Private, Equity and Venture Capital

Market intelligence from Barnes Buchanan


Maybe last year wasn't so bad after all. In fact, judging by the many banks, investors and private equity firms at the 2011 Barnes Buchanan Conference in February, the security industry is the place to be.

The Barnes Buchanan conference is one of the best purveyors of market intelligence and one of the highlights is the industry forecast Principal Michael Barnes delivers to attendees. Michael Barnes founded Barnes Associates in 1986 and directs the firm's Mergers and Acquisitions. Since founding the company, Barnes has been involved in more than 230 alarm acquisitions, with an aggregate transaction value in excess of $8 billion. The intelligence delivered in his "Alarm Industry and Market Overview" indicates the return on investment for the industry is one of the best around (about 11 percent after taxes).

Active even during recession

Barnes said 2010 was "incredibly active" in mergers and acquisitions. Guess we know that from some of the super-high-level transactions, like ADT buying Brinks; the Monitronics purchase by Ascent Media; Protection One's teaming with Chicago-based equity firm GTCR; and Security Networks' acquisition/partnership with private equity firm Oak Hill Capital Partners. Better yet, "recurring revenue has continued to grow, even in the recession years (up some five percent in 2010)," Barnes said. While total revenue was flat in 2009 and estimated to be the same in 2010 (this was unprecedented), the capital markets remained active and "2011 looks pretty bright," according to Barnes. "The year 2010 was about a lot of activity among the top 10 players. There were six large deals with an average recurring monthly revenue at a multiple of about 34." Barnes commented that some 10 percent of the embedded RMR in the industry changed hands in 2010.

"In general, the markets seem to be favoring the more sophisticated operator," Barnes continued, citing that the top five companies in the industry (ADT, Protection One, Monitronics, Vivint and Stanley) that make up some 37 percent of the revenue grew about seven percent in total revenue. "The fundamental growth drivers in the industry remain extremely strong. And there are thousands and thousands of incredibly smaller players who actually grew faster than the larger companies. This may be an important turning point in the industry. The technologies are making larger companies grow faster. It could be a signal that some of the smaller companies may get out of the business or become marginalized," he said.

Barnes shared interesting thoughts on the 'door knocker' or summer sales programs that use students or other experienced sales forces to blanket a neighborhood or visit surrounding neighbors: "The door knocking, we think, is a great model. Some 10 to 20 percent of the residential market is in the hands of those who use that model. Done well, we think it is a good way to get more business."

"The dealer program is still a very active model and continues to be extremely attractive," Barnes said. "Some 7.5 billion was spent in 2010 acquiring accounts. It's controllable and systematic and a voice of confidence in the dealer channel. We are extremely bullish on the PERs space. The trick is in the details; it's a different sale but it's a great place to be."

"As far as the capital markets, there are billions raised but not used. Smart money sees the industry as a good place to play. We could see a big player come in from outside the industry but we don't think so. It will be interesting to see if Stanley Convergent Security Solutions makes a big move into the residential market. I think we will see a big buy by Stanley in 2011 if they want to get into it."

"There has been a huge vote of confidence by private equity in buying; a lot of money, yet cautious and favoring the larger deals that have great management and great operations."

For more great insights as to the ways the industry can move forward and get a better handle on what drives profitability visit www.barnesbuchanan.com.