UTC to acquire GE Security

$1.82 billion deal brings prize Edwards fire business; what's to become of the rest?
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Thursday, November 12, 2009

HARTFORD, Conn.—A much-rumored deal whereby UTC buys the GE Security business is nearing fruition: UTC announced today an agreement to purchase the GE Security business from General Electric for $1.82 billion. The deal awaits regulatory approvals.

“This is a perfect strategic fit for Fire & Security,” said Ari Bousbib, president, commercial companies, at UTC, addressing the Citi Industrial Manufacturing & Transportation Conference today. “It’s a company that comes with arguably the best fire systems franchise in North America, the Edwards business, which has solid presence and gives us product and technology that we lack, a UL-listed product line, along with a broad array of security systems, video surveillance, and access control that complements very nicely our own portfolio of products and technology.”

UTC estimates Edwards as creating $500 million in revenue, which represents more than a third of the total $1.2 billion market for fire products.

And, even though “the fire market doesn’t grow that much,” said Jeff Kessler, who followed the market for years with Lehman Brothers and now with Imperial Capital as managing director, “it’s a good cash flow business and they’ll be able to brand this thing until the cows come home ... No question this makes them the leader in the fire area.”

Most importantly, Bousbib said, UTC is attracted to the GE Security business as a whole because it feels it can leverage the portfolio better than GE did. “The GE Security business was primarily a product-based business, with very little service. Their strategy was different from ours. We’re going to build a service model; we’re going to develop an after-market, which we’ve done for the rest of our commercial business, which should lead to very nice incremental top-line growth.”

This would seem to indicate UTC hopes to leverage its Red Hawk commercial integration business in installing more of the Edwards and other GE Security product base.

Kessler said it remains to be seen whether UTC can tack the service on to the GE Security portfolio. “The UTC management has done a pretty good job in both integrating and keeping separate some of the divisions they’ve acquired over time. Clearly, using Lenel with Red Hawk in certain areas has worked. It hasn’t worked as easily with the fire companies. They still have a challenge to get to the point they’re talking about, let’s call it productizing a service. They have to get over some channel conflict issues, which most companies in the industry are not willing to take on. GE clearly stayed with the products. UTC is willing to take this on, but it’s going to take some doing.”

(For more on how GE's residential dealers might be affected, go here.)

Kessler also wondered whether there might be spin-off activity. He theorized that GE’s MAS central station automation software business, which might have as much as 75 percent market share, could be an attractive piece for many industry players.

Also, look for changes in manufacturing. “GE, of course, does a nice job already with manufacturing,” Bousbib said, “but I think they have a total of eight manufacturing facilities, and some of them are still in high-cost locations. We see opportunities to integrate the supply chain, maybe more advanced transfers to China. We see opportunity in R&D.”

Bousbib noted that UTC, after this deal, will now have invested nearly $9 billion in its Fire & Security business, which includes not only Red Hawk, into which UTC also merged the former Initial Security integration business, and Lenel, but also the Chubb and Kidde brands, the Onity access control line, and more. In total, UTC has bought more than 50 companies in fire and security over the last five years.

The GE Security acquisition, though it’s a large deal in relative terms in the fire and security industry, is really just a “bolt-on,” Bousbib said, as UTC looks to increase its market share in what it considers to be a $100 billion market globally. Currently, the company reports roughly $6 billion in total Fire & Security sales.

Hence, the GE deal is also just a part of UTC’s plans to enhance its Fire & Security business. Bousbib also said the company is looking to reduce its 550 branches by as much as 40 percent, consolidating what are now separate fire and security branches, for example. “We need density,” he said. “We need to optimize our branch network to generate more revenue per branch.”

The company will also look to gain marketshare with its Kidde and Chubb brands in North America and Asia, Bousbib said, as well as further acquire to fill in any gaps in the product line. “It inhibits growth if you don’t have the full array of products,” he said. “It increases the chances that you’ll have the bigger share [of each job and the market] when you have the full array.”