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ADT vs. Comcast: Prelude to a Takeover?

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April 16, 2012
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ADT vs. Comcast: Prelude to a Takeover?

There has been much conjecture about why ADT’s parent company, Tyco, would break into three parts. The split is underway as we speak, and the “new” ADT is going to be a smaller entity – and strictly residential. The commercial alarm side of ADT is being merged with the Tyco’s fire alarm division, and run separately. Often when this kind event takes place, the standard justification provided is “unlocking shareholder value” - which can be corporate-speak for preparing part of the business to be sold. And that is just what some observers of the alarm industry are wondering: will ADT be for sale?

Tyco is making progress in its planned split into three independent publicly traded companies. On March 28 the company announced that it is rebranding ADT's North American commercial security business as Tyco Integrated Security. After the split, the three independent companies will be: Flow Control, ADT Residential, and Commercial Fire & Security.

What’s In a Name?

“We will announce our new name externally on March 28 and begin using it June 30. Over the coming months, we will also aggressively introduce and advertise the name in the market to ensure customers, partners and prospects continue to think of us first when they think of commercial security in North America,” Brian McDonald, interim president, Tyco Integrated Security, said on March 26.

The Plot Thickens

Then the industry analysts start developing their own theories, and we move from the standard announcement (some might call it “spin”) to the opinions of outside observers. Here is where it gets interesting.

When Ed Breen, chief executive of conglomerate Tyco, which owns ADT among its fat business portfolio, quit Comcast's board of directors (after 6 years) last November, "many investors promptly jumped to the conclusion that ADT might be an acquisition candidate for Comcast," writes Steven E. Winoker, senior analyst at Bernstein Research, in a report to clients Wednesday.

Why Would Comcast Buy ADT?

Cable companies are interested in what Winoker calls a "home invasion," the sale of alarm systems and other remote-control electronic services to homes already wired for cable. It's "the next frontier" for cable companies facing slow customer growth, what with cable phone sales expansion "in its final innings," and business services growth "not sufficient to attract growth investors" to the stock.

What are the Alternatives Plans?

But Winoker doesn't expect Tyco to sell ADT to Comcast. More likely Comcast will roll out its own alarm service, maybe in partnership with ADT if Tyco is willing to share; maybe in competition, at similar prices, in the old, incremental cable-business way; or maybe at cut-rate prices, if Comcast sees alarms less as a profit center, and more as another way, once they're signed up, to keep more Comcast customers from cancelling service. In the end, Winoker expects alarm sales won't boost Comcast profits much, but they may trim ADT profit margins, and could shave a few dollars off Tyco's share price.

I’ll let this analyst in a little secret: Comcast launched a home security offering months ago! The suite of advanced services is only offered in a “bundled” package, meaning you have to use other Comcast services to get access to the home security offering.

Another Take – from Another Source

Many have speculated that ADT could become an attractive M&A target for Comcast, and turn the MSO (Multi System Operator) into a market leader virtually overnight. That idea has been fueled by the fact that ADT's CEO Edward Breen resigned from the Comcast board last year. But some analysts note that Breen's resignation is understandable because Comcast and ADT were becoming competitors. And that's not the only reason. "ADT's geographic footprint doesn't match that of any Cable operator, nor does its technology, nor does its principal focus on security rather than automation. An organic growth strategy is far, far more likely, in our view," one research firm concludes. If that's the case, Comcast may have a long, patient march ahead if they expect to turn their budding home security play into future a profit-driver.

One thing I can tell you about the alarm industry - no matter how big it gets, information has a habit of getting around. For instance, we have heard from reliable sources that Comcast has only signed up a fraction of the home alarm customers they expected to have by now. But think about why: would you trust a service provider to protect your home and family who is held in such low regard by so many? It’s not easy being on the list of ten most hated companies in America, but Comcast has managed to do that.

As one of the few nationwide providers of advanced home security, FrontPoint regularly competes against ADT and large new entrants (like Comcast) who seem to act as if bigger automatically means better – at least that’s the attitude they are often perceived as having. As a more customer-friendly and more nimble alarm company, FrontPoint has led the alarm industry with peace of mind that is safer, smarter, simpler, more affordable, and virtually impossible to defeat. And we care deeply about every customer review we receive – both positive and negative. That’s why we’re the leader in wireless home security, and  the #1 ranked alarm company in the US.

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Comments
Alan
April 20, 2012 at 3:53 AM
Interesting and seemingly well reasoned review, Peter. A merger doesn't seem to make much sense, but then, big companies have made many foolish moves in the past, and will make many more in the future, no doubt. As always, you guys execute so well and have such a solid offering at value prices, no huge concern for you no matter how this turns out. Thanks for sharing.
Peter M. Rogers
April 24, 2012 at 5:42 PM
Thanks, Alan. You are right about some decisions made by business being hard to understand. So far we have made the right ones, if the reviews are any indication!
Alan
April 20, 2012 at 3:53 AM
Interesting and seemingly well reasoned review, Peter. A merger doesn't seem to make much sense, but then, big companies have made many foolish moves in the past, and will make many more in the future, no doubt. As always, you guys execute so well and have such a solid offering at value prices, no huge concern for you no matter how this turns out. Thanks for sharing.
Peter M. Rogers
April 24, 2012 at 5:42 PM
Thanks, Alan. You are right about some decisions made by business being hard to understand. So far we have made the right ones, if the reviews are any indication!
Justin A
July 12, 2012 at 10:08 AM
As a former Comcast customer, I see this being a very piss poor decision for this company as a whole. You would think improving on customer service would be the number one priority. The reason I say former customer is for the following reasons; Problems with customer care, failure to fix in-house problems such as, repairing problems within the infrastructure with land lines, constant loss of internet, and last but no least, the lack of respect for the customer. Now your going to add a new problem to the mix, with home security. I wouldn't recommend Comcast to anyone. I feel bad for anyone who is going to pay for this service. I think the company should fix the problems they have first before adding a new one.
Peter M. Rogers
July 12, 2012 at 10:29 PM
Justin - Thanks for your comment, and I'm sorry to hear about the experiences you have had with Comcast. The general reaction from the alarm industry to Comcast offering home security is that they will spend a lot of advertising dollars and not get great results. After all, people are looking for peace of mind, and it's challenging to convince consumers that you are going to protect their homes and families when providing even basic connectivity and entertainment service has been such a problem. Unfortunately, the decision to get into home security appears to be driven by a desire to improve their overall cancellation rates, by getting their customers to sign up for things (lime home security) that normally have better retention metrics, as part of a "bundled" service. It's a cynical ploy, I think, and I suspect a lot of people will see thorough it. As a company that works really hard on providing world-class service, we agree with you: it would be better to fix the things they are already offering, rather then compound the problem by adding additional services. Thanks again.
Justin A
July 12, 2012 at 10:08 AM
As a former Comcast customer, I see this being a very piss poor decision for this company as a whole. You would think improving on customer service would be the number one priority. The reason I say former customer is for the following reasons; Problems with customer care, failure to fix in-house problems such as, repairing problems within the infrastructure with land lines, constant loss of internet, and last but no least, the lack of respect for the customer. Now your going to add a new problem to the mix, with home security. I wouldn't recommend Comcast to anyone. I feel bad for anyone who is going to pay for this service. I think the company should fix the problems they have first before adding a new one.
Peter M. Rogers
July 12, 2012 at 10:29 PM
Justin - Thanks for your comment, and I'm sorry to hear about the experiences you have had with Comcast. The general reaction from the alarm industry to Comcast offering home security is that they will spend a lot of advertising dollars and not get great results. After all, people are looking for peace of mind, and it's challenging to convince consumers that you are going to protect their homes and families when providing even basic connectivity and entertainment service has been such a problem. Unfortunately, the decision to get into home security appears to be driven by a desire to improve their overall cancellation rates, by getting their customers to sign up for things (lime home security) that normally have better retention metrics, as part of a "bundled" service. It's a cynical ploy, I think, and I suspect a lot of people will see thorough it. As a company that works really hard on providing world-class service, we agree with you: it would be better to fix the things they are already offering, rather then compound the problem by adding additional services. Thanks again.
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