Avigilon Buyout Potential Analyzed

A number of Avigilon investors and analysts have asked us about the potential for Avigilon to be bought out / taken over.

Basically, with the stock price down so far (60%+ since the peak last year), the idea here is that Avigilon is now very 'cheap' and would be quite attractive to large companies wanting to expand into or within the security industry.

In this note we:

• Examine Avigilon's management barriers to a buyout
• Compare Canon / Axis to an Avigilon acquisition
• Assess the potential for a Chinese acquirer

Management Barriers To Buyout

The biggest barrier is that Avigilon's management believes its stock price is far undervalued. Now trading at ~$12.50, we severely doubt Avigilon management would support a ~$20 buyout offer, even though that would represent a 60% premium over the current price.

This year, Avigilon's management has typically signaled the target stock price is in the $40+ range. Indeed, the stock price just 18 months ago was ~$34. Avigilon points to its progress for a $500 million run rate, its future potential for $1 billion revenue, compared to Avigilon's current market capitalization of just ~$550 million, as evidence that the company should be easily valued at multiples of the current price.

Because of this, for a buyout to happen, it is likely that the acquirer would have to offer at least $30 a share, if not more. In practical terms, this means the acquirer needs to offer $1.2+ billion.

Of course, as the Canon / Axis deal shows, it only takes a single company to get a high price, but there are very few entities that are willing to spend such a premium plus more than a billion for any video surveillance manufacturer.

Canon / Axis Compared to Avigilon

The price Canon paid for Axis is the most common justification for a far higher Avigilon stock price. Applying the metrics of Canon's $2.8 billion purchase to Avigilon, given Avigilon's higher growth rate and roughly half of Axis' revenue, Avigilon should be worth 3x or 4x what it is today, the claim goes.

The biggest problem with the comparison is that Canon made a big mistake buying Axis for $2.8 billion. Along with the video surveillance industry as a whole and Avigilon specifically, Axis growth rate has continued to drop, indeed in the most recent quarter Axis revenue declined in constant currency. Purely on financial terms, factoring in new knowledge about the state of the market now, the numbers are no longer justifiable nor comparable.

One of the biggest positive factors in Axis acquisition is that the company is relatively low risk. They have a long track record, great management stability, and a strong R&D organization. By contrast, Avigilon biggest R&D investment is in buying patents and they have turned over more executives this summer than Axis has in the last decade. Avigilon represents a lot more risk.

Chinese Acquirer

A number of analysts have speculated that a Chinese manufacturer might target Avigilon. The theory goes that the Chinese are strong in hardware but weak in software. In particular, Hikvision and Dahua are now huge companies worth multi-billions.

On the plus side, Avigilon has stronger VMS and analytics software than any Chinese manufacturer.

However, there are a number of challenges in making this work:

• The price: Of the Chinese manufacturers, only Hikvision could really afford to pay a $1+ billion for a company. However, Hikvision could likely acquire Genetec for a fraction of that price if they really wanted the most sophisticated VMS offering.
• VMS conflict: It is not clear that Hikvision even wants to improve its VMS software competitive positioning as it is doing extremely well partnering with VMS companies selling massive amounts of cameras.
• Avigilon's factories: Do Chinese companies want Avigilon's 2 North American production facilities given they have their own sophisticated production in China? Perhaps they see this as a way to be more 'American' or they might see it as wasteful.
• Paying in Cash: It would be very risk for Avigilon to be paid in Chinese stock, given the extreme volatility in the Chinese stock markets recently. We would suspect Avigilon would want to be paid in cash (like March Networks did with Infinova). However, would Hikvision really want or be able to pay $1+ billion in cash for Avigilon? 

Outlook

Ruling out a buyout would be imprudent as it only takes one large committed company to make a deal happen.

However, an Avigilon acquisition anytime soon, with the stock price what it is, is unlikely, given Avigilon's management desires, the realities of the video surveillance marketplace and the challenges for potential buyers justifying such a deal.

It is still certainly possible that Avigilon rights itself, shows that the turnover will have no long term impact and delivers improved growth / profits, but that is a far more probable outcome than a buyout.