Industry Analysis Report: Mergers & Acquisitions

Oct. 27, 2008
As the security industry continues to grow at a healthy pace, the mergers and acquisitions market continues to shake things up. Whether you're an owner or an employee, a merger or acquisition can have a big impact on how you do your job—or whether you even have a job at all

This month Security Dealer, in conjunction with its web portal, surveyed its readers to learn about industry growth and how they've been affected by the M&A market. This article summarizes the results and gives insights into the current M&A market.

The M&A Market and You

One very positive sign for the security industry's financial health is that nearly 90% of the survey's respondents said that their business grew last year, with the most common range of growth being 5-10%.

When asked if they had been involved with a merger or acquisition while in the security industry, nearly 7 in 10 answered “yes.” Interestingly, 3 respondents in 10 are considering a possible merger or acquisition within the next year.

Of the respondents whose companies have been involved in acquisitions or mergers within the past 2 years, 36% were doing less than 250 installations per year (and 33% were doing 250-499 installations per year). When asked by how much their installations per year went up after the acquisition, 28% had no increase and 44% went up by less than 250. Perhaps most noteworthy, 31% reported that their RMR per account went up as a result of the merger or acquisition.

John Mack III, CEO and co-founder, USBX Advisory Services, gives a few possible reasons as to why RMR per account would go up as a result of a merger or acquisition. One being that the new company offers more services for their customers, and another could simply be that they are more willing to charge a higher price.

Alarm dealers who have personally sold the customers tend to shy away from raising prices, according to Mack. “So when you buy a bigger company and you look at it more as a financial asset, your notion is to try and keep pace with inflation… You're going to look at a price increase strategy that at least keeps you competitive but increases your revenue per customer,” he adds.

Current Market Dynamics

Alarm companies are sold to a large degree as a function of the value of their recurring revenue monitoring contracts. For example, if you have 2,000 alarm monitoring customers who are each paying you $30/month, then you have $60,000/month in recurring revenue.

“There's a certain multiple acquirers are willing to pay for that monthly recurring revenue stream,” says Mack. By doing due diligence they know what the attrition is on that portfolio and how long that portfolio is going to stick around, he comments.

Mack estimates that 25-35 times monthly recurring revenue is what's going to be paid for a smaller alarm dealer. “It's a much easier proposition to buy a smaller alarm dealer,” says Mack. According to him, there's a much more ready market for the sale of small alarm dealers than there is for systems integrators who don't have that recurring revenue.

When larger alarm dealers are purchased, they can command a multiple in the range of 35-45, says Mack. Larger alarm dealers tend to have better margins; and if they are specialized in a particular sector with a meaningful presence, then that also could add value for a potential acquirer.

“The issues for why a larger alarm dealer is going to get more valuation than a smaller one is simply just a notion of scale,” says Mack. “There aren't many large alarm dealers out there—and that's true of integrators too by the way—so you're going to be paying a little bit for the scarcity premium of that larger company.”

Preparing Your Employees

People tend to resist change, and mergers and acquisitions are no exception. A Kenexa Research Institute study earlier this year found that “mergers and acquisitions typically disengage employees.” Furthermore, if layoffs are involved, this can deepen the negative attitudes of even the employees who survive the layoffs. So what are some of the things that owners who are selling their company (or merging) can do to keep their employees focused on doing a good job?

“Communicate, communicate, and communicate,” advises Jack Wiley, executive director, Kenexa Research Institute. “There is no substitute for honest open communication in terms of how it affects employees' views of their companies.”

Nearly 23% of respondents to Security Dealer/SIW's survey could not say that their company had given a clear explanation of possible company changes prior to the merger or acquisition. However, is there anything else beyond words that an owner can do for their employees who will be acquired or merged with another company?

Mack readily admits that it's not always easy to prepare employees for a merger or acquisition, because the owner isn't in control of what happens once the business is sold. ”If you're an owner who really cares about your employees then you're typically going to be looking for a buyer who's going to first of all want to keep as many of these employees as possible,” he explains.

Both Wiley and Mack agree that looking at how a company has handled mergers and/or acquisitions in the past is a good indicator as to how they'll handle it with you and your employees.