All these unanswered questions

Friday, November 1, 2002

Managing Editor, Security Systems News

For the past two months, our Mass Marketing/Residential section has been filled (quite literally) with coverage of major problems at some of the industry's most prominent dealer programs. In late August, the biggest of them all, ADT's Authorized Dealer Program announced that the company would no longer fund account acquisitions at its current level in an effort to improve the quality of the accounts it folded into its portfolio. In mid-October, Leasecomm said it was terminating all funding for new loans, essentially ending the program. That announcement came only two weeks after it notified its dealers that the top price the company would pay for accounts would be reduced to a paltry 24 multiple, according to a letter from Leasecomm. That's a far cry from the multiples seen only a few years ago, when it wasn't unusual to hear rumors of acquisitions that garnered a 40 multiple or more.

All told, the changes in the two dealer programs affected the livelihood of more than 1,000 dealers in a span of about two months. It also raised many questions about the viability of the low-down, mass market model and the practicality of a dealer program as a way to build a monitoring portfolio, particularly now when capital providers are tight-fisted with their cash as a way to guarantee the survival of their own operations.

But how much has really changed? Is it just current market conditions that have dictated these drastic changes in the lives of those 1,000 plus dealers, more than 700 from ADT and nearly 340 from Leasecomm? Will things return to some type of status quo when the economy stabilizes? Or are we seeing fundamental shifts in the way this entrepreneurial industry allows new people to come into security? Are dealer programs the only way for the average Joe to become ABC Security? Are they a necessary part of life in the residential mass market?

You could argue that the corporate parentage of both ADT, a subsidiary of Tyco International, and Leasecomm, the main operating arm of MicroFinancial, had something or everything to do with the changes in the companies' respective programs. Tyco, for nearly the past year, has been stumbling, first with a failed breakup attempt and then with a massive uncovering of embezzlement by the company's leaders, which led to a total changing of the guard. Leasecomm has had its own troubles - just days before it announced the termination of its funding for the dealer program, the company saw its president resign and a new chief named while the company's new corporate focus was being announced. That company's stock has dropped from a high of more than $9 in July to less than $2 at press time.

Are we waiting to see who falls next? The Monitronics, SAFEs and SLPs of the industry all report overwhelming demand for their services; with so much demand, each can pick the cream of the crop, both in dealers and in accounts. How will this trickle down to the consumer, the average homeowner whose credit is maybe not so perfect? Would you want that customer anyway? Maybe or maybe not. Is anyone worried about what a change like this will do to the residential penetration rate?

There are many unanswered questions here, and for many of these questions, there may be no answers. Not yet, at least. One dealer who spoke to Security Systems News about the demise of Leasecomm said given the events of the past year or two, he didn't know where the security industry is headed - in fact, he joked about getting into the restaurant business. And while industry analysts report that there is a well of capital at the disposal of the security industry, it's seemingly being directed into other channels in the market, systems integration, guard companies, new technology like biometrics. High profile restructurings or failures like these certainly aren't going to steer any money into the residential coffers.

The residential market sure isn't flashy, but it's been the bread and butter of a large portion of the industry for some time. Is this another fundamental about to change? Maybe soon we'll get the answer.