The 800 lb. gorilla of the US alarm industry is about to go it alone. As described in this recent article
, shareholders of Tyco International Ltd just approved the breakup of Tyco into three separate public companies:
- Tyco’s flow control unit, which will merge with Pentair Inc.
- The commercial fire and security division, which includes Simplex/Grinnell
- ADT, which will become a primarily residential alarm services provider
Announced roughly a year ago, the breakup has only fueled speculation that one or more of the three new entities could be a takeover target. And a lot of the attention has fallen on ADT…
[ADT CEO] Naren Gursahaney was trying to put to rest speculation by investors and analysts that the soon-to-be independent company could be an attractive takeover target for a cable or telecommunications company looking to expand its offerings, or for a private equity buyer. Gursahaney is well aware of the buzz. "I'm spending 100 percent of my time building the strategy, building the team (for) a stand-alone company," Gursahaney said in an interview. "We do intend to go it alone. We're going to be a stand-alone public company."
Who are the Likely Suspects?
For some time rumors have circulated that ADT would be a tempting acquisition for a variety of the larger US phone and cable companies trying to get into home security and home automation. Names like Comcast, Verizon, and even AT&T have appeared as potential suitors in articles published in the alarm industry press. After all, the distinction in products and services between these companies and ADT is getting fuzzier all the time.
With about 6.5 million subscribers in the United States and Canada, ADT will be the only publicly listed U.S. company focused on security monitoring, with a growing business in home automation systems. It will be the largest player in a fragmented $12.5 billion market. The market penetration [for home security] could double from around 20 percent of homes to 40 percent, Gursahaney said, closer to the levels of cable and telecom service providers. More than half of Americans have cable service, for example. Only about 1 percent, mostly high-end homes, pay for home automation systems such as ADT's "Pulse" interactive service that includes lighting and thermostat controls.
Might ADT Start Acquiring Again?
ADT grew while under Tyco's umbrella with the $1.9 billion acquisition of Broadview Security [formerly Brink’s Home Security] in 2010. Rather than seeing itself as a takeover target, it could be an acquirer, he said. "There could be acquisition opportunity because it's a very fragmented market," Gursahaney said.
ADT going back on a buying spree is an interesting notion. When I competed against ADT in the ‘90’s, they were buying anything with a “pulse” – sorry, no pun intended! They ended up acquiring both my old companies (SecurityLink and Alarmguard). Then, around 2001, they pretty much stopped buying entire companies, although ADT still continued to purchase large portfolios of accounts from door knockers like APX (now Vivint), as well as ADT’s own Authorized Dealer program. And, of course, the Brink’s/Broadview acquisition mentioned above…
Why Does ADT Buy Accounts?
ADT can only create so many new accounts on their own, so they need to buy alarm accounts from others – either in portfolios or entire companies, just to stay ahead of their cancellation rates. In the alarm industry, customer cancellation is often termed “attrition,” which is usually measured on an annual basis and expressed as a percentage. In other words, if an alarm company has an attrition rate of 10%, then they are losing 10% of their customers (and by extension 10% of their recurring revenue) each year – or, one out of 10 customers each year.
Back in the 1980’s, when I joined the alarm industry, a 10% attrition rate was nothing to be proud of. Most companies tried to achieve 6%, but the norm was closer to 8% - meaning you lost roughly one out of 12 customers a year. Times have certainly changed: alarm industry cancellation rates now average roughly 12%, and some companies are even worse than that. In fact, industry giant ADT is one of them.
In fact, Tyco recently reported ADT’s cancellation rate at 13.5%, up from the previous quarter. That means that ADT has been losing roughly one out of every 7 customers a year! If you accept the reported total count of 6,500,000 customers, ADT would be losing 877,500 customers each year. In fact, only one other alarm company in the US (Protection One, a distant #2) even has as many accounts as ADT loses each year. No wonder ADT spends so much on advertising for new customers!
By comparison, FrontPoint is proud to have the lowest cancellation rate of any nationwide alarm company, and it’s only a fraction of the rate reported by ADT. Many factors go into this accomplishment: we offer systems that are safer, smarter, simpler, more affordable, and virtually impossible to defeat – and your FrontPoint system moves with you. We also take a refreshingly transparent and consultative approach to explaining our products and services – it’s a big part of what drives our overwhelmingly positive reviews, and makes us the leader in wireless home security. We’ll keep our eye on ADT and the telco and cable providers as we grow – it’s certainly going to be interesting!