Investment Trends Webinar PPT Alper

Report
Welcome to the
SIA Investment Trends
Committee Webinar
July 31, 2014
Information. Insight. Influence. securityindustry.org
SIA Investment Trends
Committee Webinar
Introduction
John E. Mack III
Executive Vice President
Imperial Capital
Information. Insight. Influence. securityindustry.org
SIA Investment Trends Committee Overview
Mission: To increase availability of security industry related Capital Markets,
M&A and Investment Information to participants in the industry.
Elements:
Periodic Webinars on investor related topics
Periodic Reports on investor related topics
Registry of Investors interested in the industry
Advocacy for an annual SIA report on the industry growth and key metrics in partnership with a
world-class research organization
Event(s) for CEOs and/or Investors at SIA conferences - ISC and SNG
Promotion of the industry to the financial media
Recognition:

Examples – Annual awards for best - M&A Deal, Financing Transaction, CEO, CFO, & Corp Dev Exec
Committee Members Targets:
Executives including: CFO's, Corporate Development (M&A), Investor Relations, Investors (private or public),
Investment Banking Research Analysts, Investment Banking Corporate Finance, Senior Lenders
Founding Committee Members:
•
•
•
•
John E. Mack III - Chairperson - Imperial Capital
Alper Cetingok - Raymond James
Andrew Dodson - Parthenon Capital Partners
Jeff Kessler - Imperial Capital
•
•
•
•
Franklin McClelland – Allegion
John Orr – Ascent Capital (Monitronics)
Stephan Segouin - The ADT Corporation
Will Schmidt - Capital Source
Information. Insight. Influence. securityindustry.org
Speaker Biographies
John E. Mack III, Imperial Capital, LLC
Executive Vice President,
Co-Head Investment Banking,
Head Security Group

John E. Mack III is Executive Vice President, Co-Head of Investment Banking and Head of Security Group at Imperial Capital,
LLC. Mr. Mack joined Imperial Capital in 2008 as part of the firm’s acquisition of certain assets of USBX Inc., an investment banking
firm focused on mergers and acquisitions. Mr. Mack was founder and CEO of USBX. Prior to USBX, Mr. Mack served as the CEO and
a member of the Board of Directors of Protection One, Inc., then the nation's second largest provider of life safety and property
monitoring services. Prior to assuming the role of CEO, Mr. Mack held the positions of CFO, Chief Strategy Officer and Executive Vice
President of Business Development, where he was involved in over 200 acquisitions and oversaw the company’s growth from
approximately 30,000 subscribers and $17 million in revenue to more than 1.6 million subscribers, $600 million in revenue and an
enterprise value of over $2 billion. Before joining Protection One, Mr. Mack was a Senior Executive Officer with Westec Security, Inc.
Alper Cetingok, Raymond James
Managing Director
Co-Head, Security, Defense & Govt.
Service Group

Mr. Cetingok joined Raymond James in 2012 as Co-Head of the Security, Defense & Government Services (SDGS) Group in
connection with Raymond James’ acquisition of Morgan Keegan. Raymond James’ SDGS Group has completed more than 120 M&A
and financing transactions valued at approximately $17 billion and, in 2012, was recognized by Global Security Finance as the leading
M&A advisor to the security and defense industries. Mr. Cetingok is also a member of the Investment Banking department’s Executive
Committee. Prior to joining Raymond James, Mr. Cetingok spent approximately 15 years at Morgan Keegan, where he founded and
led the firm’s Security & Defense Group and held the distinction of being the youngest Managing Director in the firm’s history.
Stephan Segouin, The ADT Corp.
Vice President, M&A and
Group CFO, ADT Canada

Mr. Segouin joined ADT in 2012 as head of M&A. In that capacity Mr. Segouin sourced and executed the Devcon and Protectron
acquisitions. Prior to ADT, Mr. Segouin was the head of Corporate Development at NextEra Inc., the second largest U.S. power
company from 2005 to 20011 reporting to Jim Robo, then President. In that capacity Mr. Segouin led all the M&A and strategic
planning for NextEra and founded Clearsky, NextEra's venture fund. Before that Mr. Segouin was an investment banker with Lehman
Brothers and Goldman Sachs.
Will Schmidt, Capital Source
Managing Director,
Security Lending Group

Will Schmidt currently holds the position of Managing Director within CapitalSource’s Security Lending group. His primary
responsibilities include developing new client relationships and structuring, underwriting, and funding transactions within the security
and government services markets. Prior to joining CapitalSource in 2004, Mr. Schmidt had broad financial and operational experience
in the security alarm industry with positions at SLP Capital and Dealers Monitoring Acceptance Corp (DMAC). At SLP Capital, Mr.
Schmidt held the position of Vice President of Dealer Relations, Senior Vice President of Embrasure and Senior Vice President of the
Special Asset group. Prior to SLP Capital, Mr. Schmidt worked at DMAC, initially as a Regional Sales Manager and later as Director of
Dealer Relations. In the latter position, his responsibilities included managing DMAC’s field service operation as well as managing all
aspects of the acquisition of accounts from the DMAC dealer network.
Jeff Kessler, Imperial Capital, LLC
Managing Director
Equity Reserach

Jeffrey Kessler is currently a Managing Director of Institutional Research at Imperial Capital, LLC in the New York City office.
Mr. Kessler has been the leading security industry analyst on Wall Street for 30 years. including twenty-one years as the senior
security industry & business services analyst with Lehman Brothers. In 2006 Mr. Kessler was named in the first “Security
Magazine” poll as one of the industry “25 Most Influential Leaders”, and was a co-founder of the “Securing New Ground,” conference.
At Lehman Brothers, Mr. Kessler published an annual “Security Industry Annual” for 15 years and at Imperial Capital, Mr. Kessler
covers 15 leading publicly traded security companies, publishes the quarterly “Security Monitor,” selected White Papers on the industry,
and is involved in one of the industry’s largest security conference, the Security Investor Conference.
Information. Insight. Influence. securityindustry.org
M&A
Alper Cetingok
Managing Director
Co-Head, Security, Defense & Govt. Service Group
Raymond James
Information. Insight. Influence. securityindustry.org
M&A Market Drivers
Improvements in macroeconomic conditions have created a favorable
backdrop for M&A
U.S. Market Performance (Jan. 1, 2004 – Mar. 31, 2014)
U.S. Market Performance (Apr. 1, 2013 – Mar. 31, 2014)
Leveraged Loan Volume Since 2004
Middle Market Debt Multiples of Leveraged Loans
Strong
equity
markets
Bank Debt/EBITDA
6.0x
Robust
Credit
markets
4.3x
4.0x
2.0x
4.7x
0.4
0.8
3.5
4.3
4.7x
5.6x
0.4
0.6
Non-Bank Debt/EBITDA
4.5x
0.8
4.5x
4.2x
0.8
0.5
0.8
3.4
3.8
3.8
2010
2011
2012
3.3x
3.7
2.5
4.8x
5.3x
0.2
0.7
5.2
4.2
4.3x
4.6
5.3
2013
YTD
2Q14
0.0x
2004
Private Equity Fundraising ($B)
2005
2006
2007
2008
2009
Private Equity “Dry Powder” ($B)
Substantial
Capital
availability
Information. Insight. Influence. securityindustry.org
M&A Market Statistics
M&A activity has rebounded from post-recession lows and is likely to continue
on a positive trajectory in the near- and intermediate terms
U.S. Historical Annual M&A Activity ($B)
Increasing
deal
volumes
Disclosed Value ($B)
$1,500
U.S. Historical Quarterly M&A Activity ($B)
Number of Transactions
6,000
$1,000
4,000
$500
2,000
$-
Disclosed Value ($B)
$600
$400
1,000
$200
500
$-
3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
U.S. Private Equity Deal Flow ($B)
Capital Invested ($B)
$600
$400
$385
$362
$400
Number of Deals
$459
3,000
$465
2,000
$192
$171
$200
Private Equity Deal Flow by Size (# of Deals)
$244
1,000
$0
0
2008
2009
2010
2011
2012
2013
YTD
2Q13
YTD
2Q14
Median Quarterly EBITDA Multiples
Median EBITDA Multiples by Buyer Type
15.0x
Financial Buyer
14.0x
11.4x
Strong
valuations
1,500
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD YTD
2Q13 2Q14
Substantial
private equity
activity
Number of Transactions
10.2x
9.6x
10.0x
8.6x 9.3x
11.2x
10.1x
Strategic Buyer
12.0x
12.2x
12.8x 13.2x12.2x
10.4x
9.1x
8.5x
5.0x
0.0x
3Q12
4Q12
1Q13
2Q13
3Q13
Information. Insight. Influence. securityindustry.org
4Q13
1Q14
2Q14
Security Market Trends
The pace and magnitude of change in the security industry is at historically
high levels, resulting in meaningful implications for security market M&A
Trend
Commentary
 Use of traditional security channels to sell and manage portfolio of services (e.g., video
surveillance, access control, intrusion alarm, energy management, IP telephony, etc.)
Security as a platform for managed services
 Conversion of business models from low-margin, installation and systems integration sales to
high-margin, recurring revenue maintenance and monitoring contracts
 Emphasis on benefits other than security, such as business intelligence, in order to shift
purchasers’ frame of reference from “security = cost” to “security = ROI”
 Most segments of security industry experiencing market disruption as result of new market
entrants emphasizing technology, new offerings, new delivery methods, etc.
Emergence of disruptive, “next-generation”
RMR business models
–
–
–
–
Residential: connected home, DIY, solar
Commercial: managed services, DRaaS
Video: video monitoring for enterprise (VSaaS, MVaaS)
PERS: mHealth, telemedicine
 Substantial investment by cable and telecommunications companies to expand offering into both
residential and commercial security (e.g., Xfinity Home, AT&T Digital Life, etc.)
 Large, well-capitalized technology companies aggressively expanding into security to capitalize on
growing connected home opportunity (e.g, Google/Nest/Dropcam)
Rapidly changing competitive landscape
 Increasing investments by existing market participants to diversify offerings, access new end
markets, etc. (e.g, Securitas, Canon, etc.)
 Historically high levels of private equity investment during last five years by private equity
investors
Growth of institutional investment in industry
across multiple asset classes
 Increasing frequency of new, early-stage investors entering market seeking to capitalize on new
trends (e.g., Sequoia Capital, Khosla Ventures, etc.)
 Unprecedented levels of debt investment in support of M&A and organic growth initiatives
Information. Insight. Influence. securityindustry.org
Transaction Case Study – TransAlarm
The combination of iVerify and TransAlarm with support from Securitas creates
a formidable new participant in the managed services market
May 2014
Background

Has been acquired by
TransAlarm, Inc. (“TransAlarm” or the “Company”) is a leading provider of security systems integration and alarm
monitoring solutions to the commercial market in the United States and Canada
–
TransAlarm provides systems design, installation and integration services for a comprehensive range of
security hardware devices and technologies including intrusion, fire alarm systems, CCTV, alarm and video
monitoring, access control and business intelligence solutions
–
The Company maintains core operations in the Minneapolis/St. Paul region with a rapidly growing national
accounts program serviced through third-party technicians
with equity investment to support the
transaction provided by

iVerify is a leading provider of real-time, remote security monitoring solutions using video and audio technologies
Transaction Highlights

Raymond James’ Security, Defense & Government Services Group (“SDGS”) served as exclusive financial
advisor to TransAlarm in connection with the Company’s assessment of strategic alternatives

Process culminated with the sale of TransAlarm to iVerify, Inc. with equity financing for the transaction provided by
Driehaus Private Equity, iVerify’s existing financial sponsor, and Securitas AB, one of the world’s largest security
companies
Significance of Transaction

The combination of TransAlarm and iVerify creates one of the most comprehensive solution portfolios in the
security industry and positons the combined company as a leader in the rapidly evolving managed services
segment of the market

As a result of Securitas’ investment in iVerify, Securitas diversifies its service offering and deepens its footprint in
the North American market, while iVerify gains access to Securitas’ substantial base of guarding customers, which
generates annual revenue in excess of $10 billion
Information. Insight. Influence. securityindustry.org
Transaction Case Study – SimpliSafe
The financing of SimpliSafe by a highly regarded new investor to the industry
exemplifies the investment community’s growing interest in security
January 2014
Background


Has completed a minority investment led by

SimpliSafe, Inc. (“SimpliSafe” or the “Company”) is a leading provider of do-it-yourself (“DIY”) security systems to
primarily residential customers in North America
The Company offers a highly integrated solution consisting of proprietary hardware and software supported by
ongoing monthly monitoring services to consumers seeking alternatives to traditional, professionally installed
security systems
SimpliSafe’s business model is unique in many respects, including no long-term contractual commitments and
value-oriented pricing
Transaction Highlights

Raymond James’ Security, Defense & Government Services Group (“SDGS”) served as exclusive financial
advisor to SimpliSafe in connection with the Company’s assessment of capital formation and strategic alternatives

Process culminated with a minority investment by Sequoia Capital with proceeds from the transaction used to
provide liquidity to existing shareholders and growth capital for the Company
Significance of Transaction

Sequoia Capital’s investment in SimpliSafe validates the perception that certain segments of the security industry
are ripe for disruption on the basis of, among other things, superior technologies/products, more attractive
customer value propositions and differentiated sales and marketing strategies

Investment also serves to increase the profile of the industry through the entry of a venerable and highly successful
investor such as Sequoia Capital and evidences the investment community’s interest in building exposure to
companies well positioned to capitalize on the rapidly growing market for connected home products and services
Information. Insight. Influence. securityindustry.org
Security M&A Overview
John E. Mack III
Executive Vice President
Imperial Capital
Information. Insight. Influence. securityindustry.org
Security M&A Overview
Security M&A activity has rebounded since the second half of
2013, largely due to lower interest rates, a recovering economy
and a bull market
Security Transactions
200
160
82
120
73
56
62
64
41
46
39
14
37
43
15
14
13
55
38
41
13
69
55
8
16
6
55
55
51
80
40
58
7
12
52
23
18
27
12
55
45
58
64
67
52
46
21
8
11
48
44
28
60
13
51
26
15
77
61
42
1
38
14
14
28
6
54
45
38
51
22
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014
Physical Security Sector
Identity Solutions Sector
Information Security Sector
Information. Insight. Influence. securityindustry.org
Security M&A Overview
Physical Security M&A has experienced year over year rebounds in
each of the last four quarters
Physical Security Transactions
100
80
60
40
24
40
30
30
31
38
45
20
23
20
19
23
23
37
17
25
15
29
14
27
23
15
25
8
20
20
25
25
25
27
18
26
37
13
30
22
23
23
23
20
25
9
24
22
13
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014
Physical Security Services
Physical Security Products
Information. Insight. Influence. securityindustry.org
Security M&A Overview
Identity Solutions M&A volume has experienced significant
improvement since the temporary lull at the beginning of 2013
Identity Solutions Transactions
30
25
20
18
15
16
10
10
5
10
6
9
9
9
12
5
4
5
0
2
8
8
6
6
4
6
4
1
5
1
4
6
3
7
9
7
4
2
12
8
11
7
2
3
0
1
6
8
8
7
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014
Identity Solutions Services
Identity Solutions Products
Information. Insight. Influence. securityindustry.org
Security M&A Overview
M&A levels in the Information Security sector has increased and remained relatively stable
over the past six quarters versus 2012
IT Security (Cyber Security) Transactions
100
80
31
60
30
23
32
21
40
28
19
35
19
14
24
25
9
15
9
18
37
34
31
28
24
51
43
20
35
32
18
32
30
41
30
30
31
19
10
8
11
18
41
37
40
34
21
15
10
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014
IT Security Services
IT Security Products
Information. Insight. Influence. securityindustry.org
Key M&A Catalysts
Advancements in technology are driving product and service innovation of security
solutions, creating a strong M&A environment for the Security Industry
Cyber Security
 The proliferation of mobile devices and increased use of cloud computing has created greater security
vulnerabilities and heightened awareness by enterprises and consumers

High demand from private and government sectors for cloud-based security services such as encryption,
application and messaging security, identity and access management (“IAM”), security analytics and
event management
o
The cloud security market is expected to grow from $4.20 billion in 2014 to $8.71 billion in 2019
with a CAGR of 15.7% during the forecast period 2014-2019 (1)
o
The global spread of cybercrime, which includes computer viruses, malicious software, and identity
theft, presents a significant opportunity for the security software market. The direct global cost of
cybercrime is more than $110 billion (2)
o
One of the fastest growing segments in cloud-based security is expected to originate from IAM,
which currently stands at $500 million and is projected to grow to $1.24 billion in 2017 at a 28.3% CAGR
(3)

Within IAM, one of the fastest growing sectors is Identity as a Service (“IDaaS”) as Gartner
predicts that by year-end 2015, IDaaS will account for 25% of all new IAM sales, compared with
less than 5% in 2012. IDaaS is the combination of administration and account provisioning,
authentication and authorization and reporting functions used to manage SaaS applications and
internal applications
Information. Insight. Influence. securityindustry.org
Key M&A Catalysts
Availability of Disruptive Technology at Affordable Price Points

Technologies are dramatically improving and being provided at consumer-friendly price-points, thus
broadening the market
 The Video Surveillance market has seen a decrease in pricing in recent years while driving volume and
maintaining margins; overall a net positive to industry growth


According to IHS Research, the market is expected to expand by more than 12% in 2014 to $15.9
billion and heading to $23.1 billion in 2017
New disruptive technologies present an opportunity within wireless, video surveillance as a service
(“VSaaS”) and managed video as a service (“MVaaS”), and situational awareness technology such as
analytics

According to IHS, the world market for VSaaS and managed video will grow in excess of a 25%
CAGR from 2010 to 2020

The emergence of VSaaS and MVaaS will be a major contributor to the increase of cloud-based services
Demand for Broader Product Suite
 The market is increasingly demanding converged solutions that combine physical security, identity
management and information security and then moving the delivery of these services to cloud-based
business models

Firms are improving and making their existing product and service offerings more sophisticated to cater to the
specific needs of each client in specific vertical industry segments, and many firms are accomplishing this
through M&A
Information. Insight. Influence. securityindustry.org
Key M&A Catalysts
Strong M&A Appetite from Strategic and Financial Buyers
Strategic
Financial

Strategic buyers have been motivated by a desire to
expand breadth and depth of service offerings, add
new product lines, or expand geographic footprint

The scope of strategic buyers has increased beyond
the security industry:
•
•
•
•
IT Services companies – seeking to build
platforms that will facilitate the integration of
security within the business enterprise and
then moving to cloud based service delivery
models
Security Technology companies – expanding
current offerings for integrated solutions
Building Control companies – integrating
security and monitoring component to existing
building management products and services
Industrial Conglomerates – looking for new long
term growth industries

Private equity investors are attracted to the high
growth potential available from the security industry
and recent deal flow has demonstrated the availability
of future exit opportunities

Venture capitalists have been active, investing in
disruptive and specialized security technologies

There has been a recent surge in capital markets
activity for alarm companies with Interface, Vivint,
Monitronics and Securitas Direct all closing large
financing deals recently
 Private equity investors have been prevalent across
a range of traditional security businesses, and in
particular the alarm sector where 9 of the top 20
companies are PE-owned

Low loan default rates in security investments
resulting in more aggressive leverage
Information. Insight. Influence. securityindustry.org
ADT’s Acquisition of Protectron
TRANSACTION HIGHLIGHTS:
HAS ACQUIRED:
A subsidiary of:
Financial Advisor to
The ADT Corporation
July 2014

The ADT Corporation acquired Reliance Protectron Inc., a subsidiary of Reliance
Comfort Limited Partnership, a portfolio company of investment funds managed
by Alinda Capital Partners, for total cash consideration of CAD $555 million
(approximately USD $500 million)

Acquisition strengthens ADT’s Canadian operations and creates a combined
security industry leader in Canada, differentiated by its ability to reach consumers
and provide them with better service and more choice across a variety of
traditional security and automation technologies

Protectron’s efforts to sell home automation products and services will be
accelerated by ADT's considerable strengths in this area. The deal also creates
opportunities for operational and administrative synergies
COMPANY DESCRIPTION:
Incorporated in 1988 and headquartered in Montreal, Quebec, Protectron is one of Canada's
largest security monitoring and installation companies. It employs over 900 qualified
professionals who specialize in the selling, installing, servicing and monitoring of electronic
security systems for more than 400,000 residential, commercial, industrial and wholesale
subscribers nationwide. Subscribers are offered a full suite of security and related monitoring
products and services, including intrusion, smoke detection, personal and medical
emergency, and environmental monitoring as well as other specialized services. Best-inclass interactive and home automation services adapt to today’s connected lifestyle.
The ADT Corp. (NYSE: ADT) is a leading provider of electronic security, interactive home
and business automation and monitoring services for residences and small businesses in
the United States and Canada. Headquartered in Boca Raton, Florida, ADT helps provide
peace of mind to more than six million customers, and it employs approximately 17,000
people at 200 locations.
Information. Insight. Influence. securityindustry.org
HID’s Acquisition of Lumidigm
TRANSACTION HIGHLIGHTS:

Acquisition extends HID’s authentication portfolio while positioning the
company to deliver a variety of new secure identity solutions into more
applications

Lumidigm’s patented multispectral imaging technology overcomes problems
with traditional biometrics, particularly in harsh environments

As part of HID, Lumidigm extends its proven technology beyond finger- and
hand-based applications into iris, facial and other smart imaging systems
WAS ACQUIRED BY:
COMPANY DESCRIPTION:
A subsidiary of:
Exclusive Financial Advisor to
Lumidigm, Inc.
February 2014
Lumidigm, a global leader in authentication solutions is dedicated to enabling convenient,
secure, and reliable identification of people, products and credentials. Developed with
“real world” performance as a priority, Lumidigm’s multispectral imaging technology,
innovative software and biometric fingerprint sensors allow customers to know “who”
or “what” to a high degree of certainty. Lumidigm and its strategic partners have met
challenging authentication requirements in markets such as banking, healthcare,
entertainment, and government services. The Lumidigm Advantage is also suitable for
industrial, commercial, and transportation applications. Lumidigm is headquartered in
Albuquerque, New Mexico.
HID Global is the trusted source for innovative products, services, solutions, and know-how
related to the creation, management, and use of secure identities for millions of
customers around the world. The company’s served markets include physical and
logical access control, including strong authentication and credential management;
card printing and personalization; visitor management systems; highly secure
government and citizen ID; and identification RFID technologies used in animal ID and
industry and logistics applications. The company’s primary brands include ActivID®,
EasyLobby®, FARGO®, IdenTrust®, LaserCard® and HID®. Headquartered in Austin,
Texas, HID Global has over 2,100 employees worldwide and operates international
offices that support more than 100 countries. HID Global® is an ASSA ABLOY Group
brand.
Information. Insight. Influence. securityindustry.org
The ADT Corporation
Stephan Segouin
Senior Vice President, M&A and Group CFO
ADT Canada
Information. Insight. Influence. securityindustry.org
ADT has a multi-pronged growth strategy with 4
main levers
ADT Growth Strategy
 Core organic growth
o Interactive take rates
o Customer upgrades
o Price increases
 Dealers
o New dealers
o Increased interactive penetration
 Acquisitions
o Redeploying strong cash flow from existing customer base
o Adding accounts and capabilities
o Increased regional penetration
 New products
Information. Insight. Influence. securityindustry.org
ADT has demonstrated its commitment to M&A by
executing a number of transactions since its IPO
The Rationale For Acquisitions
 Historically ADT has been an active buyer/consolidator
o Broadview acquisition nearly doubled ADT’s size and paved the way
for the Tyco separation
 ADT’s large North American presence and operations make us a
logical acquirer
o Strong cash flow to execute deals to grow core business
o Given our significant footprint, we typically have the most synergies
o Allows ADT to be very competitive on price
o Ability to provide management of acquired companies careers at ADT
 Since going Public in October 2012, ADT as added ~525,000
customers through corporate acquisitions (excludes bulks)
o Meaningful source of account growth for ADT
Information. Insight. Influence. securityindustry.org
We acquired Devcon Security in August 2013
for $148.5M
Devcon Acquisition – August 2013
 We acquired Devcon in August 2013 for $148.5M
o 118,000 customers with $3.6M of RMR
o Transaction executed at a 41x RMR multiple
 Transaction rationale
o Quality account base and management team
o Business line of interest to ADT (meaningful HOA portfolio)
o Competent sales force that relied on self generated leads to get
accounts
o Attractive opportunity given the shift in “advertising voice” with the
larger telcos and cable companies entering the market
o Some element of distress following Devcon’s failed expansion effort
that allowed ADT to get a “good deal”
o Highlighted ADT’s ability to due diligence complicated transactions
Information. Insight. Influence. securityindustry.org
The Devcon acquisition has been successfully
integrated into ADT
Devcon Acquisition – August 2013
 Update
o Cooperative integration with ADT
• Hollywood call center still open
o Key management members offered senior positions within ADT
o No dip in sales during year 1 and no disruption in business model
• HOA business remains strong
o Replicated Devcon’s self generated sales model and implemented it
within ADT’s larger sales force
o Successfully divested Devcon’s commercial subsidiaries (Mutual &
Stat-Land) at a higher multiple within 4 months of closing the deal
• Sold at 43x RMR
Information. Insight. Influence. securityindustry.org
Protectron is the second largest security company in
Canada and is based in Montreal, QC
Protectron Acquisition – July 2014
 Acquired Protectron in July 2014 for CDN$555M
o 400,000 customers with CDN$12M of RMR
o Negotiated transaction (no auction) and executed at a 46x RMR
multiple
 Transaction rationale
o Combining number 1 and number 2 players to create a critical mass
in Canada with over 800,000 customers
o Opportunity for ADT to have a stand alone management team in
Canada
• Prior to the acquisition, ADT Canada largely ran out of the US
• Not an optimal structure for either side
o Opportunity to adopt best practices of both businesses and to
rationalize the operations where there is overlap
Information. Insight. Influence. securityindustry.org
The Protectron acquisition is off to a good start
Protectron Acquisition – July 2014
 Update
─ Deal announced in April and closed in early July
─ Ahead of expectations
─ Company performing well and currently drafting integration plan
─ Protectron’s management team enthusiastic about their future roles in
the larger Canadian platform
Information. Insight. Influence. securityindustry.org
ADT remains committed to M&A and believes it to be
one of its key levers of growth
Conclusion
 Acquisitions are a key part of ADT’s growth strategy
o Added ~525,000 customers through corporate transactions since
October 2012
o Roughly 7% of ADT’s customer base
 ADT is best positioned to be the acquirer of choice
o More synergies then any of our competitors
o Cooperative approach with management of acquired companies
 Since its IPO, ADT has been aggressive in the market place and has
done large deals at attractive multiples with strong returns
o All transactions executed at attractive multiples
• 41x RMR for Devcon
• 46x RMR for Protectron
Information. Insight. Influence. securityindustry.org
Debt Capital Markets
Overview
Will Schmidt
Managing Director, Security Lending
Group Company
Capital Source
Information. Insight. Influence. securityindustry.org
Robust Macro Debt Capital Environment





Strong appetite for assets across size and risk continuums
o Traditional Banks
o Institutional Investors / CLOs
o High Yield Bonds
o Second Lien / Mezzanine / Subordinated Debt
Leverage levels are conducive to M & A activity
Favorable structural elements (liberal covenants,
generous acquisition baskets, etc.)
Spreads appear to have reached an equilibrium and
remain issuer friendly
M & A activity will be a key driver for issuance volume as
refinance activity slows
Information. Insight. Influence. securityindustry.org
U.S. Leverage Loan Issuance
Information. Insight. Influence. securityindustry.org
Middle Market LBO Leverage
Information. Insight. Influence. securityindustry.org
Middle Market Term Loan Yields
Information. Insight. Influence. securityindustry.org
Implications for the Security Industry


The broader security industry continues to be perceived as having
stable fundamental demand drivers with solid macro trends
Recurring security services segment (RMR)
o
o
o
o
o
RMR-related accounting nuances are understood by a subset of
industry lenders, but largely avoided by mainstream banks
Favorable leverage levels traditionally reserved for digital security
monitoring are now be selectively applied to the video monitoring,
managed access control and other managed services business
segments
Battle-tested structures have proven the durability of RMR assets
Despite specialized nature of these loans, ample capacity exists
with strong leverage and lower pricing evident at all levels in this
market
Competition largely driven by deal size
Information. Insight. Influence. securityindustry.org
Implications for the Security Industry
 Non RMR-centric security businesses also benefit from strong
demand drivers
o
o

Strength in general leverage lending markets are sustaining
favorable structures for these issuers
Many of these businesses also benefit from material noncontracted recurring revenue
Government services security providers
o
o
o
Differentiation is key given budgetary pressure. Are there LPTA
(Low Price Technically Acceptable) alternatives?
Underwriting environment remains challenging, driving more
conservative leverage levels. Must demonstrate continued
performance in downside case.
For differentiated businesses with strong contract diversity,
favorable pricing and structures persist.
Information. Insight. Influence. securityindustry.org
Case Study 1: Alarm Security Group

Acquired by Parthenon Capital in 2007. Management team lead
by Joe Nuccio, CEO and Ralph Masino, CFO.

CapitalSource anchored and arranged a senior credit facility to
facilitate Parthenon’s acquisition and provide capital for
continued growth.

The company’s senior credit facility provides a flexible interestonly structure with availability that grows as the company’s
recurring service base grows, allowing the capital structure to
scale with the business.

ASG has continued to grow significantly since 2007 through both
internal sales and selective acquisitions of quality account bases.

Over the past 6+ years, the loan facility has been increased
several times and additional participants have been added, most
recently increasing total capacity to $300 million.
Information. Insight. Influence. securityindustry.org
Case Study 2: Independent Alarm Company

The principal of a regional alarm company expressed concerns
about their local bank’s understanding of their business and its
reliance upon the principals’ personal guarantees.

The principal had experienced difficulty in getting financing for a
recent in-market acquisition, despite relatively modest levels of
senior leverage.

CapitalSource structured a facility that allowed the company to
make future acquisitions, while at the same time repaying the
existing senior lender and allowing the partial repayment of
some shareholder loans to provide liquidity to a non-active
shareholder.

Through its parent, Pacific Western Bank, CapitalSource was
also able to provide depository services for the client at a lower
cost than their previous lender.
Information. Insight. Influence. securityindustry.org
High Yield Market Overview
John E. Mack III
Executive Vice President
Imperial Capital
Information. Insight. Influence. securityindustry.org
High Yield Market Highlights




2014 YTD issuance of $306.3 billion remains well ahead of YTD 2013 issuance ($196.1 billion), and is on pace to
break the $441.6 billion record set in 2013

In the last four weeks, 97 tranches of debt (representing 81 issuers) have been priced for total proceeds of $50.2 billion

M&A volume remains the leading use of proceeds, after several years of refinancings leading market issuance
High yield mutual funds have recorded an inflow of $5.0 billion 2014 YTD
As of the week ended July 18, the secondary market had a YTD return of 4.98%
Secondary yields and spreads as of the week ended July 18 were 5.34% YTW and 3.78% STW

Spreads have widened 43 bps since reaching the YTD low on June 23 rd (3.35%)

YTW has risen 49 bps since June 23rd and is currently at its highest level since March
High Yield Weekly Fund Flows
4,000
3,000
2,000
1,000
0
(1,000)
(2,000)
(3,000)
Source: Thomson Reuters LPC
(4,000)
(5,000)
Jul-13
Aug-13
Sep-13
Oct-13
Weekly Flows
4-Wk Avg
Nov-13 Dec-13
Jan-14
Feb-14 Mar-14
Apr-14
May-14
Jun-14
Jul-14
Information. Insight. Influence. securityindustry.org
Alarm & Monitoring High Yield Issuers
(1)
Offering Date /
Maturity
- 4.125%
- 6.250%
- 2.250%
- 3.500%
- 4.125%
- 4.875%
Notes
Notes
Notes
Notes
Notes
Notes
(May '14 / April '19)
(Oct. '13 / Oct. '21)
(July '12 / July '17)
(July '12 / July '22)
(Jan. '13 / June '23)
(July '12 / July '42)
- 12.5% Notes (May '14 / Aug. /18)
- 9.250% Notes (Jan. '13 / Jan. '18)
(2)
- 9.125% Notes (July '13 / April '20)
- 8.750% Notes (Mar. '12 / Sept. '18)
- FRN Notes (March '12 / Sept. '18)
- FRN Notes (March '12 / Dec. '18)
- 6.375% Notes (Nov. 12' / Dec. '19)
- 8.750% Notes (Nov. '12 / Dec. '20)
Financial Statistics:
RMR
($ in millions)
$258.0
$9.9
$43.1
€ 53.7
$42.1
ARPU
$41.05
$97.45
$41.15
€ 35.70
$53.05
LTM Adjusted
EBITDA
($ in millions)
$1,721
$47
$321
€ 227
$304
Total Debt
($ in millions)
$4,700
$376
$1,626
€ 1,440
$1,855
Total Debt / RMR
18.2x
38.0x
37.8x
26.8x
44.1x
Total Debt / LTM
Adjusted EBITDA
2.7x
7.9x
5.1x
6.3x
6.1x
LTM Adjusted
EBITDA / Interest
Expense
8.6x
1.3x
3.1x
1.8x
2.2x
$10,202
n/a
$2,057
n/a
n/a
Leverage Statistics:
Valuation:
TEV
Source: Thomson Reuters LPC
TEV / RMR
39.5x
n/a
47.8x
n/a
Information. Insight. Influence. securityindustry.org
n/a
Security Industry Outlook
Jeff Kessler
Managing Director, Equity Research
Imperial Capital
Information. Insight. Influence. securityindustry.org
Investing in Security Companies Beats the Market. Why?
Key Drivers that Make Security Investing Attractive
 Heightened global awareness following 9/11 has created the need for
larger, disciplined companies that provide superior platforms and closer
“touch” with Government, commercial, institutional, and residential users.
 Major technology “step ups” have helped successful public companies
to distinguished themselves in using “big data” from video, identification,
access control, intrusion devices, biometrics, and a multitude of other
sensors to help the premises owner make better decisions and improve
ROI.
 On the Residential side, service providers are focused on home
automation, using wireless interactive applications, with highly visible,
branded partners, may create a doubling in the current 25mn homes using
security or interactive home systems within 7 years.
 The stock market has identified those security companies that lead
these trends and have awarded them with superior performance over
the last five- and ten-year periods.
Performance of Select Physical and ID Security Stocks
Information. Insight. Influence. securityindustry.org
Physical and ID Security Constituents
Security Coverage - Constituents
Acxiom Corporation (NasdaqGS:ACXM)
AlarmForce Industries Inc. (TSX:AF)
Allegion Plc (NYSE:ALLE)
Analogic Corporation (NasdaqGS:ALOG)
Ascent Capital Group, Inc. (NasdaqGS:ASCM.A)
Assa Abloy AB (OM:ASSA B)
Checkpoint Systems Inc. (NYSE:CKP)
Command Security Corp. (AMEX:MOC)
Constellation Software Inc. (TSX:CSU)
Control4 Corporation (NasdaqGS:CTRL)
Corrections Corporation of America (NYSE:CXW)
CTS Corporation (NYSE:CTS)
Danaher Corp. (NYSE:DHR)
Diebold, Incorporated (NYSE:DBD)
Digimarc Corporation (NasdaqGS:DMRC)
Federal Signal Corp. (NYSE:FSS)
FLIR Systems, Inc. (NasdaqGS:FLIR)
Gunnebo AB (OM:GUNN)
Identiv, Inc. (NasdaqCM:INVE)
Image Sensing Systems, Inc. (NasdaqCM:ISNS)
ImageWare Systems Inc. (OTCPK:IWSY)
IndigoVision Group plc (AIM:IND)
INSIDE Secure (ENXTPA:INSD)
ISC8 Inc. (OTCPK:ISCI)
Johnson Controls Inc. (NYSE:JCI)
Kratos Defense & Security Solutions, Inc. (NasdaqGS:KTOS)
L-3 Communications Holdings Inc. (NYSE:LLL)
Loomis AB (OM:LOOM B)
MSA Safety Incorporated (NYSE:MSA)
Napco Security Technologies, Inc. (NasdaqGS:NSSC)
NIC Inc. (NasdaqGS:EGOV)
NICE Systems Ltd. (TASE:NICE)
OmniVision Technologies, Inc. (NasdaqGS:OVTI)
Oracle Corporation (NYSE:ORCL)
Prosegur Compañía de Seguridad, S.A. (CATS:PSG)
RELM Wireless Corp. (AMEX:RWC)
Securitas AB (OM:SECU B)
Stanley Black & Decker, Inc. (NYSE:SWK)
The ADT Corporation (NYSE:ADT)
The Brink's Company (NYSE:BCO)
Trimble Navigation Limited (NasdaqGS:TRMB)
Tyco International Ltd. (NYSE:TYC)
United Technologies Corp. (NYSE:UTX)
VASCO Data Security International Inc. (NasdaqCM:VDSI)
Verint Systems Inc. (NasdaqGS:VRNT)
Versar Inc. (AMEX:VSR)
Zicom Electronic Security Systems Limited (BSE:531404)
Information. Insight. Influence. securityindustry.org
July 2014
44
Security Industry Overview and Long-Term Trends
2014-2015 a Breakout Year:
 Focus on margin and longer customer lives for leading installers.
 Uptick in human behavior learning systems which provide automated
responses when things are as they should be, and warns the user when
incidents develop (Internet of Things [IOT] concept).
 Increased use of radio frequency identification (RFID) and digital
watermarking in retail for asset tracking and inventory management.
 “New-age” fingerprint technologies that have the ability to overcome
the read problems of older “ridge” technologies.
 DNA anti-counterfeiting technology in the retail, commercial, and
government sectors.
 Continued development of wireless, remotely interrogated locks and
access control systems.
Information. Insight. Influence. securityindustry.org
Examples of Public Stock Leaders
Information. Insight. Influence. securityindustry.org
Assa Abloy AB (ASSA’B-SK) – The Acquirer
 Based in Stockholm, Sweden, Assa Abloy is the largest provider of door
opening, access control, and identification solutions. Growth has come
from both strategic acquisitions with a good history of ROCE and
organically.
 Assa Abloy’s portfolio spans the entire range from physical (fire doors,
door opener/closers, fences, and gates), to hybrid (electro-mechanical to
wireless migration), to Government card identification solutions, to new
leading edge technologies in NFC, Bluetooth, biometrics, digital
authentication.
Information. Insight. Influence. securityindustry.org
Assa Abloy AB (ASSA’B-SK)
Organic vs. Acquired Growth (%)
20
15
10
5
Q1/10
Q1/11
Q1/12
Q1/13
Q1/14
(5)
Organic growth, %
Acquired growth, %
Information. Insight. Influence. securityindustry.org
Assa Abloy AB (ASSA’B-SK)
Segment Analyses (Sales in SEKbn)
60,000
50,000
40,000
ENTRANCE SYSTEMS
GLOBAL TECHNOLOGIES
ASIA PACIFIC
30,000
AMERICAS
EMEA
20,000
10,000
FY11
FY12
FY13
FY14E
FY15E
Information. Insight. Influence. securityindustry.org
Verint Systems (VRNT) – Actionable Intelligence
 Based in Melville, New York, Verint is a leading provider of security
intelligence and enterprise intelligence solutions focused on three areas
of business: actionable security intelligence, customer relationship
optimization, and security intelligence (e.g., fraud, risk, and compliance
and network). The company has developed these leadership positions
around its ability to take large amounts of “big data” and make them more
easily usable for its constituencies, improving their business or security
efficiencies, and the ROI.
 For example, Verint was recently awarded a three-year $100mn contract
for network security intelligence, which will ramp up in 2014, with full
margin benefits expected in 2015-2016.
Information. Insight. Influence. securityindustry.org
Verint Systems (VRNT) – Segment Revenues ($mn)
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Important Imperial Capital Disclosures, Certifications and Other Information
Ratings Distribution and Definitions
Outperform
In-Line
Underperform
61.73%
35.20%
3.06%
Equity Ratings Definitions (as of 7/1/09)
Outperform: TRR expected to exceed basket by at least 10%
In-Line: TRR expected to be in-line with basket
Underperform: TRR expected to underperform basket by at least 10%
This Equity Ratings Distribution reflects the percentage distribution for rated equity securities for the twelve month period 7/1/13 through 6/30/14. Rating definitions are expressed as the total rate of return (TRR)
relative to the expected performance of a basket of like securities over a 12-month period. Within the twelve month period ended 6/30/14, IC has provided investment banking services to 7.44% of companies with
equity rated an Outperform, 0.00% of companies with equity rated an Underperform, and 0.00% of companies with equity rated an In-Line. As of 6/30/14.
Fixed Income Ratings Definitions and Equity Ratings Definitions (prior to 7/1/09)
Buy: TRR expected to exceed basket by at least 10%
Hold: TRR expected to be in-line with basket
Sell: TRR expected to underperform basket by at least 10%
Rating definitions are expressed as the total rate of return (TRR) relative to the expected performance of a basket of like securities over a 12-month period. Please refer to our publication dated 7/1/09 for details
associated with the transition of our Equity Ratings to the current definitions.
Please refer to our previously published research reports for the risks associated with the subject issuers.
Analyst Certification: Each research analyst whose name appears in bold on the front page certifies that: (1) the views expressed in this report reflect the analyst’s
personal views about the subject securities or issuers; and (2) none of the analyst’s compensation was, is or will be directly or indirectly related to the specific
recommendations or views expressed herein. The analyst(s) responsible for the preparation of this report receive(s) compensation primarily based upon individual
performance (e.g., productivity and quality of work) and the overall financial performance of Imperial Capital, LLC, including overall revenues from investment banking
activities.
COMPANY
Assa Abloy AB
Verint Systems, Inc.
DISCLOSURE
None
5, 6, 7, 9 (IB Servs.)
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Important Imperial Capital Disclosures, Certifications and Other Information
As of the date hereof, the analyst or other Imperial Capital, LLC (IC) or Imperial Capital Asset Management, LLC (ICAM) employee who assisted in
the drafting of this report (or a member of his/her household) has a financial interest in the securities of this entity.
2 IC makes a market in the debt securities of this entity.
3 IC makes a market in the equity securities of this entity.
4 As of 6/30/14, IC or its affiliates beneficially own 1% or more of any class of common equity securities of this entity.
5 IC has managed or co-managed a public offering or Rule 144A offering of securities for this entity during the past 12 months.
6 IC has received compensation for investment banking services from this entity during the past 12 months.
7 IC expects to receive or intends to seek compensation for investment banking services from this entity within the next three months.
8 IC or its affiliates has received compensation for products or services other than investment banking services from this entity during the past 12
months.
9 IC had a [investment banking services] [non-investment banking securities-related services] [non-securities services] client relationship with this
entity during the past 12 months.
10 As of the date hereof, the analyst or other IC or ICAM employee who assisted in the drafting of this report (or a member of his/her household)
serves as an officer, director or advisory board member of this entity.
11 IC had (and/or currently has) a financial advisory relationship with certain creditors or equity holders with respect to the entity during the past 12
months.
1
Compendium Disclosure: Securities of issuers in this report, in addition to the subject issuer, may be rated by IC or its affiliate. Please see disclosures, price charts, and ratings histories
for those issuers in our previously-published research reports, available by contacting your account executive at 1-800-929-2299, or on IC’s Web site at www.imperialcapital.com.
*Disclosure items appropriate to each entity, if any, are indicated.
The table above discloses IC’s or its affiliate’s ownership, if any, of securities mentioned herein. While this report is in circulation, IC or its affiliates may, from time to time, make
purchases or sales for their own accounts of securities of any entity. The table above also discloses, as of the date hereof, whether or not IC makes a market in any of the securities
mentioned herein. IC’s market making may constitute, in the case of equity securities and certain debt securities, standing ready to make purchases or sales of securities on a regular or
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such market making activity for any entity.
This report was jointly prepared pursuant to an intercompany agreement with IC’s affiliate, Imperial Capital Asset Management, LLC (ICAM), a SEC registered investment advisor. The
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SIA Investment Trends
Webinar Conclusion
John E. Mack III
Executive Vice President
Imperial Capital
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SIA Investment Trends Webinar
Summary Comments
• Mission: To increase availability of security industry related Capital Markets,
M&A and Investment Information to participants in the industry.
• Our organizing principal for future Webinars and Reports will follow a similar
pattern:
•
•
•
•
M&A Overview
Debt Markets Overview (Public and Private)
Equity Markets Overview (Public and Private)
Case Studies
• Please provide us with feedback on how we can improve these presentations
and/or provide input more broadly on ideas for the Investment Trends
Committee charter
• We appreciate your participation and support!
• Thank you!
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