Make M&A Work for You

This article originally appeared in Security Dealer & Integrator and Security Info Watch

August 11, 2017

By John Robuck

In 2016, the security industry was in a very acquisitive mood, with mega-deals signed in virtually every area of the market. Most notably, Johnson Controls and Tyco merged, creating an integration company worth approximately $62 billion. Manned security service providers Allied Barton and Universal Services of America combined to form the largest security company in North America. Private equity firm Apollo Global Management bought home security giant ADT to add to the company it assembled from Protection 1 and ASG. All told, scores of security dealers and integrators were acquired or merged in 2016 (see SD&I’s January cover story, “The Year of the Giga-Deal” at www.securityinfowatch.com/12292632).

Notwithstanding this increased activity at the top end of the market, a series of preconceptions surrounding M&A can sometimes deter executives of small and mid-sized security firms from taking advantage of the significant opportunities that M&A offers. Among the myths:

  • M&A is incompatible with organic growth. In fact, M&A can be a valuable extension of organic growth or create paths to circumvent barriers that are stymying growth.
  • M&A is riskier than steady, deliberate growth. In practice, a company might actually incur less risk employing M&A. For example, the risks of geographical expansion could be lower with M&A than by attempting to establish a footprint in new territory from scratch.
  • M&A is more complicated than organic growth. Acquiring a company is no more difficult than any other part of running a security business. M&A does require a different skillset, but that can be supplied by specialist consultants, attorneys and lenders. With their help, smaller companies can wield an M&A strategy with the same assurance that their larger counterparts can.

How to Use M&A Strategically

Perhaps the best way to highlight the advantages of M&A is to illustrate how it can be used to secure a company’s strategic objectives. Here are three:  

1. M&A for New Territory or Capabilities: M&A is most commonly deployed to foster growth, through acquiring new territory or a new capability. A company that has achieved a dominant position in its region might see growth opportunities in an adjacent area. Similarly, a company with a specialty business – for example, providing security systems to gated communities – might consider expanding to a region that boasts a critical mass of planned, private communities. In these cases, an acquisition could make more sense than a greenfield expansion, which offers no certainty for a company that it will ultimately reach scale.

Acquiring an established, successful company in an adjacent territory provides immediate and more potential growth. Combine this with the savings to be gained through economies of scale, consolidation of duplicative services, and in-depth knowledge of local markets, an acquisition could be a winning proposition. There is also the added – though sometimes unrecognized – benefit that an acquisition removes a competitor from the market.

2. M&A for Scale and Consolidation Economics: Acquisitions offer another key advantage – they can often deliver their benefits faster than organic growth. This is particularly important for consolidation and achieving economies of scale. Acquiring companies can make better use of underutilized systems – for example, billing software, customer service lines and monitoring stations – without increasing overhead. By acquiring a company in an adjacent or overlapping territory, companies can consolidate service and installations routes and schedules. Using M&A for scale and consolidation is another tool for companies owned by private equity groups, enabling them to deploy more capital in a shorter amount of time.  

3. M&A for Personnel and Talent Acquisition: For many security industry companies, the single most stubborn obstacle to growth is recruiting and retaining competent service technicians. As technology evolves and becomes more complicated, finding personnel who can dependably install and service a variety of alarm systems has become increasingly difficult. As industry executives well know, hiring service techs is both time-consuming and uncertain. A tech who does well in an interview might not perform capably at a customer’s location.

M&A for personnel and talent acquisition gives a company instant access to proven talent, along with a customer base that will keep them productive.

Prerequisites for Pursuing an M&A Strategy

As we have seen, M&A might be a better choice – or great addition – to a company’s strategy in a variety of situations. It has the added advantage of enabling security companies to leverage their assets, including their recurring monthly revenue (RMR), without sacrificing equity or bringing in other partners. That said, not all companies are ready for M&A. The following conditions are advisable precursors to an acquisition:

First, a company must have a stable financial and operational environment. M&A is probably not appropriate for companies with high debt loads and weak cash flow. Even for companies that are well capitalized, timing should be considered, as companies that are currently reorganizing or undergoing other major changes might not want to take on the additional challenge of integrating an acquisition.  

The company should have well-established financial and internal controls. The test of an acquisition occurs in the months after the sale is finalized. For successful integration, companies should have strong accounting, billing, and customer management systems in place, as well as internal controls.

It is also helpful for company leadership to have some experience with acquisitions; thus, for companies new to M&A, it is prudent to start small and close to home. For most security companies, a tuck-in acquisition of a smaller local company is the ideal starting point.

Assemble a Team of Experts

Regardless of a company’s experience with M&A, it invariably makes sense to assemble a team of specialists that can guide it through the process. They can help identify a target for acquisition, provide due diligence, assist during the transaction, and provide ongoing integration support.

The team should include:

1. An investment bank or consultant: When a company engages a third-party advisor, it gains the benefit of the advisor’s network as well as its experience in security industry acquisitions and integration. A consultant could also be a retired executive, a business broker, or a CPA.

2. A due diligence provider. Before a security company proceeds with a material acquisition, it should consider engaging a partner with the industry familiarity and skills to perform confirmatory financial due diligence. A lender may require the engagement of such a firm to assess the purchaser’s collateral.

3. Experienced legal counsel. For peace of mind, an acquiring company should engage a lawyer that specializes in M&A and has experience in security industry transactions. This will ensure that the transaction will conform to all applicable regulations and standards and will make for a smoother closing process.

4. The lender. Here again, a critical criterion is industry experience. A company should look for a lending institution that has a team devoted to the security industry, that has financed numerous acquisitions, and that is well versed in the market and regulatory trends shaping the business. Equally important, the lender should have an established reputation for finding ways to craft transactions that advance the unique interests of each of their clients.

When choosing a lender, a security company should also take the long view. It should select a lender with the capacity to grow with the company as it pursues additional acquisitions and who can offer complementary services like letters of credit, corporate cards and treasury management. With the security industry increasingly turning to acquisitions, having a long-term partner who knows their business is a true competitive advantage.