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Cambridge Protection Industries/Honeywell Security Monitoring/Protection 1: Building Success by Building Relationships

May 14, 2015

While researching the security alarm monitoring industry in the early 1990s, GTCR met Jim Covert, a resourceful, experienced leader in the industry. At the time, Mr. Covert was CEO of SecurityLink, one of the industry’s leading consolidators and the second-largest company in the industry. Even after Mr. Covert sold SecurityLink to Ameritech in 1994, GTCR continued to cultivate a relationship with him throughout the remainder of the decade. GTCR’s patience paid off. In 1999, we collaborated with Mr. Covert to form a management start-up, Cambridge Security (“Cambridge”).

A proven leader, Mr. Covert was an ideal choice for a partner with whom we could take advantage of the attractive growth and cash-flow dynamics surrounding the security alarm monitoring industry. The industry was growing at attractive rates as security concerns and, thus, alarm monitoring penetration rates increased in both residential and commercial environments. The plan was to acquire several attractive, growing companies and transform them into a single integrated entity, resulting in large synergies and additional earnings. Based on his industry experience and reputation, GTCR had strong confidence in Mr. Covert’s operational capability, especially his ability to create a sales organization that would accelerate the company’s growth.

In 1999, shortly after the formation of Cambridge, the company purchased several smaller security alarm monitoring businesses throughout the Midwest and the western United States. Then, in 2000, GTCR contacted Southwestern Bell (“SBC”) and offered to purchase SecurityLink, which SBC had acquired when it purchased Ameritech. SecurityLink had deteriorated significantly since Mr. Covert’s departure, and the business was experiencing substantial cash losses. SBC had received a mandate from the FCC to divest this business as a condition of its acquisition of Ameritech.

GTCR, Mr. Covert and Mr. Covert’s former SecurityLink colleague Tim Whall worked for almost a year to develop a financial plan to carve out the company from SBC and return it to its previous level of profitability under Mr. Covert. GTCR was able to develop confidence in the plan due to Mr. Covert’s and Mr. Whall’s informational advantage in having previously built and managed the business. Cambridge purchased SecurityLink in early 2001.

Mr. Covert, Mr. Whall and their Cambridge team moved quickly to carve out the business and operationally transform the company’s critical cash-flow metrics such as churn, cost of customer acquisition and overall profitability. Substantial cost cuts were initiated with negligible impact on business performance. As well, Mr. Covert and Mr. Whall were successful in reducing attrition, improving customer acquisition costs and leveraging SecurityLink’s strong brand and number-two market position.

Shortly thereafter, Tyco/ADT, the largest company in the industry, expressed interest in buying Cambridge. Mr. Covert and Mr. Whall had operationally transformed SecurityLink back into a strong competitor, particularly in the commercial sector of the market. In July 2001, six months after GTCR had purchased SecurityLink, Tyco/ADT purchased the business.

GTCR maintained a strong relationship with Mr. Covert, Mr. Whall and the other managers throughout their non-compete periods. Mr. Whall remained with Tyco/ADT and was ultimately appointed president of that business. In early 2004, with six months left to go in Mr. Covert’s non-compete period, Honeywell decided to sell its very attractive commercial security alarm monitoring business (“Honeywell Security Monitoring”). Honeywell stated publicly that it had let this business shrink in order to avoid fallout from direct competition with the monitoring company customers of its much larger security equipment business. GTCR had pursued the purchase of Honeywell Security Monitoring with Mr. Covert in the 1990s, and GTCR pursued it once again following these market developments. Mr. Whall was a critical contributor to this effort, and he left his position as President of ADT to assume the same position at Honeywell Security Monitoring upon closing.

Honeywell Security Monitoring was the second-largest player in the attractive commercial segment of the market, and its sale generated significant strategic interest. One strategic buyer offered Honeywell a materially higher price than GTCR, but failed to consummate the transaction due to the nature of the non-compete Honeywell was willing to provide. Honeywell stated it anticipated similar issues with other strategic buyers and decided to sell to a financial buyer. However, this transaction proved challenging to other financial buyers due to the need to carve out the business extensively from Honeywell branches, call monitoring centers, IT systems and back-office processing. It also required the immediate re-establishment of a larger sales force to maintain and grow the business. In contrast, GTCR believed it was uniquely positioned as the only viable financial buyer due to its management relationships with Mr. Whall and Mr. Covert and their track record in the industry.

GTCR purchased Honeywell Security Monitoring (renamed “HSM”) in June 2004. Mr. Whall was in place prior to closing to begin making needed changes, and Mr. Covert and the other managers joined the business shortly after closing. Management initiated the arduous carve out from Honeywell operations and completed a number of small acquisitions to leverage the fixed-cost operations of HSM and strategically transform its geographic footprint. Equally as important, Mr. Whall and Mr. Covert completely reversed the revenue decline in the business.

In mid-2006, two years after GTCR’s acquisition of HSM, StanleyWorks began to express strong interest in the company. StanleyWorks had a large presence in the physical security space (i.e., locks) and stated a desire for a turnkey platform to enter the electronic side of the business. In January 2007, StanleyWorks purchased HSM.

Seeing further opportunity in the security monitoring industry, GTCR maintained an active relationship with Mr. Whall and Mr. Covert after the sale of HSM. Mr. Whall had agreed to stay with StanleyWorks for a year post-closing to help it achieve synergies by folding parts of its operation into HSM. When he left a year later, GTCR and Mr. Whall teamed up again to acquire another company in the industry. Mr. Whall and GTCR immediately targeted Protection 1 as the most sizable remaining integrated electronic security monitoring platform in the industry. GTCR and Mr. Whall first approached Protection 1 in 2008. Dormant credit markets, however, made a transaction difficult to consummate. As credit markets improved, GTCR re-approached the company in the fall of 2009. Relatively soon thereafter, the board of Protection 1 announced a sale process for the company.

Using their extensive experience in the industry and with Protection 1, Mr. Whall and GTCR benchmarked Protection 1 performance on a range of critical growth, cost and cash-flow metrics against levels that were achieved in the SecurityLink and HSM transactions. Ultimately, this work culminated in a detailed operational transformation plan for the business. In April 2010, GTCR announced an agreement with the Protection 1 board to purchase the business. The acquisition closed in June 2010. Upon closing, Mr. Whall became CEO of the company and Mr. Covert joined GTCR on the board.