Cruzin’ with Susan

Understanding how, as an independent alarm dealer, you value your company is a topic that hasn’t come up much over the last five or so years. Prior to then, attrition, RMR (recurring monthly revenue), mergers & acquisitions, market values, cost of capitol, margins, etc., were common terms and very much a part of a dealer’s vernacular. With investors again looking at the security industry and financial institutions ready to loan you money, it’s time to delve back into this subject.

Knowing the value of your company is critical in obtaining working capital and loans for merging with or acquiring other alarm companies, or for an exit strategy, if you are considering that route. The financial part of the business is not always a dealer’s forte and oftentimes overlooked.

The Tenth Annual Barnes, Buchanan & Mallon Conference, held recently at The Breakers in Palm Beach, FL, serves as an education in finance. Barnes Associates is an investment banking firm which specializes in providing financing, acquisition, divestiture and valuation services to the security alarm industry. Since 1986, the firm has been involved in over 200 alarm company acquisitions and financings with an aggregate transaction value in excess of $4 billion.

Barnes Associates has also developed a significant consulting and research practice. In connection with these activities, the firm has assembled an extensive database of alarm company performance results and pioneered several analysis techniques now widely used in the industry. These resources have been used in consulting and strategic planning assignments with many of the industry’s largest companies, investors and lenders. The firm works with clients throughout the U.S. and is based in St. Louis, MO and Chicago, IL.

In his presentation, “Industry and Market Overview,” Michael Barnes, who directs the firms’ Mergers and Acquisition (M&A) activities, reiterated that M&A activity in the U.S. has been down. He contends that deals and the value of those deals hit their peak around 1999-2000. The number of deals reached close to 12,000 and their value was put at $1,400 billion. The number of deals made fell to a low of around 7,000 in 2002. Deal values took a huge slide during that period, as well, and fell to a low $400 billion. On an optimistic note, in 2004, deals were up by 25% and the value of the deals made was up 55%, Barnes notes. This year looks even better.

During a lunch, at the table were Jack Mallon, senior managing director, Mallon and Associates, along with company directors Robert Rutkowski and Jon C. Mallon, They discussed how their company meets the financial needs of the security industry by assisting clients in accelerating their growth opportunities and enhancing their shareholder value.

Mergers and acquisitions require several elements. You need buyers, sellers and capital. Mallon and Associates, for example, represents both buyers and sellers in M&A transactions. The company identifies potential targets and conducts in-depth financial analysis of the companies and their markets. Mallon performs due diligence services and participates in negotiating and structuring the transaction.

The movement of money is the essence of merger and acquisition activity. One plus one makes three is the equation underlying a merger or acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. The companies come together hoping to gain a greater market share or achieve greater efficiency.

Although they are often used as though they are synonymous, the terms “merger” and “acquisition” mean slightly different things. When a company takes over another one and clearly becomes the new owner, the purchase is called an acquisition. A merger happens when two firms, often about the same size, agree that joining together in business is in the best interests of both their companies.

Companies buy companies to reach new markets and grow revenues and earnings. A merge is often considered as expanding two companies’ marketing and distribution, giving them new sales opportunities. A merger can also improve a company’s standing in the investment community: bigger firms often have an easier time raising capital than smaller ones. Investors must determine whether the purchase will be beneficial. In order to do so, they must ask themselves how much the company being considered is really worth.

Under the Microscope
When looking at your independent alarm company business, factors such as total revenue, recurring monthly revenue, internal growth rate, your location of accounts, staff (especially the owner and management), attrition (how much it costs to attain new customers) and debt are some of the many factors investors consider. Your inventory is looked at along with the status of your central station and company history.

It’s hard for you to know when a deal is worthwhile. If you are looking to merge with another security installing company, the first consideration is finding one with a healthy grasp of reality. Working with financial advisors and investment bankers, you will arrive at an overall price that you are willing to pay for that company. If everyone agrees, you go ahead with the deal. If not, you attempt to negotiate until all parties agree and the deal can be executed.

No matter which side of the table you’re on, or simply to grow your business, an important part of the equation is capital. Capital can be financial assets or the financial value of assets, such as cash and equipment owned by a business. In this sense, capital refers to financial resources available for use.

On the other hand, capital can mean the money you want to borrow. It is a good idea when seeking capital to secure financing from sources that are knowledgeable about, and specifically interested in, investing in the security industry. Here again, the cyclical nature of the security industry is at play. Where there once were many lenders interested in the industry, now it is fragmented and underserved, according to Gretchen Gordon, business development officer at CapitalSource. Gordon was part of a panel presentation at the conference, “New Players in the Alarm Industry.”

Capital Source acquired SLP Capital in April 2004. The company is focused on security, says Gordon, including traditional alarm companies, mass marketers and systems integrators. She also indicated that the company is expanding into new sectors and redefining security into new technology and markets.

“We are back” was another term heard throughout the event—be it companies or multiples. Richard Ginsburg, president and CEO of Protection One, discussed the problems and lessons the company learned over the last few years. Now that it is on the road to recovery, the company will be identifying and evaluating acquisition opportunities.

With increasing interest from investors and some of the largest companies in the industry looking to acquire, it’s likely that multiples for alarm companies will start moving upwards. Another presenter, Jim Covert, president Honeywell Security Protection, suggested that acquisitions in the 50X or even 60X RMR range might be possible.

Of course, lawyers are involved in all these dealings, representing parties concerned. Buchanan Ingersoll PC is a law firm with over 340 lawyers. Also one of the conference sponsors, the firm’s Security Alarm Group of more than a dozen lawyers in Pittsburgh, New York , Philadelphia and Miami, extends counseling to both start-up and established companies in acquisitions, dispositions, financing, tax planning, licensing, litigation, employment law, customer contracts and other day to day concerns.