What If Hikvision Bought ADI?

There has been a rumor going on recently about Hikvision buying ADI. We have no idea if it is true and are not here to speculate on that.

What is interesting is whether this would be a good deal?

We know Hikvision has a multi-billion pot of cash and we saw another Chinese company weeks ago buy Ingram Micro so it certainly is in the realm of possibility.

My gut feel is that it is a great fit. But a few others I have talked to think it would be terrible.

My thoughts:

  • ADI is the best vehicle to reach the low end dealer
  • Hikvision can stuff their products to every low end dealer directly and they can get other security products from China, cut out the OEMs / resellers and sell there
  • They gain physical facilities all over to ramp up their $10 billion revenue goal which will need a few billion out of North America
  • Sadly, Hikvision would have a much higher customer service and competency level than ADI.

Objections I have heard include whether ADI dealers would buy from the Chinese government but I think the average trunkslammer would buy direct from Mao if the price was right and it was in stock.

Agree / disagree? What do you think?

I just puked a little bit in my mouth.

Well Hikvision USA was the ADI global vendor of the year for 2014 and Hikvision Canada for 2015, so it's already a love fest. 2016 looks even better:

Jeffrey He, president of Hikvision USA and Hikvision Canada, elaborated upon the global relationship Hikvision has with ADI.

“The partnership we initially created with ADI in North America has now become global in nature. We are excited to continue that strong partnership in North America and extend that to shared markets overseas. We are honored to receive Vendor of the Year as acknowledgement of our successes in Canada, and we are confident that 2016 will be an even more fruitful year.”

Why buy the cow when you are getting the milk for free?

Because you have enough money to buy the whole farm.

They would be better off spending their money on a VMS like Genetec.

Maybe one like Genetec, but not actually Genetec, since you just can't go buy a private company.

Also, I'd imagine that the culture clash in the event of a sale would be pretty harsh and there would be an exodus of top people, reducing the value of the asset.

Besides, in most places in the world except here, they have already have an Enterprise VMS.

Yes, you can buy a private company. In fact, it's often easier to buy private companies. Your question on culture is an interesting one.

Sure you can buy a private company, but only if they are willing to sell.

Technically the same is true of a public company; the shareholders must be willing to sell. However the reality is that many shareholders will be just trading for profit, and therefore more than willing to sell if offered a decent premium. Even the majority has a fiduciary duty act for the value of all shareholders.

Long story short, a public company can take actions to thwart a takeover, but if the offer is 5x the fair market value (for instance), it's hard to stop.

Whereas you could offer Genetec 50x and they could say no.

Oh, another interesting question. Assume that happens: Does Anixter / Tri-Ed drop Hikvision? On the one hand, they would not want to carry products of their main rival. On the other hand, Hikvision is fairly powerful in the low end of the market and their customers might 'demand it' or risk losing them to ADI.

I would absolutely bet on yes. Every dollar of profit that flowed to Hikvision would be to a competitor.. I believe they would absolutely stop selling (and they should in that unlikely circumstance). They would simply back a different player like Acti or Vivotek... wouldn't you agree.

To me this is a little bit like buying a buying an entire shopping mall so you can have a spot to sell your scented candles.

ADI is a big distributor, but does Hikvision really want all the overhead that would come with it? It seems like they'd have to really make some significant changes at ADI to get their product in front of people. Given the slim margins of distributors they might get a better effect just giving ADI $10M upfront to only sell Hikvision cameras.

?.. $10m to only sell Hikvision cameras? Do you have any idea how much Axis ADI sells?

Odds are so low unless they bought the Honeywell manufacturing products as well since ADI is their only reseller (except direct).

...they might get a better effect just giving ADI $10M upfront to only sell Hikvision cameras.

maybe throw in exclusive promotional postering rights as well.

Makes sense to me, it certainly was very successful for many reasons , when I bought my International Distributors while I was at Detection Systems.

As an American integrator I hate Hikvision and we always try to use other brands wherever possible, which is not that hard to do even if they bought ADI.

I get that they could buy ADI, I just don't get the why part.

You control the main distribution channel

You get tremendous marketing data

You can kick out or limit your competitors access to market.

You can automatically feed the channel with your own new products including those that aren't video related. Where would Honeywell security be without ADI?

ADI is global and it would help Hikvision in many countries sell more products, plus in some countries they can consolidate with their own branches to save cost.

Plus you get much higher revenue, and control the distribution channel worldwide which the market makers like a lot. You got to remember Hikvision is a public company and image/illusion is everything to the market analysts. This is all about controlling the world market and the stock price in the end.

Control of the channel would be a short term gain. I'm sure other manufacturers would jump ship on ADI post acquisition.

Marketing data? You mean they get to know just how poorly the competition fares in comparison? Hik is a disruptive force. They market info really isn't that valuable.

I don't think the competitors would stay around long enough to be kicked out. They would simply align with other distributors. ADI isn't the only game in town.

Where is Honeywell Security? That's a good question. If ADI is their savior, I don't put much stock in ADI then either.

Hik has cash to burn. Saving a few points on consolidated branch offices is peanuts.

As far as stockholders go, I really have no insight there, but I would think the track they're on now serves them better. Finishing their USA team build out and adding better tech support would further them much more than buying the channel IMO.

Larry, good points.

I wanted to second and elaborate on this:

"You got to remember Hikvision is a public company and image/illusion is everything to the market analysts."

I would vary only by saying for a Chinese publicly traded company, it is likely less that they care what overseas financial analysts think that what the government / country thinks.

Take HNA's Ingram Micro deal. HNA is originally a regional airline, now it will own the largest IT distributor in the Western world. That's a big credibility boost and shoots them much higher up the Fortune 500 rankings, which is an important marker for Chinese companies.

ADI is obviously not as large as Ingram but it's essentially the Ingram for security trunkslammers.


Well I have personal experience doing exactly this, buying up distributors and not one manufacturer pulled out in one large country we kicked Aritech out a switched every customer to our products, went from start up to biggest player overnight.

Dont under estimate what any growth does to your stock price especially if you have a great story to go with it

Larry, would this same scenario help the industry leader, not a start-up?

Absolutely, even where I was the market leader it helped a lot.

if I was making the decision and the price and terms were right I would do it in a second. Also would have to evaluate other opportunities with the cash I had , but that being said if you drive up the share price you do a secondary offering and get your cash back and go on to the next deal.

China analysts really not much different than US guys except they react faster to hype and Asian investors are well known to go into a buying frenzy easily on news.

i suspect Hikvision isn't worried much about the government as they are about the stock market. I would guess they have that relationship well under control. I dealth with the Ministry of Public Security from the top down for many years,I did the very first joint venture with them as a foreign company in 1989. We set up central stations all over and they left us pretty much alone to run things our way.

Is this an honest question? I cannot imagine anyone who understands the channel or business in general would think this could even be viable for ANY camera vendor to acquire ADI or any other distributor that relies on revenues from multiple camera manufacturers.

But ok, I'll play along, so let's look:

ADI is what, $1.2B in revenue.. shall we estimate that 40% of that is from cameras alone (maybe higher, maybe lower, but in the ball park) so $1.2B x 40% = $480 million.. let's call it $500m. How much is Hik's portion of that? $100m? Probably high, but close, so let's use that.

So they come up with an ADI valuation using FCF or a multiple (EBITDA, Revenue.. pick/ don't care). Then they pay a premium on top.. usually 30-50% to avg stock price or value if private or not broken out like it is w/ ADI.

Acquisition is executed. Next thing that happens? Larry Newman, Bosch, Samsung, Arecont and the rest of the prominent brands cancel their contracts.

The $500m in camera revenue drops 80% to essentially ~$100m. Total revenues drop ($400m) roughly 25% and the acquisition becomes extremely dilutive. Somebody and Hik gets fired.. or worse. So no- doesn't really fit.

Does buying a VMS make more sense - You bet. The best one they can find.

And another thing: I'm new to the blog so perhaps I've missed something.. but what is all of this "hate chinese" rhetoric? Much seems directed at Hik. Why?

Is it cause their cameras aren't made in USA? If so, so Sweden, Germany and Japan is ok (and most are still made in China anyway..) Arecont is USA! Is it because Lenovo bought IBM pc's, laptops and server business? Do none of you drive Japanese cars..? or

Look- I'm a red blooded American and I'm fully against manufacturing businesses moving out of the US like companies like Carrier.. etc.. but that's not what's happening here. Is this just part of the natural bias cycle (Irish keep off the grass, Japanese..) etc..?

If it's just your personal opinion that you don't like Chinese owned companies- then that's ok and no need to explain/ I have friends that feel that way and I'm not challenging that. But if there's a business reason, please share.

The $500m in camera revenue drops 80% to essentially ~$100m.

Larry Newman, Bosch, Samsung, Arecont and the rest of the prominent brands cancel their contracts.

First of all, your knowledge is dated. The top brands at ADI are respectively Hikvision, FLIR/Dahua, Hikvision W-Box, Honeywell and Axis. The others you listed are bit players for ADI, even Axis is far far from what they used to be.

Equally importantly, ADI still has a very valuable asset. There are legions of trunkslammers whose main reading is the funny pages on print newspapers who buy from ADI because ADI is their local warehouse / bank.

If vendors cancel, fine, ADI/Hikvision can redirect most to Hikvision or Hikvision under other names.

And there's still a risk for the manufacturers cancelling unless they are sure they can redirect all those ADI dealers to other distributors, which they have to be concerned about. Larry Newman still needs to make his number (and Axis America's growth is weak enough as is, without cancelling a huge distributor).

If you do not understand why Hikvision is so controversial in the industry, then it points at your own lack of understanding of competitive dynamics in the 2016 market.

Respectfully not 100% sure I agree with the ADI assumptions- (http://ipvm.com/reports/adi-branch-sales) the hypothesis implies that "top brands" as measured by the handfuls of units stocked in each local branch is reflective of total revenue. Based on that logic, you’d conclude (based on your chart) that ADI sells slightly more Honeywell than Axis. My understanding is that inventory is for small projects or replacements as many/most large orders (dominated by Axis btw) are shipped direct/ not 'will called'.

Regarding the dealers; I'm pretty sure that the Axis integrators, LSI's and NSI's all have accounts with both ADI, Anixter.. and a number of others too btw. No re-directing necessary. However, you're right, unwinding would take longer for some than others... but the revenue decline (IMHO) would be significant enough to blow up the valuation/ purchase ROIC%. Maybe they'll still do it- (I've been wrong before) but considering the broad availability of cameras across 6,7,8 distributors in North America and the lack of 'switching costs', my money is on that they won't.

Re: Hik/ Chinese companies - In the market past, I've seen hesitation from integrators because of concerns over quality and long term company stability. I understand 2016 competitive dynamics- no difference in what Ubiquiti is doing, good technology / great price.Trying to understand from a business perspective if there's more to it.

Hik/ Chinese companies - In the market past, I've seen hesitation from integrators because of concerns over quality and long term company stability. I understand 2016 competitive dynamics- no difference in what Ubiquiti is doing, good technology / great price.

Absolutely not the same as Ubiquiti.

With Ubiquiti, buyers are forced to make a choice - get a great low price but sacrifice human local support (pre-, post-sales and real tech support).

With Hikvision, buyers get the great price and generally get equal if not better human local support. Hikvision probably has more sales and support people in the NYC area than Ubiquiti has overall. Hikvision NA has 200+ employees (almost all for local sales and support), a huge number for this industry and continues to grow rapidly.

That is what makes Hikvision disruptive and its sustainability highly debatable. Local sales and support is very expensive, especially considering how low Hikvision is pricing product.

This is why Hikvision is unlike any other Chinese surveillance manufacturer, as none of the others (even Dahua) is even an order of magnitude close to spending on local sales and support like Hikvision.

There is NO real business reason, everyone always wants to knock off the top dog # 1, # 2 it is eating other manufacturers alive that HikVison charges ZERO, NATTA, NONE license fees. And after that they make a product that consumers of all types actually LIKE. They cannot beat them so all they can do is complain, try to find minor issues and make a big deal of them, etc etc. Axis is overpriced, 99% of VMS software is just as good as Hikvisions OLDER software, except HikVison is FREE of charge, nothing ever. Customers LOVE no license fees. As soon as someone explains to a customer that they can have an IP system without FEES, they buy it. Sorry folks I'm sure many will disagree and I am cool with that but as long as HIKVISION makes cameras and NVR's I will be selling them by the boat load, and laughing all the way to the bank....

...99% of VMS software is just as good as Hikvisions OLDER software.

Good point, yes 99% of VMS software is easily just as good as OLD Hik, if not far better...

...so I need to apologize to John and the rest of you for my tone in my initial post, "Is this an honest question?..." It was rude, and not professional. I should have re-read my stream of thought before posting.

Bumping this, since Larry Tracy is now suggesting Hikvision will / should buy ADI and comparing it to my suggestion of LTS as an alternative. From Tracy:

I seriously doubt LTS makes much sense to expand in place of ADI unless the ADI acquisition doesn't take place.

ADI makes much more sense for so many reasons. Top and Bottom line growth quickly with easily raised capital from public share offering. Controls and enhances distribution of your product and cripples many competitors at one time. Plus it gives you access to tremendous marketing data that is invaluable.

The loss of ADI will hit Honeywell sales hard. The in house products lines are getting weaker by the month due to lack of marketing and engineer resources. The last five to 10 years have hit Honeywell Security hard, wrong people in charge who have made serious mistakes. I think ADI is holding up Honeywells internal product sales and without ADI the sales will crater much faster.

I agree that ADI helps Honeywell sales significantly and that Honywell's product sales stand to lose.

LTS and ADI are a bit like comparing a bicycle and a jet. Both are transportation, but the pricing and tradeoffs are much different. My point with LTS is that it represents a low-cost path for Hikvision. Buying ADI is a high cost, complicated path. Hikvision's only Western acquisition is Pyronix for $24 million so if they did buy ADI, it would be a huge deviation from their approach to date.

cripples many competitors at one time

I do think it would criple lower-cost players (Dahua, FLIR, Honeywell, DW, etc.) but Hivision has already crippled most of the other lower-cost players (e.g., Everfocus, Speco, Geovision, Vivotek) so not sure how much damage is left to be done.

I do think Hikvision needs to be worried about strong players dumping ADI. Would, e.g., Axis and Hanwha keep ADI if Hikvision bought ADI? I am not sure about that so Hikvision has risks of its own on a deal like that.

I mean... stranger things have happened, but I just don't see it, and I don't see them as being successful if they do.

1) Retail is tricky. It takes a lot of time and effort and skill and luck to be successful at it. Frankly, this is far removed from Hikvision's core competencies.

2) ADI doesn't just sell, or even primarily sell, CCTV. They sell intrusion, fire, access control, some telecom, and AV. All those markets bear only superficial similarities to CCTV. Even assuming they could manage to sell CCTV successfully in a retail environment, learning to sell the other product categories is going to be a long and painful process.

I don't know if Hikvision reads IPVM or if they just react to things their dealers scream at their reps, but just in case: don't do it!

One would assume the product focus would narrow to security and surveillance. My ADI carries a lot of AV and other general integration type equipment, and elimination of that would become a problem for AV guys. In some areas ADI is the only option for a walk-up counter.

I would doubt that anyone who acquired ADI or runs the company would change any product line that was profitable. Would be really stupid to do so