Kessler on Stanley's Sonitrol acquisition

June 12, 2008 -- just hung up the phone with long-time security industry analyst Jeff Kessler, who many in the industry knew from his days at Lehman Brothers before he went independent this last year. Kessler took the time to weigh in on the forthcoming acquisition of Sonitrol by The Stanley Works and how Sonitrol will fit into Stanley's Convergent Security Solutions business unit. Here are his thoughts, excerpted from our conversation:

Kessler on the overall focus for Stanley in the security space…

They certainly are moving away from their traditional business of hardware and moving towards security. They were going to get beaten up by big box retailers on hardware prices. It's smart for them to get into sercurity services area as oppposed to the door hardware business.

The fact is that I think this is what Brett Bontrager [president of Stanley Convergent Security Solutions] wants. They bought installation businesses to take advantage of the equipment they already made and sold. But they were installation business that didn't give them great margins and returns. The acquisition of HSM got them into the recurring revenue side of the business and it gave them the ability to go back to their customers and offer them monitoring. It looks like they bought HSM because it was the glue that allowed them to pull together their installation and hardware businesses…

Currently security is somewhere around 35 percent of Stanley's business, and now about a third of that is recurring revenue driven. The Sonitrol acquisition will boost both of those numbers.

On the value of the Sonitrol brand…

They have a sterling reputation for audio and video verification. They get the best police response to an alarm. No one else gets that response. That is the brand that Stanley has bought.

On the importance of understanding that Sonitrol is a franchise organization…

Sonitrol has been built around a franchisee system. This franchise relationship is very important. Automated Security Holdings [a firm out of the UK] formerly owned Sonitrol. Then ASH was sold to ADT around 1997, and the relationship between Tyco and the franchises wasn't good. They felt like they were being forgotten.

In 2003 or 2004, a combined group of equity firms bought the Sonitrol management company from Tyco. Since that time, they've take advantage of first-right-of-refusal and bought up some of the better franchises.

They've got to make sure the franchisees get heard. There was or is a lawsuit filed by the franchisees in California against the management company. Stanley is really going to have to pay attention to the needs of the franchisees. The potential for creating a commercial alarm juggernaut to compete with ADT is very real, but to do so, they have to make sure the franchisees are on board.

On the likelihood for the Sonitrol brand name to be lost inside Stanley…

Sonitrol is a name that goes back a long time, and it would be hard to change that name. Some of these franchisees have done nothing but live and breathe their Sonitrol brand because they truly believe it to be the best thing. It would have to be over 5 or 6 or 7 years [for Stanley to change the Sonitrol name]. I don't think it would be as difficult to change the HSM name [formerly Honeywell Secuirty Monitoring before it was divested to become HSM and then later sold to Stanley] as it would be change the Sonitrol name into Stanley.

More information:
Kessler weighs in on industry M&A topics like this one on his website and blog, The Security Analyst.