at UTC). He came to UTC as part of the GE Security buy.

During the Dec. 6 conference call, (again, according to seekingalpha.com) Orbegoso said “once this noncompete expires, we will have the ability to take a look at possible adjacencies, such as commercial fire solutions and larger commercial and enterprise security offerings that we can integrate and leverage with our existing infrastructure and customers. These adjacencies could potentially quadruple our addressable markets. And again, today we are extremely encouraged by the momentum that we have in this space and our ability to execute.”

The potential is definitely there with the larger commercial projects, according to the folks at Imperial Capital. Jeff Kessler estimates that the security market in businesses smaller than 7,500 square feet is $2 to $3 billion, but the the market segment that includes businesses that are 7,500- to 25,000 square feet is an $18 billion to $20 billion market segment.

I spoke to some folks in the industry (aside from TycoIS) who currently do work in that market segment and they fully expect ADT to jump in to that market.

And while it’s an opportunity, not everyone believes it's an $18 billion-plus opportunity. It may be on paper, but one integrator told me “that’s a segment that’s been stuck in neutral for a lot of years.”

The commercial fire business, on the other hand, if you can get the right people on board—and ADT certainly has the resources for that—could be a more immediate opportunity.

Orbegoso has instituted many changes in the way ADT approaches security for small businesses. It was typically treated as a kind of  “extension of residential security,” but that’s the not the case any more. It will be very interesting to see how Orbegoso and ADT approach this new, larger, more complex market segment.

There may be disagreement about market segment size, but there’s general agreement that ADT has the potential to have some meaningful impact in this segment.

Imperial Capital: Growth in smart home market will benefit large security companies, but not smaller ones

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Tuesday, March 25, 2014

I recently wrote about a new ABI Research report that predicts professional security companies’ share of the smart home market will be cut in half by 2019 as telecom and cableco competitors leverage their own strengths in the space.

However, not all security companies will fare the same, according to a new report from Imperial Capital, a New York City full-service investment bank. Imperial Capital says that large security companies will do much better than smaller ones as the smart home market grows.

Imperial Capital’s latest prediction on the market for the next six to seven years was released today. It differs from the ABI report in that it drills down more on how size matters.

Simply put, what Imperial Capital predicts is that the top 30 residential security companies will do well over that time period, whereas “the bottom 80 percent of security providers” will see negative growth.

The report, authored by Jeff Kessler, Imperial Capital’s managing director of institutional research, says that Imperial Capital’s and ABI’s views on the market are “generally consistent.” However, Kessler writes, “our biggest difference with the ABI report may be that it does not separate out the top 30 security companies from the rest of the industry, which may very well have customer generation problems.”

Those big companies will do well, Imperial Capital says in its report.

“Our estimates are that the market for home services will grow about 10 percent annually over the next seven years to over 50 million homes, driven by new applications form the security industry, new home services offerings, and marketing from cable and telcos,” the report says. “We estimate the top 30 residential security companies will grow subscribers at about 5 percent annually, from about 11 million current users to about 16-17 million users, driven mainly by life-safety focused subscribers to whom professional response and service and the certainty of police, fire, and personal emergency response is more important than price and bundling convenience.”

However, the report says, “this is offset in our analysis by all other smaller security companies falling from 12 million to 5 or 6 million by 2020.”

When you add those companies—which Imperial Capital says comprise 80 percent of security providers—to the top providers, “we see the security industry as flat to down in this period. In fact, because of this estimated decline in the revenues of small companies, our aggregate estimate of market share is actually more conservative [in] stance than the ABI Study.”

Imperial Capital also believes the smart home market will grow even more than ABI predicts.

“Where we also diverge with the ABI report is in the size of the market six to seven years from now,” the Imperial Capital report says. “ABI estimates a market in six years that is 37 percent larger, and Imperial Capital estimates that it will almost double in six years. The difference, we contend, is new services and technologies from the likes of Alarm.com, Vivint, and iControl … [and also more] “PERS” (personal emergency response systems) home health care and emergency response users. These advanced PERS applications are also being developed.”

HID reportedly paid $60m for Lumidigm

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Wednesday, February 12, 2014

Updated 2/13/14

Identity solution provider HID this week made its second purchase in a month, buying fingerprint biometric provider Lumidigm.
In January,  HID announced that it had purchased IdenTrust, a provider of digital identities.

The Albuquerque Journal is reporting that HID paid more than $60 million for the biometric company. Through a spokesperson HID said that because this is a "private transaction" the company would not comment on the purchase price.

I was not able to speak to Jeff Kessler at Imperial Capital about the deal. (Imperial advised Lumidigm,) but I did get a look at a research brief Kessler published on Feb. 12, where he said this deal "continues to put distance between Assa Abloy’s HID Division and the competition in the way of interoperable, identity solutions for government and enterprise users."

Here's more from Kessler's brief:

In our opinion, Assa Abloy has made a concerted effort to become the undisputed leader in higher technology access control and identification solutions for not just enterprises and institutions, but for Government as well—the latter is an area in which it did not have a lot of traction until 2011. However, a series of acquisitions have turned the company into the leader in this segment from a revenue perspective. This is unlike Safran (which purchased L-1 in 2010), which is primarily involved in registration and border identification. The challenge remains for Assa Abloy and HID to integrate these acquired technologies and companies carefully, to let some of the more creative sectors provide both competitive advantage to Assa Abloy, yet still remain the leading providers of software and identity solutions to other companies in the industry as well.

Founded in 2001 and based in Albuquerque, N.M., Lumidigm has 33 employees. Its 2014 sales are expected to be $25 million, and the deal is expected to be accretive to earnings per share, according to HID parent company ASSA ABLOY.

Common problems with fingerprint biometrics include that fact that the technology will not work in harsh environments or when peoples’ fingers are dirty. In addition, some peoples’ fingerprints are simply not detectable. Lumidigm’s technology overcomes these problems, HID said, with its patented “multispectral imaging technology [that] uses multiple light spectrums and advanced polarization techniques to extract unique fingerprint characteristics from both the surface and subsurface of the skin.” The technology is also highly effective in detecting “imposter or ‘spoof’ fingerprints,” according to HID.  

Lumidigm’s products are used in verticals such as banking, healthcare, entertainment, and government services. HID is also interested in Lumidigm’s “premier global customer base,” HID CEO Denis Hebert said in a prepared statement.  

The opportunity for HID, according to a statement from Bob Harbour, executive chairman of Lumidigm is: “to apply multispectral imaging capabilities to credential acquisition and authentication, gesture recognition, and other image-based process control systems, making multi-factor authentication on a single, integrated device a reality.”

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