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Analysts Assess Allegion’s Strengths and Strategies

Analysts from Imperial Capital, Sandra Jones & Co., PSA Security Network' and Davis Mergers and Acquisition Group share their thoughts on Allegion's spinoff from Ingersoll Rand.



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SSI’s annual February Business Issue features my exclusive and in-depth interview with Allegion President of the Americas Tim Eckersley. In putting together the piece, which I began piecing together last summer, I asked some of the security industry’s leading analysts for their assessments of this powerful access control-focused supplier that was recently spun off from Ingersoll Rand. Allegion, which became an independent, publicly traded company in December, includes top access brands like Schlage, Von Duprin, Kryptonite, XceedID and LCN among its 23 total makes.

Following is what Jeff Kessler, managing director, Imperial Capital; Sandry Jones, principal, Sandra Jones & Co.; Bill Bozeman, president and CEO, PSA Security Network; and Ron Davis, president, Davis Mergers and Acquisitions Group had to say about the spinoff and the market in general.

Was Ingersoll Rand’s spinout of its security business as Allegion a wise strategic decision?

Jeff Kessler: It was a wise decision for two reasons. First, the business can now focus capital allocation on a business substantially different than the other IR divisions. Europe needs more focus that it could receive as a division of IR. The developing interactive wireless access control technology was not understood nor appreciated by IR investors. Secondly, an activist investor was pushing for more value in IR if the security businesses were spun off, which is what happened.

Sandy Jones: Yes, it was a good decision because IR, like other conglomerates such as Tyco, Fortune brands and UTC, realized that by decoupling aspects of their business there are longer term advantages to their stockholders and stakeholders. It is like being an only child; they now get 100% of the time and attention of their board vs. sharing it and vying for attention.

Bill Bozeman: I see the move as a positive one. It will allow Allegion to focus on a niche they have considerable experience in. IR is a great company but it would be a push to claim they were focusing all their energy in our niche.

Ron Davis: Yes, now they can focus on industry-specific objectives, without carrying the corporate burden and overhead. It will allow them to be more nimble with regard to acquisitions, and will also permit them to concentrate on their core business.

What type of success and growth do you foresee for Allegion? What are the best- and worst-case scenarios? 

Kessler: The best case is that the U.S. remains a very high margin, reasonable growth business, while Europe turns losses into profits and improves overall returns with successful acquisitions that in turn drive better manufacturing absorption, scale, and competitiveness in Europe, driving the Allegion stock up. The worst-case scenario is for Europe to stagnate the next five years with unsuccessful acquisitions and brands that refuse to integrate full locking and access solutions like Allegion sees in the U.S. In that case, the stock goes nowhere. There are companies in this industry that are growing over 30% per year and access control is now changing from a high-trust, but purely replacement market to a new, remote networked industry, including phones that can remotely interrogate car or college keys, that will challenge video for growth. As the second-largest company in this industry, Allegion has a huge opportunity in front of it, but a near-term challenge in Europe.

Jones: They are a profitable business today with excellent brands in the U.S. They are in a position to leverage those brands and will grow significantly if they refine their go-to-market strategy, focus on select vertical markets, and augment their organic growth with a strategic acquisition of scale that eliminates a competitor and that allows them to expand globally. The worst case is that we have another economic downturn and that new construction comes to a grinding halt.

Bozeman: After the initial stage of managing as a spinoff, I see a significant increase in growth as compared to when they were a division of IR. Once going, it’s not complicated, it’s all about focusing.

Davis: The best case is they will continue to grow organically as well as through acquisition. The worst case is they don’t have the management expertise that will allow them to overcome the branding that they’re going to need to compete in the marketplace.

What are advantages or disadvantages for Allegion competing with access control suppliers like Assa Abloy, Stanley, AMAG or Kaba? 

Kessler: Allegion has the single largest brand name in the world in Schlage, with other leading brands such as Von Duprin and CISA. Stanley’s main competitive offering is doors and opening technologies, and not the specific locks and electronic access devices that Assa Abloy, Kaba and Allegion offer. Allegion’s biggest competitive challenge is to become more competitive, larger and offer more integration between its brands in Europe, where it trails Assa Abloy and Kaba. Allegion has a superior operation in the U.S., where its operating management has understood the need to bring the best mix of its brands into a solution required by the integrators and ultimately, the end users.

Jones: They are of significant enough scale to make a difference in the market but after that it is not about size; it is about bringing solutions to customers, value to the channel and profits to stockholders. Each of the companies you named, and some others not named, has their own strengths and challenges, and when you line them up they overlap in some areas but see the future differently. I think of Assa in the U.S. as more of an identity management company, Stanley as a monitoring business with their eye on health care along with their commercial customers, and AMAG as an electronic access control business that is now part of G4S.

Bozeman: Both Assa and Stanley are fine companies with proven track records. Allegion still needs to prove itself. On paper they seem to have a very good shot at making a difference. They have a strong management team, a strong product line and an existing network that should serve them well. Their first year will be transitional; the following year will be the one to watch. I do not see AMAG or Kaba as their main competitors.

Do you expect Allegion will look to expand beyond access to establish itself in video, intrusion or other technology areas? 

Kessler: I believe, to be relevant in five years, all the major providers of locking and access will partner with providers of these technologies. Nevertheless, the integrator has the ultimate responsibility of trying to provide the “one throat to choke.”

Jones: You don’t have to own video or intrusion to partner, incorporate or include them. I think for the near term Allegion has enough on their plate in their core business and are far better off developing alliances, collaboration or OEM arrangements with video and intrusion. However, with that said, they should invest in technology ranging from more wireless, NFC, or other areas that really differentiates them in the market.

Bozeman: It seems to be the direction most security manufacturers want to take. However, I feel Allegion would be better off focusing on what they do best and not venturing into new products they have limited experience with such as alarms and video.

Davis: They would be so far behind the learning curve that it would be hard for them to compete. I anticipate them acquiring other access control companies as they become available, and branding themselves in the access control market.

Considering some of the strong brands within its portfolio, such as Schlage, does it matter if the Allegion name becomes a high profile brand among resellers and/or end users? 

Kessler: Kaba, and smaller private companies like Simons Voss and Salto, are single brand companies. However, Assa Abloy has hundreds of brands and Allegion has tens of brands. It is their challenge, and their opportunity, to make sure integrators know what is in their quiver, and to a lesser extent make sure the box of Schlage locks also has some Allegion identity on the box as well. But to be sure, Allegion is pushing Schlage, Von Duprin and CISA, just as Assa Abloy pushes HID, Yale and Medeco.

Jones: Brand issues are different at the channel level and at the end user level. For the consumer, the Schlage brand is well established and synonymous with reliability. At the enterprise level, knowing there is a well-funded global solutions company is more important than the pieces and parts.

Bozeman: At this stage the Allegion name means little; however, I believe as time goes on and as they develop themselves in the field, their brand will become more important and consequently they will focus more on their new brand.

What are Allegion’s greatest strengths from a products and technology standpoint?

Jones: Their strengths include reliable, durable products and on the residential side they have shown creativity. Their weakness is that, commercially, there are similar products so their challenge is differentiating by moving more to solutions and compliance. They have done an excellent job in the school market and if they continue on that path of addressing customer issues vs. hardware they will be a strong competitor in the future.

Kessler: The brand awareness of Schalge, and the development of the aptiQ wireless connectivity technology.

Do you anticipate Allegion being very active in the M&A space? Why or why not? 

Kessler: Allegion must make acquisitions in Europe to gain scale, new product technologies, new geographical competitiveness, and greater absorption of manufacturing capacity. They have excellent talent in business development, and may be hiring more over time. Unfortunately, the largest independent private brands know Allegion needs to make acquisitions.

Jones: I think they will focus on only a couple of strategic acquisitions that will have to be of scale, potentially eliminating a competitor, or giving them the growth they need in a market, either vertically or geographically. I think they will also be smart about what they buy and make sure to blend the new business and take advantage of them rather than just bulking up their bottom line indiscriminately.

Davis: Yes, they will have capital available, a good base of businesses and will look to grow through acquisition as much as they grow organically.

Why do you believe the access control industry remains so fragmented, and do you expect it to consolidate? 

Kessler: Access control has remained the province of many local locksmiths and electronic card manufacturers, as well as software providers for physical access control systems. However, there is tremendous consolidation going on in the industry right now as multiple forces of terrible headlines; government technologies finally becoming cheap enough at the enterprise level; hosted systems in the cloud; a constant shift to wireless electronic networked systems from manual systems; and the demands laid on the industry from architects, specifiers and integrators all force consolidation.

Jones: I think the access control market is poised for growth. Proprietary and closed systems have kept them from consolidating but as we move from closed to open systems I think you’ll see more consolidation. Not only do we have an opportunity to consolidate and grow the market, but I think there is a lot more suppliers can do to help the end user, especially at the enterprise level. We also have opportunities to include more identity, like video or biometrics, with access and help them reduce the vulnerabilities and costs associated with multiple databases for physical and logical security.


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