According to the results of a survey conducted by Capital One at the recently held Honeywell CONNECT conference, 68 percent of security system professionals polled said they expect to complete at least one acquisition in the next year and 16 percent said they expect at least three acquisitions. This desire by companies to grow their businesses through acquisitions could be attributed to the fact that 85 percent of those surveyed expect to see improved financial performance over the next year.
John Robuck, managing director of Capital One Commercial Banking, said while the results of the survey were generally in line with what they expected, he was a bit surprised at the pace companies planned to carry out acquisitions. In fact, eight percent of respondents said they expect to complete more than four acquisitions in the next year.
“For a company, four acquisitions - even though it was just eight percent of respondents – that’s a pretty heft task,” he said.
Another encouraging sign for the industry’s financial health, according to Robuck, was that just over 80 percent of those surveyed indicated that any financing they secured within the next year would be growth-oriented, whether it is opening lines of capital for organic growth (53 percent) or for an acquisition (29 percent).
“It’s great to see and we think that utilization of debt capital allows for incremental and swift growth for a lot of these companies if done correctly and partnered with the right group, but it is great to see that rather than just simple refinancing or change in ownership,” added Robuck. “The perception within the industry by practitioners that own these businesses or run these businesses, in reading through these survey results, they think they are investing in a very, very positive industry and a very, very positive dynamic for continued growth.”
With this amount of M&A activity in the industry, Robuck said it’s important for both buyers and sellers to secure good partners for these transactions, including lenders, advisers or equity investors.
“If you’re looking to execute on a continuous acquisition strategy, engaging somebody to advise you on that process to set kind of a strategic goal and really a plan around that acquisition strategy, I think, makes a lot of sense,” he said. “And those folks will advise you on certain elements, whether it’s geographic concentration, expanding into new capability or new diversification strategies as well. Let’s say that your just focused on residential and maybe you want to diversify a little bit further into commercial to kind of round out your portfolio, having those advisers would be helpful.”
Robuck believes both the fragmentation and economics of the industry create an environment that’s conducive to this volume of M&A activity.
“The United States is fairly large and when you particularly start talking about residential home ownership, it is in every nook and cranny of the country, so it’s difficult for one provider to get into all of those nooks and crannies. You have dealers of all varying sizes that have built up reputations within their local markets, established great service offerings and serve their customers very well, so you have just naturally within this industry some fragmentation that occurs,” he said. “I think what drives the M&A activity is really the consolidation economics. Essentially, businesses that operate in this space have the recurring monthly revenue and an acquirer of that RMR can easily add that to their existing base and the incremental rate to service that base is relatively minor. It’s an accretive acquisition day one, whereas in other industries you acquire but then it takes a year or two to fully integrate and then also to execute on certain cost or revenue synergies.”
The evolution of connected home technology that has provided dealers with additional revenue streams in recent years has also had a substantial impact on the industry’s financial health. According to the survey, interconnected devices were cited by 42 percent of respondents as the technology innovation or trend expected to be the most impactful over the next 12 months, followed by do-it-yourself and self-monitored systems (24 percent) and managed video monitoring (23 percent).
“I think what (smart home technology) has helped the industry do is really allow a diversification of the value proposition, whereas before it was kind of a peace of mind security value proposition that they offered to their customers and now that value proposition is everything from cost savings, whether that’s through a thermostat control, or you have convenience with lights and locks with video,” said Robuck. “All of those different services have allowed alarm companies to go out to the market place with additional offerings.”
