Business as usual
On August 22, 2007, a Wall Street Journal headline proclaimed: Ã¢â‚¬Å“Credit Crunch Moves Beyond Mortgages.Ã¢â‚¬Â That was six months ago. Here in early December, as of this writing, we have San Francisco Fed president Janet Yellen telling Forbes the United States is not yet Ã¢â‚¬Å“in an all-out credit crunch like the early 1990s.Ã¢â‚¬Â
So if analysts canÃ¢â‚¬â„¢t even agree on whether weÃ¢â‚¬â„¢re in a credit crunch or not, what should your average alarm company owner think about the possibility of raising capital to buy accounts, make acquisitions or grow the company?
According to industry lenders with experience working with small- to medium-sized alarm companies, which make up the vast majority of the market, things havenÃ¢â‚¬â„¢t changed much. Ã¢â‚¬Å“From our standpoint, weÃ¢â‚¬â„¢re business as usual,Ã¢â‚¬Â said David Stang, senior vice president at LaSalle Bank and head of the Security Alarm division. Ã¢â‚¬Å“Our lending standards are the same as theyÃ¢â‚¬â„¢ve always been. I donÃ¢â‚¬â„¢t see [the credit crunch] as a concern.Ã¢â‚¬Â
Gail Scannell, vice president at the Media & Communications Division at US Bank, which generally works with $50 to $200 million deals, agreed. Ã¢â‚¬Å“This applies not just to security alarm deals but to what we do in general: US Bank has been pretty much unscathed by the sub-prime crisis.Ã¢â‚¬Â
On the other end of the spectrum, Jim Wooster, president of Alarm Financial Services, which operates in the small-loan space to dealers with as few as 300 or so accounts, said the current situation may indicate an opportunity for smart alarm company owners to grow and make acquisitions. Ã¢â‚¬Å“We still have solid access to capital and the changes have resulted in the lower interest rates and that has resulted in our ability to pass on lower rates to borrowers,Ã¢â‚¬Â he said. Ã¢â‚¬Å“For a lot of dealers, this has created a time in the market where theyÃ¢â‚¬â„¢re in the position to buy other companies that may be struggling, and for those companies with financial strength and diversification, this is possibly a good time for them to go out and make acquisitions and use capital from people like me and banks to finance those acquisitions. ItÃ¢â‚¬â„¢s not unlike the real estate market, I guess; with good capital and credit it becomes a buyerÃ¢â‚¬â„¢s market, perhaps.Ã¢â‚¬Â
WoosterÃ¢â‚¬â„¢s comments perhaps most clearly indicate that the country is hardly in the midst of a true credit crunch, which is generally agreed upon to be accompanied by higher interest rates, imposed by lending institutions concerned about defaults or bankruptcies. Because the current situation in the United States was largely created by institutions lending to sub-prime borrowersÃ¢â‚¬â€borrowers that actually didnÃ¢â‚¬â„¢t really qualify for loans in the first placeÃ¢â‚¬â€those companies that do have their financial houses in order are in fact more likely to be able to find capital now, as lenders look for safe bets.
Ã¢â‚¬Å“As a general rule,Ã¢â‚¬Â said Stang, Ã¢â‚¬Å“we look at the basicsÃ¢â‚¬Â in evaluating a borrower: Ã¢â‚¬Å“cash flow, attrition, RMR, concentrations that they may have in different markets.Ã¢â‚¬Â
This last point is where many alarm companies are being affected by the Ã¢â‚¬Å“credit crunchÃ¢â‚¬Â; those who rely heavily on the new-build market for new business are clearly being affected by its collapse. In the latest of a string of bad signs, the countryÃ¢â‚¬â„¢s largest home builder, Lennar, on Dec. 3 sold a portfolio of 11,000 properties for just 40 percent of their previously stated book value to Morgan Stanley, which itself in October reported $3.7 billion in losses.
Ã¢â‚¬Å“To the extent that dealers I work with are dependent on the new building network, theyÃ¢â‚¬â„¢ve been significantly impacted by whatÃ¢â‚¬â„¢s going on in the housing market,Ã¢â‚¬Â said Wooster. Ã¢â‚¬Å“Our business has increased because what youÃ¢â‚¬â„¢ve got is companies who were relying on revenue from the new housing market and itÃ¢â‚¬â„¢s dried up, or decreased, so they now need to borrow money to get them through this rough time or as they make adjustments to their business to go into more lucrative areas. So for us, as a lender, this has caused an increase in the inquiries to our company and the interest in our loans.Ã¢â‚¬Â At the same time, Wooster said, Ã¢â‚¬Å“from a credit standpoint, weÃ¢â‚¬â„¢re not behaving any differently; weÃ¢â‚¬â„¢re not being asked to meet higher standards and weÃ¢â‚¬â„¢re not asking our dealers to meet higher standards.Ã¢â‚¬Â
Scannell said sheÃ¢â‚¬â„¢s always been a bit skeptical of alarm companies that rely too heavily on the new-build market. Ã¢â‚¬Å“ItÃ¢â‚¬â„¢s always been tough for them to do that profitably,Ã¢â‚¬Â she said. Ã¢â‚¬Å“ThatÃ¢â‚¬â„¢s something weÃ¢â‚¬â„¢ve always kept an eye on: What percent of new revenues is associated with builder programs. ItÃ¢â‚¬â„¢s even more of a red flag now.Ã¢â‚¬Â
Further, to insulate your company from sub-prime homeowners now being hit with rising adjustable rate mortgages, CITÃ¢â‚¬â„¢s director of Media and Communications Gretchen Gordon advises being smart about taking on sub-prime alarm contracts. Ã¢â‚¬Å“You have to make a determination,Ã¢â‚¬Â she said. Ã¢â‚¬Å“The guy below [a credit score of] 625 is also the guy who potentially has the adjustable rate mortgage and is he going to struggle to make his payments? Will attrition increase? That depends on your customer profile.Ã¢â‚¬Â
Good news for those looking to grow and acquire is that most industry watchers agree that with growing attrition and slower growth multiples will come down over the next few years. Ã¢â‚¬Å“I think I would say that from the buyersÃ¢â‚¬â„¢ perspective, they do feel that sellers price expectations still are very high,Ã¢â‚¬Â said Stang. Ã¢â‚¬Å“ThereÃ¢â‚¬â„¢s a sense from the buyers that the multiples need to be a little bit more realistic; every company thinks theyÃ¢â‚¬â„¢re another HSM.Ã¢â‚¬Â
Ã¢â‚¬Å“SellersÃ¢â‚¬â„¢ expectations for sales multiples continue to be a problem,Ã¢â‚¬Â agreed Scannell. Ã¢â‚¬Å“Everyone thinks theyÃ¢â‚¬â„¢re going to get 55 or 60 times, which just isnÃ¢â‚¬â„¢t going to happen. I think thatÃ¢â‚¬â„¢s been going on for the last couple of years, and maybe with some of the smaller operators, in this climate they might decide 40 or 35 probably isnÃ¢â‚¬â„¢t such a bad idea.Ã¢â‚¬Â
The other opportunity created by the Ã¢â‚¬Å“credit crunchÃ¢â‚¬Â is that big institutional investors are wary of the hedge funds that have done so poorly of late with the sub-prime situation. So, an alarm company or integrator looking for venture capital might be able to raise money that way. Ã¢â‚¬Å“Venture capital is at the highest level of investing since the Internet bubble,Ã¢â‚¬Â said Ed Perry, general partner at Murphree Venture Partners, which contributed to InfrastructÃ¢â‚¬â„¢s raising of $3 million earlier this year to finance the merger with Dowley Security. Ã¢â‚¬Å“Big institutional investors are moving their capital,Ã¢â‚¬Â he said, Ã¢â‚¬Å“so there should be a lot more venture capital available in the next few years.Ã¢â‚¬Â
So, regardless of the gloom and doom you might see on the financial pages, itÃ¢â‚¬â„¢s hard to listen to the experts and come away with anything other than the opinion that well-run, conservative alarm companies and integrators may very well be looking at a positive financial situation over the coming year.