2016 is shaping up to be the year of the billion-dollar merger in the security market. After last month's mammoth Tyco/Johnson Control merger, a second big merger has rocked the market, this one involving one of the most familiar names in the consumer market – ADT. The home and small business security company, which traces its history back to 1874, has agreed to be acquired by private equity firm Apollo Global Management, and will merge with competitor Protection 1, a subsidiary of Apollo-owned Prime Security Services Borrower LLC. Smart technology integration It’s the second time in a month that a company “formerly known as Tyco” has been involved in a multi-billion-dollar merger. On January 25th, Tyco announced an agreement to merge with Johnson Controls (and to abandon the Tyco name). ADT was part of Tyco before being spun off as a separate company in 2011. The new combined company will retain the familiar ADT brand and remain headquartered in Boca Raton, Florida. Read more: Tyco and Johnson Controls merger driven by convergence The announcement comes amid rapid changes in the residential security and home automation market, much of it driven by emerging Internet of Things (IoT) technology. Holding the largest share of the U.S. residential security market, and a respectable small business presence, ADT has been aggressively promoting its leadership role in home automation with its ADT Pulse product. At the Consumer Electronics Show in 2016, ADT announced integration of several “smart” technologies, including the Nest Learning Thermostats, with Pulse. ADT is creating a home automation ecosystem through strategic partnerships with various technology companies using its application programming interfaces (APIs) to achieve best-in-class smart home automation. Adding Protection 1 customers to the mix will expand those opportunities. Protection 1 began in 1991 when it was spun off from PacifiCorp., a power utility. It grew rapidly, largely through acquisition, into a full-service business and home security company, although growth came with financial challenges along with way. Protection 1 and ASG Security were acquired by Prime Security Services Borrower last year. Currently, Protection 1 operates five security monitoring centers and serves more than 2 million customers. Entering commercial security sector Recently, Protection 1 has made strides in the retail and enterprise markets, including promoting electronic security technologies that can help companies comply with ever-increasing regulations and guidelines that govern their industries. The enterprise business is a nice complement to ADT, which has focused on smaller businesses (and residential) since ceding its enterprise business to Tyco in the 2011 spin-off agreement (the non-compete expired in 2014). “Protection 1’s robust commercial presence will speed ADT’s expansion into the commercial sector,” says Timothy J. Whall, Protection 1’s President and CEO. The acquisition is by no means a “done deal,” however. The agreement includes a 40-day "go-shop" period in which ADT could look for a better offer. Jeff Kessler of Imperial Capital contends that ADT's shares are undervalued on the market, and should be higher than $26.87. "Despite the 56% premium Apollo is paying for ADT (based on the closing price on Feb. 12, 2016), the valuation is not high, and we believe it could allow room for a possible strategic bid, even in the current challenging market," he says.
Imperial Capital estimates DVTEL has revenues of $35 to $45 million, growing at well over 10 percent annually On November 30, 2015, FLIR Systems announced it acquired DVTEL Inc., a provider of enterprise-class security and video surveillance solutions, for $92 million in cash. Commenting on the transaction, Imperial Capital views the announcement very positively. DVTEL is a leader in software and hardware technologies for advanced video surveillance. Imperial Capital estimates the company has revenues of $35 to $45 million, growing at well over 10 percent annually. Therefore, the price FLIR is paying for a highly-regarded industry technology and full solutions leader, at about 2x revenue, is not high, according to Imperial Capital. The following additional commentary on the FLIR/DVTEL deal is provided by Jeff Kessler and Saliq Khan of Imperial Capital. View We are maintaining our Outperform rating and our one-year price target of $40 on FLIR shares; our price target is about 30% above the recent share price. Many may still consider FLIR as just a premier provider of very high-end cameras in the bellies of Bell Helicopters in a very uncertain government sector. However, this 35-year-old company is a global leader in thousands of infrared detector cores and thermography equipment markets and also provides lower-priced products to the commercial and consumer security customers as well as other customers (e.g., automotive, boating, Original Equipment Manufacturers [OEM], smart grid.) Rationale DVTEL is a privately-held company and, though its brand may not be as well-known as other companies, its technology and industry vision has always been at the industry forefront, and it has won many product awards. DVTEL develops true broad-based video solutions, for large companies such as Google, mainly for the enterprise level market, but the company’s medium business solutions include: Open platform for other camera manufacturers; A highly rated “Latitude” Network Video Management System (NVMS); A full set of video analytics developed through its acquisition of ioimage in 2010, one of the strongest analytics suites on the market; Cameras, encoders and video analytics. DVTEL developed an industry-firstmobile video application that turnsmobile smartphones intofull-featured IP video surveillancecameras DVTEL has developed many cutting edge products over time that remain innovative, but under FLIR could be marketed and commercialised with a strong brand behind them, particularly because FLIR is an industry leader in providing cloud-based services in which customers can view and manage each of their site installations, gain access system health reports, receive email alerts upon system status changes, etc., allowing end users to detect and cope with problems before they occur, saving time, money and on-site visits. Storage And Transmission Improvements DVTEL developed an industry-first mobile video application that turns mobile smartphones into full-featured IP video surveillance cameras that stream video into DVTEL’s Latitude Network Video Management System. [They are a] leader in the new group of 4K super high definition cameras that can be used for gaining four times the evidentiary detail with minimal impact to storage costs, relative to the older standard 1080 pixel, that can drastically improve the stability, range, and detail of video images for evidence. Meanwhile, DVTEL is developing storage and transmissions improvements to keep both bandwidth and cost issues in line. Mixing Strengths And Weaknesses DVTEL’s technology and solution focus is “cool,” but there are additional reasons supporting our positive view on the new acquisition. There are several strategic fits of mixing strength and fixing weaknesses in acquiring DVTEL: The acquisition of DVTEL is a directchallenge to the integration communityto now take a full solution from FLIRseriously FLIR has already demonstrated it knows how to integrate video acquisitions, such as the October 2012 acquisition of Lorex Technology, which take up the low and medium end of video cameras and total video solutions. Right now, FLIR is still known in the security industry as a high quality niche participant in thermal infrared imaging for specialty purposes, even though its generation security camera offerings have garnered wards of their own. The company is now known as a full video solutions provider, which is what Canon is trying to do with its recent acquisitions of Axis Communications (cameras) and Milestone Systems (VMS). The acquisition of DVTEL allows FLIR to become a major participant in the full solutions market, by already being a significant and respected manufacturer of cameras, and core miniaturization, along with thermal technology and a developing hybrid visible light/thermal capability. DVTEL brings FLIR a very high technology capability analytics (something that FLIR has been stressing in all its trade show and security conference meetings and in meetings with investors), as well as a well-respected VMS. DVTEL brings a true open system capability to FLIR with a wider range of SDKs (software development kit) than even FLIR has. Despite some major successes in the last couple of years, DVTEL still lacks a big brand name and has little impact in the consumer and small and medium business (SMB) space, where FLIR has made a big impact with its acquisition of Lorex Technology. The acquisition of DVTEL is a direct challenge to the integration community to now take a full solution from FLIR seriously, as the other major North American choice has had some controversial management moves. Whether or not FLIR can challenge the full solution being put together (albeit with declared strong “Chinese Walls”) of Canon Inc., Axis Communications and Milestone Systems has yet to be seen. We still believe the low-cost camera arena is increasingly being dominated the large Chinese manufacturers, who may eventually get smarter about offering more open, better full video solutions However, our understanding is that there may be some resistance by end-customers to Asian video analytics solutions at the SMB and Enterprise level of the security industry. Jeffrey KesslerInstitutional ResearchImperial Capital Saliq KhanVice President of Institutional ResearchImperial Capital
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