ADT's move into commercial security, fire

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.