ADT cuts funding, announced changes to dealer program

BOCA RATON, Fla.--In a much anticipated move, ADT Security Services announced in late August that is was dramatically reducing funding for its authorized dealer program, at least for the month of September. In a letter sent to the company's more than 700 authorized dealers, the company said it was limiting the number of accounts that it would purchase from its dealers over the four weeks in an effort to "improve the program's long-term quality and performance levels," the letter said. Dealers who received the letter, dated Aug. 23, were given a specific number of accounts that ADT would purchase in weekly installments until Sept. 20. Any installation contracts generated in excess of that amount could be monitored on a third-party basis by ADT or sold to another company, according to the letter. The changes to the program were made effective immediately. At press time, ADT officials said the changes were part of a routine evaluation of the "efficiency, quality and productivity" of the program, but admitted that the review of the program included a slowdown in funding for the program, the elimination of some authorized dealers as well as potentially closing the doors of the program to new dealers. "Clearly we are, as part of this evaluation process, looking to in the short term possibly slow some funding, but that is not necessarily a long-term objective," said Jay Stuck, vice president of residential marketing and corporate communications for ADT. "As part of this evaluation, we are taking a look at the size of the network and then we will proceed accordingly." Market watchers said the company is cutting back after its funding for the account purchases was slashed from parent Tyco International, a once renowned and powerful conglomerate now hobbled by investor distrust and charges of fraud against former top-ranking officials at the company. Company shares dropped to $8.25 in late July and closed at press time at just below $17. "The fact that they are cutting back here is not a surprise," said Steve Altman, a credit analyst at Commerzbank in New York. "Wall Street has been wondering when a company has been providing its forecasts why they had been continuing to spend on acquiring dealer accounts." ADT's dealer program, which reportedly costs the company $800 million annually run, makes it a natural target for a company under such tight shareholder scrutiny, Altman said. Buying dealers accounts "has been questionable growth vehicle for the company that investors are concerned about," Altman said. "This is sort of the low hanging fruit of where they can reduce outflows." Tyco's security business, which encompasses manufacturing, distribution and the largest players in both the security and fire protection arenas, has generally done well, despite external economic conditions, analysts said. While the dealer program might have been a successful strategy in the past, the huge draw on capital from the dealer program could have been a weight on the shoulders of new management. "The feeling in the industry was that the ADT dealer program was creating problems that had been part of their erosion of accounts and was flowing out of deficiencies in the program," said Jack Mallon, principal at Mallon & Associates. "I would suspect that the new posture is a result of new management taking a hard look and making the necessary judgement." What's necessary to keep Tyco as a corporation afloat is of little comfort to dealers affected by the cutbacks. One dealer who spoke to Security Systems News has already had scaled back operations to a skeleton crew, letting go of a sales staff of 30 and waiting for the next word from the company. "When you are an authorized dealer and the premise of all your business is a free home security system...you can't jump ship and say who will buy this paper?" he said. "My billboards, my yellow pages, all ADT. And I have a contract with ADT that says that I can't sell to anybody but them. That's a problem because you never look to see who you're going to sell (your accounts) to. You don't have to worry about that because contractually you're not going to sell it to anybody else." Jesse Stubbs, president of Hometalk in Littleton, Colo., was one of a couple of hundred dealers who received letters from ADT informing them that their contract was terminated, due to high attrition in their accounts or because they had fallen below a monthly quota of 15 accounts. Stubbs, a dealer for the past three years and one of the first in ADT's PowerHome program, said his letter informed him that his contract would be terminated in 30 days, but effective immediately, the company would no longer be purchasing his accounts. Ten of his accounts that had already been submitted for funding were returned, but at press time, he was left holding 40 to 50 more accounts that he needed to sell. Stubbs had installation relationships with three major homebuilders. "I understand their position, but I'm very frustrated that they didn't give the customers any notice," he said. "It's how they are handling the transition, that's what makes me upset."