Barnes: Do conditions today favor larger players?

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02/11/2011

Is there something about the market today that is favoring the big players in security over the smaller players? This is a question that Michael Barnes will address today, Feb. 11, on Day 2, of the Barnes Buchanan Security Alarm Conference, here in Palm Beach.

Today starts out with Mike’s “much anticipated” state of the industry address. Among several other topics, Mike is going to talk about data that shows that the share of RMR owned by the big guys has increased steadily over the past four years.

The big guys are the five largest players in the market and the top 95 companies. The small guys are the rest of the players in the market.

Traditionally, the small guys have had a slightly bigger share of the RMR pool. The reason, Mike surmises, is that they’re more nimble, they know their markets so well that they’re a worthy competitor to any of the “big guys” who try to sell in their market, and they’ve got customer service nailed.

In  2000, according to Barnes’ Associates data, the smaller players owned 49 percent of the RMR pool. That number grew steadily until 2006, when the small guys owned 58 percent of the RMR pool.

From 2000 to 2006, “there were a lot of acquisitions,” which is typically the way the big guys gain big chunks of RMR, Mike said. “But still, in those years, the small guys still outpaced the big guys.”

However, since ’06 the big guys have steadily gained back the share of RMR they lost in the six preceding years. In 2010, the share owned by the little guys is back to 49 percent, according to Barnes’ data. “Without a lot of acquisitions, the big guys beat out the small guys,” he said. 

There may be something about the market now “that favors larger, more sophisticated, capable companies,” he said.

Barnes was quick to say that he’s not predicting the death knell of the small companies... “far from it,” he said. Still, the data suggests there’s been a change, perhaps it has something to do with more internal discipline, more finely tuned customer service, more of an ease with newer technology. More on this and other trends after today’s address.

In the meantime, a few notes from Day 1 presentations.

Well first, a non-note, CapitalSource’s Bill Polk did not give his annual talk about the debt markets. “Too many tomatoes,” he told me.  Bill did, however, provide a debt market report on paper.

A few bullets from his paper: “Markets are focused on the good news (ie. U.S. corporate profits growth and margins, bank and corporate liquidity, low interest rates, lower commercial loans-and credit card delinquencies...) and are looking beyond the bad news (unemployment rates, factory orders backlog, suppliers delivery index, European sovereign debt challenges...) Most of all the markets are looking beyond “the elephant in the room—the need for federal government fiscal restraint,” he reports. And there continue to be problems at the state level as well. 

More bullets from his paper on the implications for the security industry: Polk reports that “strategic and financial buyer interest is strong across many subsectors and industry credits remain strong. Credit will be less expensive, but a focus on quality continues. Industry transactions will continue to feature club deals. Frothy loan market will translate into continued interest in placing debt capital into the security industry. Private equity is still under pressure to deploy capital... and is discovering security as an attractive investment.”

Sean Forrest, CFO of summer model company, Pinnacle Security, formerly of the PrivateBank and before that, worked with Tim Whall as CFO of HSM gave a talk yesterday.

Sean’s advice: “Invest heavily in your CFO,” to laughs, of course, but he said he’s given that advice often over the years, and never had anyone say it is bad advice.

Bankers need to understand the alarm business, but Forrest said security operators need to understand what bankers need from them as well “Anticipate their needs, and get them what they need to get you through the approval process.”

It’s a good idea to find some common ground with your competitors. He said Pinnacle and APX Alarm/now Vivant, have “helped each other out with licensing.”

While strategic vision for a company is “necessary and important, operating discipline is far more important in the success of an alarm company.”  Asked if he today he’s seeing “the most money ever chasing the industry?” Forrest answered: “absolutely, not just in debt, but in equity.”

Interest is driven by recent large deals. The big companies are buying, but the industry is not yet consolidated, he said.

“The middle market keeps redeveloping and reinventing itself, sometimes with the same teams.”

I’ve got more on yesterday’s New Deal panel, Technology panel and ADT’s John Koch’s address, which I’ll post later.