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UTC and GE Security: Good Sale, Good Buy and More to Come
Source: Memoori 2009/11/27

On Nov. 12, UTC announced it agreed to purchase GE Fire & Security for US$1.82 billion which will be the biggest security and safety deal recorded in the last five years. Many column inches have since been written about why this was such a good deal for UTC but in the short term, the GE negotiating team had more to celebrate on the day. In the present economic climate, two years of steeply declining revenues and profits and only one serious buyer for the combined operation, it came out with a good deal.— By Allan McHale, Director, Memoori

On Nov. 12, UTC announced it agreed to purchase GE Fire & Security for US$1.82 billion which will be the biggest security and safety deal recorded in the last five years. Many column inches have since been written about why this was such a good deal for UTC but in the short term, the GE negotiating team had more to celebrate on the day. In the present economic climate, two years of steeply declining revenues and profits and only one serious buyer for the combined operation, it came out with a good deal.

For UTC this is a deal of two halves with the old Edwards Fire Detection business being the jewel in the crown and the security business looking as though it needs a serious technology revamp.

The fire business fits in well with their current operations. It was purchased by GE in March 2005 for $1.4 billion and in 2008 to 2009 contributed $500 million of the total revenues of $1.2 billion. Without details on profitability it is not possible to put a valuation on this operation, but sold as a separate entity, it would have raised a lot more competition and may have reached a multiple of two times revenue.

When UTC purchased Kidde in 2004, it paid $2 billion on an exit multiple based on revenue of two. Both companies are essentially product manufacturers with high brand awareness — Kidde focused more on the industrial market and Edwards on commercial buildings. This acquisition will make UTC the market leader in fire detection when based on product and installed systems business. It should be able to leverage more business out of the Edwards brand than GE was able to.

This brings us to the second half, GE's security business which looks to be much flakier. Built on a firm foundation of intruder alarm systems, GE acquired during the first half of this decade such notable companies as Interlogix, VisioWave, CoVi Technologies, Kalatel, GBC and Detection Systems. Together with MASterMind Integrated Software Platform, they deliver the full spectrum of physical security equipment and can provide a fully integrated, enterprise solution for monitored security service providers and proprietary central stations.

While that looks impressive on the face of it, the general opinion among experts was unanimous: Most of the security products are weak and some are well past their sell by date with the exclusion of MASterMind. Where GE has good products, it appears UTC possibly has better ones. This is the case with Lenel access control systems and GE's Casio Rusco product offerings. The gap in UTC's portfolio of a leading edge IP surveillance product has yet to be filled, which is the largest and fastest growing segment of the market.

UTC has the opportunity to grow the value-added service business on the back of GE's mainly product business. Whilst this business model has worked well for them in fire and safety, it will be a much slower process in the fragmented security market. Installers and integrators have plenty of choice and do not need to buy products from a company that could also be a competitor.

However the deal is good for UTC and also for the industry. This month will see the largest value of transactions since Memoori began monitoring consolidation in the security business two years ago. Momentum is now building up, driven by the fact that there is more confidence in the future and opportunity to buy at realistic prices.

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