The cover story of February’s SECURITY SALES & INTEGRATION Business Issue features Protection 1 CEO Tim Whall, who participated in an exclusive and extensive interview. To round out the piece and present a deeper and unbiased assessment of the “new look” P1 and Whall’s leadership, I posed several questions to three of the most respected security industry business, finance and investment analysts. Following is what Mike Barnes, partner in Barnes Associates; Ron Davis, principal of Davis Mergers and Acquisitions Group (and SSI “Big Idea” columnist); and Les Gold, partner with Mitchell, Silberberg & Knupp (MS&K) had to say.
Compare and contrast your perspective of Protection 1 before and after the acquisition by GTCR. What advantages does P1 being private present as opposed to a public entity?
Mike Barnes: The biggest change is that the company is no longer public. When you have to present your results quarterly to a universe of investors and analysts, most of whom can’t or won’t take the time to understand the nuance of the industry, it can place a degree of limitation on what can be done. Unshackled from these constraints, the company can more quickly and decisively move to create value. Protection 1 is also now much more focused on the commercial markets, and is finally showing signs of achieving real internal growth.
As for public versus private, security alarm companies generally have a tough go at being public. First, it is expensive, in terms of both actual costs and human resources. Secondly, the nature of how value is created, particularly when done through internal sales, makes it difficult to show simple, crisp results to Wall Street. A large investment is required to originate new customers and their highly valuable recurring revenues. Unfortunately, the combination of a multiyear payback period and the inability to capitalize much of the investment means that internal growth can hurt the near-term, classically important valuation metrics of cash flow and earnings. This is one of the reasons there have always been so few publicly traded alarm companies. Sophisticated private investors can and do understand the industry’s dynamic, and can unchain management from the limitations inherent to a narrow focus on near-term cash flow and profits.
Ron Davis: Prior to the acquisition of P1 by its present owners, the business that eventually came under the management of Richard Ginsburg, was in disarray and needed to be fixed. Ginsburg and his team took all of the parts that now make up P1 and put them into a recognizable, quality-driven business. When Tim Whall and his team took it over, their mission was to take it to a whole new level. With their emphasis on quality and management development, they are not only adding to P1’s status as one of the largest companies in the industry but also a company that stands out in the customer service area.
Being private allows management and its board the opportunity of being more entrepreneurial, without the restraints of having to report almost every detail to the public shareholders. At the end of the day, Whall and his team pretty much answer only to GTCR and they have worked well together in the past.
Les Gold: Prior to acquisition by GTCR, Protection 1 was primarily a residential company. It is my understanding that since the acquisition, there has been a significant interest in building the commercial and national business, although I understand the company still maintains a strong interest in the residential side of the business. In addition, it is my understanding that the company has significantly improved the attrition.
As a private company, they can concentrate on business as opposed to the constant reporting and significant expense required by being public.
What does P1 CEO Tim Whall bring to the table? Does he have any weaknesses?
Davis: Whall is an amazing CEO, and has almost a cult-like following among his management team. He knows what he’s doing, has the credentials and is unrelenting in his commitment to corporate goals. If he has any weaknesses, it’s that he has set such a high standard for accomplishment that others on his team may have difficulty in emulating him.
Barnes: Whall is one of the best in the business. He is a great leader with a highly disciplined approach to running the company. He has also spent virtually his entire adult life in the industry, so he understands all the nuances. It is clear he is the right guy, in the right place.
Gold: Whall is one of the finest, or perhaps finest, operator in the business. My experience has been that not only has he learned the business well, but he surrounds himself without outstanding people. Any weaknesses he might have he overcomes by surrounding himself with the proper people.
Which competitors ought to be concerned about P1 and why?
Gold: All the large companies should be concerned as P1 will become a very major force in the commercial and national accounts market.
Davis: There is no question that P1 will be a tough competitor in every market they’re in. Almost by definition, they will go head-to-head with Stanley and will compete very aggressively against existing regional players.
Do you see a conflict of interest between P1’s installation and third-party monitoring (CMS) businesses?
Barnes: No, CMS is highly capable and run as a relatively autonomous unit. Most end users are not aware of their monitoring being outsourced, so it is unlikely that any customer-driven conflict dynamic will arise. Alarm companies that do not operate a central station are typically seeking a provider that has the right combination of capability and price. There are a number of highly capable competitors, and the market is efficient. So far, it does not appear that CMS is hampered by its connection to Protection 1.
Davis: If you’d asked me this question 10 years ago, I would have answered it differently. Today, there are so many crossover marketing programs by so many companies that everyone in the industry pretty much accepts that strange bedfellow partners are more the norm than the exception. It seems as though the CMS monitoring business is functioning pretty much as an independent entity.
What do you see as the top challenges for P1’s leadership?
Gold: Growth. I believe P1 will and should get into the acquisition mode. Obviously this should be done very carefully and with proper guidance by the experts.
Davis: Establishing a strong brand, particularly in the arena of national accounts. Keeping the excitement level as high as it is now. Finally, putting in place a strong succession strategy in the event something happens to any one of the senior management team. Right now Tim Whall, Dan Bresingham and Don Young are as strong a team as any in the industry.
Barnes: Consistent success in the commercial markets will be key, but Protection 1 probably also has to develop a major residential market initiative. With strong performance in both, and demonstrated consistent growth in the customer base, the company will be firing on all eight cylinders.
Do you believe GTCR and Whall will “flip” P1 similar to past ventures? What are the similarities and/or differences in the scenarios?
Davis: The obvious answer is that any company is for sale at the right price. But I don’t see the “flip” happening in the near future. The company has a lot of debt and I see this as an intermediate length play, five years maybe? I don’t believe there are any similarities between this entity and others that GTCR and/or Whall with which they have been involved. There are significant opportunities for P1 to grow internationally as well as domestically. It’s likely that the management team recognizes this also.
Gold: You must keep in mind that P1 is owned by GTCR, a private equity firm. Normally, private equity firms will maintain a property for three to seven years and then look to a return for their investors. When GTCR determines that it is prepared to sell the company, I do not believe it will be considered a “flip” due to its size.
Barnes: We advised GTCR and Tim Whall when they purchased Protection 1, as we did in their prior industry investments, and I can say categorically that they always assume they will keep their investment for the long run. Their past success has been the result of their uncanny ability to see value where others don’t, bring the best management to the situation, and then be highly disciplined in measuring their rate of value creation relative to what the market says the enterprise is worth. The company, like GTCR’s prior industry investments, occupies a strategically important place on the map, and there is always the possibility that a buyer will want that particular combination of scale, performance and position. If an offer is compelling, they will sell … be it today or five years from today.