Why did Broadview accept ADT's proposal?

Thursday, January 21, 2010

YARMOUTH—Why’d they do it? Why did the “golden boy of alarm company operations,” as Imperial Capital managing director Jeff Kessler called Broadview Security, agree to be acquired by industry giant ADT?

It’s well known that ADT has had its eye on Broadview, but Broadview’s spurned ADT for more than 20 years. Why say yes now?

Kessler, who’s followed the company since 1983, said Broadview is the best-run alarm company in the industry, but its high-growth years are likely behind it. “It continues to be the gold standard of operations … but, it’s highly possible that they were facing some headwinds,” he said.

What kind of headwinds? Competition may be afoot from companies that can offer more services, faster, at a lower creation-multiple, but for the same monthly monitoring fee. Kessler said that Broadview’s cost to create an account is around $1,300 to $1,400, and its attrition rate is very low, around six to eight percent, he said. However, “there are companies out there whose attrition rate is higher, but the creation cost is $700, $800, $900, and they can add in new next-generation services … wireless, two-way voice, interactive services, as well as wired technology.” These companies can get the same $30 to $40 in RMR just as easily, he said.

These companies are also adept at lower-cost marketing; Internet marketing, for example. Once you have an established marketing methodology, as Broadview does with its TV campaigns, for example, “it’s hard to shift that big ship around.”

While their attrition rate may be much higher than Broadview’s, competing firms “can afford to lose more customers when the cost to create a customer is one-half to two-thirds lower.” That’s not to say that Broadview was floundering in any way, Kessler emphasized. They could continue to have steady growth for many years to come, he said.

Asked about the creation multiple at ADT, Kessler said it’s “fair to say it’s above $1,000, but lower than Broadview’s.”

And what about next-generation interactive services for ADT and Broadview? Tyco CEO Ed Breen addressed this question during a Jan. 19 investor call. He noted that ADT is in beta mode with its interactive services offerings now and will roll it out in the second half of the year.

Broadview's finally been wooed by ADT, but Brink’s Home Security may resurface in the industry in another two years. “Brink’s Armored Security has the right to the name when the non-compete agreement ends,” Kessler said. “There may be another Brink’s some day.”