More than two years in the offing, the complex cash and stock swap deal creates a new diversified co

When SLC Technologies Inc. announced and then finally completed its purchase of Interactive Technologies Inc. (ITI) this spring, the security industry began asking the new company—Interlogix—the logical question … why?

The official reasons for the buyout are numerous: the need to diversify product lines, expand globally, improve marketing programs and boost technological output.
“With Interlogix, we are opening up a whole new chapter,” says Tom Auth, former president, CEO and chairman of ITI. “ITI is no longer a company focused on a single segment or niche. More than 90 percent of our engineering resources were dedicated to our wireless products. We are glad to be a part of Interlogix and its whole new approach. It may take a year or two for us to get all the benefits of this combination, but I believe it’s going to be a very nice business.”

ITI’s strength as a provider of RF equipment for the residential market seems to fit in well with SLC’s recent diverse acquisitions that have broadened the company beyond the burglar alarm market into Palm technology, real estate, fiber optics, integrated access control and CCTV.

On the flip side, ITI’s direct-to-dealer approach contradicts with Sentrol’s sales via distribution tack, but both methods will stay status quo. A potential risk from the merger pointed out in the proxy statement is that one company—ADT—now accounts for more than 10 percent of Interlogix revenues.

The unofficial reasons for the merger are few but simple: many ITI shareholders believed it was time to be financially rewarded for their years of hard work and patience. Many of those shareholders, including Auth, had seen the company grow steadily from one that flowed red ink in the early 1980s to a profitable supplier with a strong presence in the market 20 years later.

Cash and Stock Swap Deal Was Complex

Due to the complexity of merging a public company into a privately owned company, the deal took months to complete. It finally concluded on May 2, when ITI’s shareholders voted to sell approximately 15.2 million shares of its common stock to Berwind Group Partners, the sole owners of SLC. ITI stockholders were offered $36.50 per share for 50 percent of their shares. ITI’s net sales in 1999 were $123 million compared to SLC’s of $425 million.

Starting in mid-1998, ITI had engaged in several discussions to sell the company to either Honeywell or Pittway Corp. Those talks took place before Honeywell purchased Pittway in December 1999. The possible sale to Pittway is even more surprising, given that the two companies were involved in a patent infringement lawsuit at the time, which
was eventually decided in Pittway’s favor. The timeline for the deal is a long one, with the first of many confidentiality and/or “no shop” agreements being signed between ITI and SLC way back in April 1998—more than two years before the final approval of the deal.

To shed more light on the deal and what it means to dealers who use Interlogix products, Brian McCarthy, CEO Americas, spoke exclusively with Security Sales.

Security Sales: What are the reasons behind the merger of SLC and ITI?

Brian McCarthy: The proxy statement spells out the details of the merger, but it doesn’t touch the essence of “why,” and that is the really interesting and fun part.
The merger, and it truly is a merger, is really a by-product of a strategy. What was that strategy? It’s been clear to the dealers for many years that the wave of consolidation going through the industry was going to change the face of the business dramatically. As the manufacturing sector began to look at the opportunities within the security industry, they began to realize four trends.

First, to service their customers they were going to have to get much bigger. I know some dealers will argue that bigger isn’t necessarily better, but the cost of new product development and the pace at which those developments are demanded to keep this industry at par with other comparable industries are really substantial.
There is no room for error. If you miss customers’ expectations, miss dealers’ expectations, miss the expectations of the AHJs or you simply miss the market model, you’re dead. You’ve spent the money and you’re sucking air.

The second realization of today’s manufacturers is that the marketplace is growing at a relatively stable pace, but nowhere near as fast as the global marketplace is expanding. American technologies are desired worldwide. To take products to Europe, South Africa and the Far East is a nightmare with all of the hurdles and costs of protectionist barriers. But nonetheless, U.S.-made products are as good as anything in the world and probably a better value.

Third, the demands on the designer/manufacturer/supplier are increasing enormously. Because products are coming out quickly and they are complex, design teams must fill the role of marketer, literature creator, market analyst or pricing consultant for the dealers. Five or 10 years ago that wasn’t the case. A manufacturer created a pretty brochure and essentially the security dealers put together a marketing program.
Now, it has to be a bundled package. More expertise is required and you must dedicate a substantial investment to marketing and development. Part of that has been clearly driven by the speed, not only speed of development, but speed to market volume. If the dealers can’t sell the product very quickly and make their mark early, then the market passes them by.

The final market factor is one of which we as an industry should be very proud. The level of technology has really grown in sophistication. The industry is much more about interconnectivity, communications, compression algorithms and software, than it is about burglar and fire alarms. As such, the products that manufacturers are currently developing have always been limited by the market space in which we’ve defined ourselves. There are a vast number of products being developed in this industry that are not bordered by the alarm or security industry.

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