Avigilon Buyout Potential Analyzed

By: John Honovich, Published on Sep 08, 2015

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

* ****** ** ******** investors *** ******** **** asked ** ***** *** potential *** ******** ** be ****** *** / taken ****.

*********, **** *** ***** price **** ** *** (60%+ ***** *** **** last ****), *** **** here ** **** ******** is *** **** '*****' and ***** ** ***** attractive ** ***** ********* wanting ** ****** **** or ****** *** ******** industry.

** **** **** **:

  • ******* ********'* ********** ******** to * ******
  • ******* ***** / **** to ** ******** ***********
  • ****** *** ********* *** a ******* ********

[***************]

Management ******** ** ******

*** ******* ******* ** that ********'* ********** ******** its ***** ***** ** far ***********. *** ******* at ~$**.**, ** ******** doubt ******** ********** ***** support * ~$** ****** offer, **** ****** **** would ********* * **% premium **** *** ******* price.

**** ****, ********'* ********** has ********* ******** *** target ***** ***** ** in *** $**+ *****. Indeed, *** ***** ***** just ** ****** *** was ~$**. ******** ****** to *** ******** *** a $*** ******* *** rate, *** ****** ********* for $* ******* *******, compared ** ********'* ******* market ************** ** **** ~$550 *******, ** ******** that *** ******* ****** be ****** ****** ** multiples of *** ******* *****.

******* ** ****, *** a ****** ** ******, it ** ****** **** the ******** ***** **** to ***** ** ***** $30 * *****, ** not ****. ** ********* terms, **** ***** *** acquirer ***** ** ***** $1.2+ *******.

** ******, ** *** Canon / **** **** shows, ** **** ***** a ****** ******* ** get * **** *****, but ***** *** **** few ******** **** *** willing ** ***** **** a ******* **** **** than * ******* *** any ***** ************ ************.

Canon / **** ******** ** ********

*** ********** **** *** ****** *** **** ****** justification *** * *** higher ******** ***** *****. Applying *** ******* ** Canon's $*.* ******* ******** to ********, ***** ********'* higher ****** **** *** roughly **** ** ****' revenue, ******** ****** ** worth ** ** ** what ** ** *****, the ***** ****.

*** ******* ******* **** the ********** ** **** Canon **** * *** mistake ****** **** *** $2.8 *******. ***** **** the ***** ************ ******** as * ***** *** Avigilon ************, **** ****** rate *** ********* ** drop, ****** ** *** most ****** *********** ******* ********** ******** ********. ****** on ********* *****, ********* in *** ********* ***** the ***** ** *** market ***, *** ******* are ** ****** *********** nor **********.

*** ** *** ******* positive ******* ** **** acquisition ** **** *** company ** ********** *** risk. **** **** * long ***** ******, ***** management *********, *** * strong *&* ************. ** contrast, ******** ******* *&* investment ** ** ****** patents *** **** **** turned **** **** ********** this ****** **** **** has ** *** **** decade. ******** ********** * lot **** ****.

Chinese ********

* ****** ** ******** have ********** **** * Chinese ************ ***** ****** Avigilon. *** ****** **** that *** ******* *** strong ** ******** *** weak ** ********. ** particular, ********* *** ***** are *** **** ********* worth *****-********.

** *** **** ****, Avigilon *** ******** *** and ********* ******** **** any ******* ************.

*******, ***** *** * number ** ********** ** making **** ****:

  • *** *****: ** *** Chinese *************, **** ********* could ****** ****** ** pay * $*+ ******* for * *******. *******, Hikvision ***** ****** ******* Genetec *** * ******** of **** ***** ** they ****** ****** *** most ************* *** ********.
  • *** ********: ** ** not ***** **** ********* even ***** ** ******* its *** ******** *********** positioning ** ** ** doing ********* **** ********** with *** ********* ******* massive ******* ** *******.
  • ********'* *********: ** ******* companies **** ********'* * North ******** ********** ********** given **** **** ***** own ************* ********** ** China? ******* **** *** this ** * *** to ** **** '********' or **** ***** *** it ** ********.
  • ****** ** ****: ** would ** **** **** for ******** ** ** paid ** ******* *****, given *** ******* ********** in *** ******* ***** markets ********. ** ***** suspect ******** ***** **** to ** **** ** cash (********* ******** *** **** Infinova). *******, ***** ********* really **** ** ** able ** *** $*+ billion ** **** *** Avigilon?¬†

*******

****** *** * ****** would ** ********* ** it **** ***** *** large ********* ******* ** make * **** ******.

*******, ** ******** *********** anytime ****, **** *** stock ***** **** ** is, ** ********, ***** Avigilon's ********** *******, *** realities ** *** ***** surveillance *********** *** *** challenges *** ********* ****** justifying **** * ****.

** ** ***** ********* possible **** ******** ****** itself, ***** **** *** turnover **** **** ** long **** ****** *** delivers ******** ****** / profits, *** **** ** a *** **** ******** outcome **** * ******.

Comments (28)

I think Pelco or Cisco would be a better buyer since they are up market and better aligned with Avigilon type customers.

Pelco???

I wonder how that conversation would go at SE:

"Hey so remember eight years ago when we bought Pelco for $1.5 billion? So yeah, revenue is actually lower now than when we bought it but if only you gave me another $1.5 billion, this time it really is going to work out. And yeah, don't worry that Avigilon and Pelco products 100% overlap. We'll figure it out"

As for Cisco, you never know with them. They certainly have bought companies for even more than what Avigilon would want but, even for them, it would not be an easy/cheap deal to justify.

Both companies pretend to be serious in the surveillance market. This is one of the few remaining opportunities to be a top contender immediately. It's right out of the Canon playbook.

The 'let's go big' play is always the critical factor in getting a large buyout. Some mega company needs to commit, smart or stupid, to taking the gamble.

"Both companies pretend to be serious in the surveillance market."

That's quite the burn on Pelco....

Seriously, though if SE/Pelco was going to spend a billion, might as well invest it internally than buy an overlapping offering.

They haven't had the talent or vision to execute on such a recovery. It's much harder and riskier to start over from scratch than to buy your way into something that has positive momentum.

"buy your way into something that has positive momentum."

Yes but we are talking about Avigilon in September 2015. Avigilon, even at its price, is a fairly high-risk play for an acquirer, given the executive turnover, brand issues and patent enforcement campaign.

1. Executive turnover is going to happen under an acquisition.

2. Brand issue goes away with Pelco/Cisco name

3. Patent enforcement can be converted to an olive branch by opening them up.

If you do not value the brand, nor the management, nor the patent portfolio, why spend ~$1.5 billion on Avigilon?

1. Run rate revenue

2. Market share/position

3. Solid end-to-end solution

4. Solid engineering team

Basically all the things that Cisco/Pelco aren't doing well at...

The point is how much to pay. You can certainly make a solid case for all 4 but if you have to pay ~$1.5 billion and you don't make use of the brand, the management team or the patents, it's going to be hard to justify the deal.

That said, imagine Pelco or Cisco could get Avigilon at today's stock price of ~$550 million, that would be a reasonable deal to make, though I think Avigilon's CEO would not take anywhere close to that price.

I think it is more likely that Pelco will be bought than it is that Pelco will be buying...

However, an Avigilon acquisition anytime soon, with the stock price what it is, is unlikely....

A lower stock price makes a deal more likely than a higher one.

For example, if it crashes to $6 a share, offer comes in at $12...

The key thing is what Avigilon management (i.e., the Founder / Chairman / CEO, COO, etc.) can justify to shareholders (especially given that he and his co-founder own nearly 20% themselves). As long as they are near their $500 million 2016 run rate goal, I doubt they are going to accept $12 or $20 or even $25 as they can easily run numbers that justify a much higher mid to long term value.

I don't think Avigilon is as bullish as they seem. Do you?

They're unlikely to say "Wow, China's really progressed much faster than we anticipated back when we made our run rate predictions..."

Fernandez isn't stupid, he sold one company already. Besides at some point he is virtually compelled by fiduciary responsibility.

Sure, but I still think things would have to get worse. I am just saying he's not willing to throw in the towel right now. If things do not improve in 9 to 12 months, then he might change or simply have to given into the pressure on the stock.

Don't Avigilon execs have a history of being "greedy" and wanting to cash out early, making a sale more likley? [sic]

Well, the CEO has always made clear he is in it for the long term, that he enjoys what he is doing and that he believes that they can get a lot bigger and more valuable.

Accepting that is what he does believe and that the events of the past year have not changed him, I would think that makes him less likely to sell.

Even putting aside the noble claims, clearly he has a healthy ego and strong desire to go for a huge exit, so that would make selling now at (hopefully for them) the bottom unlikely.

For a publicly traded company, though, a buyout isn't a decision for only the CEO to make. About a million or more shares of Avigilon regularly trade each day, representing about 2% of the outstanding shares. If another company really feels Avigilon is undervalued, it could slowly build up a decent minority stake in the public market before it even makes a move. For example, if the other company could get, say, 15% of Avigilon, (about 7 million shares) then it would only need to make an offer on another 35%. Once it has a majority stake, it can appoint the board, etc, and the rest of the takeover falls into place.

...a buyout isn't a decision for only the CEO to make...

He's not just the CEO though. He holds several positions which would likely make a takeover infeasible.

CEO

President

Chairman of the Board

Founder

Biggest Shareholder (by far)

Not to mention he might be a real prick if you tried to take his company away from him. :)

Of course. A takeover on friendly terms would go much smoother, and be cheaper . When management is opposed, they can make things much more difficult, but it still is not like buying a private company.

Tim, and what price point do you think Avigilon's board is going to be comfortable with for a friendly takeover?

Or what price point can a hostile takeover get enough shares to buyout with management's support?

John, I agree with your assessment of what Avigilon management sees as the underlying value of the company long-term, and undoubtedly it is a lot higher than its current capitalization.

Today's P/E of 15 seems quite low for the company, unless one assumes that it is going to fall apart. Even if we give a fair P/E of, say, 25 for a growing tech-style company, that moves it into the $20 range. And then a premium for a takeover ... and a higher premium if its hostile ... could be in the $30+ range, no?

Whether a buyer would offer $1 billion to $1.5 billion for the company is another question. If Avigilon can execute on its growth strategy, then it would definitely be worth it. But you would have to feel that the current "bumps" are temporary and solvable.

Honeywell?

I would not be surprised if Honeywell acquired a video surveillance company. I would be surprised if they spend the amount of money that Avigilon would require. This is more a judgment on Honeywell's willingness to spend rather than the quality of Avigilon or any other large available manufacturer.

The most cut-throat deal of all time?

Hik buys Avigilon.

Hik then demands Dahua license the OV patents. As John pointed out they are one of the remaining camera mega-mfrs who have not come to an agreement regarding the OV intellectual property.

Impact: One high-end competitor would eliminated completely, Avigilon.

On the low-end, Dahua, could be affected by licensing more than an a Axis or Genetec would be, because even a modest per camera fee could impact their ultra-low pricing.

I'm not saying I want this to happen, but it does give Hik a lever against Dahua/Axis/Uniview.

Update: In the past 16 months, it has become much more likely that Avigilon gets bought out. 2016 was another tough year for the stock with it going down to ~$8 but now back up to $14, though still far off their 2014 high.

There's a lot of credible chatter about an Avigilon acquisition happening now.

If I could get a buck how many times I heard (since Schneider bought Pelco) that it is prepared for a buyout... I would be a rich person. :D

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