Schneider Electric Finalizes Purchase of Pelco

Schneider Electric Finalizes Purchase of Pelco
Schneider Electric's purchase of video surveillance provider Pelco in August was the latest in the power and control supplier's series of security acquisitions. With approval for the deal expected to go through this month, A&S talked to Schneider Electric about why it chose Pelco and whatˇs ahead for the pair.

Pelco celebrated its 20th birthday in June, recognizing a change of leadership in 1987 for its rapid growth as "new Pelco." It is fitting that the video surveillance supplier kicked off its third decade under new ownership, becoming part of Schneider Electric.

Security by the Numbers

"What we pay attention to, when you're not in your field, is to acquire a quality company," said Eric Pilaud, Executive Vice President of Strategy, Customers and Technology for Schneider Electric. "We have a very strict process for the synergies and so on. We refuse to pay too high a price for one (acquisition) that we could not justify."

The price was US$1.22 billion for the video security maker, when Pelco was sold August 1. The purchase will be finalized this month after antitrust and regulatory approval. Pelco recorded sales of $506 million in 2006, 36 percent of which came from outside the United Sates. The company's EBITDA (earnings before interests, taxes, depreciation and amortization, or a form of operating cash flow) were $46 million for 2006. As of June 2007, Pelco's net debt was roughly $139 million.

While Pelco hardly qualifies as a bit player, it is dwarfed by its new owner. Schneider Electric specializes in power and control, bringing in $17.2 billion in global sales for 2006. The company's headquarters are in Rueil-Malmaison, France, with 112,000 employees and operations in 190 countries. In a prepared statement, Schneider Electric said, "Through the acquisition of Pelco, Schneider Electric rebalances its Building Automation solutions portfolio by reinforcing its already existing security platform (sales of a155 million in 2006) and strengthens its ability to offer fully integrated systems."

Operating Procedure

Most of Schneider Electric's business still comes from electrical distribution, which represented 63 percent of its sales for 2006. The Building Automation business unit, which includes power and ventilation systems, electronic security and fire security, is a new division of Schneider Electric. Pelco, along with previous acquisitions of TAC, Andover Controls and Invensys Building Systems, will report to this business unit. "We thought it was very complimentary with our electrical distribution business," Pilaud said. "We can provide secure power, security and building automation.  Pelco helps us offer a complete solution."

The acquisition of Pelco fits Schneider Electric's goals and company culture. "We are extremely pleased to have come to this historic arrangement with such an outstanding company as Pelco," said Jean-Pascal Tricoire, Schneider Electric's CEO, in a prepared statement. "Combining forces with the worldwide leader in video security is an important step in the development of our Building Automation business. Having personally visited Pelco, I have a firsthand appreciation for the company's unique commitment to its people, customers, and community. These factors are core assets of the company and we are fully committed to continuing forward with this same, great culture."

As part of Building Automation, Pelco will operate within the division, which is headquartered in Malmo, Sweden. It will keep its name, running independently and managing TAC's Fire and Security Product Division globally. "We think Pelco is a great brand name recognized by customers," Pilaud said.

The Pelco headquarters in Clovis, California, along with other existing operations, will remain unchanged. Staffing will also stay the same, with no job cuts announced. As Schneider Electric has worked with Pelco previously, integrating its products into building automation solutions, it is familiar with Pelco's operations and management. "We didn't come up as an unknown acquirer one day," Pilaud said. "We've been in this relationship."

Arne Frank, Executive Vice President of Schneider Electric's Building Automation business unit, said in a prepared statement, "The combination of our companies will create a unique portfolio of products, services and solutions in the building management industry. Pelco's unique position in IP-based video security represents a tremendous additional organic growth opportunity. With this acquisition, a very important additional step is made to further reinforce our leadership in open and integrated solutions for building IT."

Schneider Electric's competitors in the electrical distribution and automation field include Siemens and ABB in Sweden, Pilaud said. In building automation, its competition includes Honeywell, Johnson Controls and Siemens Building Technologies. The addition of Pelco gives it an advantage in video surveillance over its competitors, who may be stronger in building automation or access control, but less so in video security.

Plans for the Future

Schneider Electric predicted in a prepared statement that "significant synergies" would take place with the leveraging of its Building Automation businesses, including their "respective distribution networks and the possibility to offer complete solutions." It estimated the earnings (EBITDA) from the transaction will generate US$67 million by 2011.

Pelco's CEO David McDonald said in a prepared statement, "After operating for 20 years as an independent business, the right time has come to partner with a strong, high-quality, Fortune 500 company such as Schneider Electric. The combined strengths of both organizations will yield for Pelco many substantial benefits such as increased career opportunities for our people, broader product offerings, access to important new technologies, and a stronger ability to further penetrate our global markets. Most importantly, this is the right partnership for Pelco because our two companies share the same core values including an uncommonly strong commitment to our people, providing customers with extreme levels of service, and giving back to our communities. This exciting change opens the door for the next, dynamic new chapter in Pelco's future. We are very pleased and optimistic."

The marketing-leading position of Pelco made it an attractive acquisition to Schneider Electric. "The video security industry is the most attractive segment of the security industry," said Schneider Electric in a prepared statement, citing the shift from analog to IP protocols and software solutions. "It complements/ replaces other security systems such as intruder detection, fire alarm or access control."

Pilaud agreed. "As to the quality of the company, we're interviewing customers of the target," he said. "So we have a very good idea of the strengths of the company from the eyes of the customers." Sharing similarities and being able to deliver on a business plan were also factors in selecting Pelco as an acquisition.

Pelco's transition is expected go as smoothly as the TAC acquisition that occurred four years ago. "Once we acquired TAC, we acquired more building management companies to be managed by TAC," Pilaud said. "When we acquired Pelco, we picked up the most valuable domain of security, which is video security." Other factors, including Pelco's price, intrusion control, good management team, focus on customer satisfaction and high quality products were taken into consideration by Schneider Electric's team.

The business aspects of the deal made other Pelco representatives optimistic about their partnership as well. "The Schneider deal will help us grow more rapidly all around, be it research and development, logistics or product portfolio," said Herve Fages, Managing Director-Asia Pacific for Pelco. "Pelco will remain as a separate entity within the Schneider organization, continuing to bring about world-class products and customer satisfaction. The only difference that our channel partners or end users will experience is that they will get even better service. Pelco did not have its own access control or building management solutions before, but this deal will definitely open some doors for even high levels of technology consolidation and customer service."

Schneider Electric boasts 15,000 distributions outlets worldwide, which could allow Pelco's worldwide expansion to be speeded up considerably. "Pelco started to internationalize its business, but now it can grow faster by leveraging the Schneider presence worldwide," Pilaud said. "The second benefit, we believe the management of Pelco. We see more and more applications of real integration between classical building management, HVAC (heating, ventilation and air conditioning) and security management. We propose a complete management (solution), which will be a big competitive advantage. We are ready now. It's not a dream, we are already doing these kinds of solutions."
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