Failed Arecont China AcquisitionBy: Brian Karas, Published on Oct 25, 2017
Arecont cameras are not the only things that fail.
Arecont spent months trying to be acquired by a Chinese manufacturer, only for the deal to fail, imploding into a legal battle.
In this note, we examine what happened, share the legal filing, and explore what this means for the troubled manufacturer.
Chinese Manufacturer/Acquirer NetPosa Sued By Arecont
In Arecont's court filing, they claim that NetPosa had agreed to purchase them but then backed out. Now, Arecont is suing NetPosa for $8.6 million put in escrow, plus $200+ million for 4 counts of breaches of contract.
A Chinese financial filing from NetPosa confirms the September cancellation of the Arecont deal. The purchase agreement itself was filed confidentially in US court and therefore cannot be obtained. NetPosa has not yet responded to the court filing that was just 2 days before this publication.
Arecont provided the following statement to IPVM:
While we can not comment on on-going litigation, we do not expect our customers to be affected in any way.
Who is NetPosa?
NetPosa, virtually unknown outside of China, is a Beijing based VMS / recorder developer. The company has a Chinese language only website and claims two international locations including the de rigueur Silicon Valley office which appears to be no more than a rented room in Palo Alto.
NetPosa does claim, via IHS [link no longer available], to be the largest VMS developer in China and the 3rd largest VMS developer in the world behind Milestone and Genetec. They do not list any cameras on their website, which could had led to their interest in acquiring Arecont.
NetPosa is a publicly traded company, on the Shenzhen stock exchange (similar to Dahua and Hikvision). Their 2016 financials indicate ~$200 million USD in revenue and, as of this publication, a market capitalization of $2 billion USD.
NetPosa received a 2010 investment from Intel and in the past few years have themselves invested in robot companies Jibo and Knightscope.
Purchase Price $170 Million
Arecont claims that NetPosa was going to pay them $170 million for Arecont:
$170 million, for Western video surveillance standards, is a high premium for a company like Arecont with declining revenue that we estimate to be ~$40 million in 2017 (and arguably might be worse given the fallout from this deal collapsing). NetPosa might have been able to offer this higher valuation given the robust / inflated valuations of the Chinese stock market.
The deal, however, was cancelled at the beginning of September, as Arecont confirmed:
NetPosa Termination Reason - US Govt Approval
Reasons for terminating the deal revolve around the CFIUS approval process, a process foreign entities must go through when purchasing US-based companies. Arecont's statement was that NetPosa told them they were unable to get approval, NetPosa's Chinese filing indicates the process was taking too long.
Open Secret Driving Troubles
That Arecont recently failed to complete an acquisition has been an open secret in industry circles over the past few months. It is certainly a key component to the various troubles at Arecont Vision, including rep firms and employees resigning as well as the 'management reorganization' / Schafer ouster.
Escrow $8.6 Million
The suit includes 2 main financial elements - the more basic was a claim that NetPosa agreed to pay Arecont $8.6 million as a termination fee / penalty if the deal did not conclude:
Seeks $200+ Million In Damages
Moreover, Arecont has 4 claims, each with similar demands for damages:
Alleged Shell Companies Created
One notable element was that NetPosa evidently created shell companies in the US and Malaysia to conduct the deal, as Arecont says:
Skeptical of Arecont Getting Paid
A big problem for Arecont is that NetPosa likely has no business nor assets in the US. Even if one grants the best case scenario that Arecont is totally in the right and can prove it, it is going to be hard to reach into China to get those assets. Arecont may be able to get the $8.6 million in escrow, but that would hardly be a win for them in the bigger picture.
Breached Oral Agreements
However, elements like the dependence on oral agreements could make Arecont's case more challenging:
While we are not lawyers, common business sense in a $170 million deal would be to get everything in writing.
High Risk For Arecont To Make This Public
The acquisition falling apart is bad enough for Arecont. They already face market forces against them, made worse by the fall out of the deal.
But filing a lawsuit that becomes a matter of public record will draw a lot more attention to Arecont's precarious state. This is a company that worked for months to get acquired by an unknown Chinese company.
What happens now? Who will acquire them? Can they survive independently? Can they make the debt payments on their $80 million loan? Should employees get out now? Should customers buy Arecont products if there is high uncertainty of their near future? All of these are very tough questions that they will need to answer as a result of the public nature of the lawsuit.
On the other hand, if they win the lawsuit and get the full damages, they will do better than the failed deal itself. That, though, is being quite optimistic.