March Acquired by Infinova

Long time DVR leader March Networks has been acquired by Infinova [link no longer available] a US/Chinese video surveillance manufacturer. Over the past year, signs and speculation increased that March Networks was up for sale. However, to be acquired by Infinova is simply stunning. We think this combination has a high risk of being unsuccessful over the next 3 - 5 years.

An Overview of the Deal

The plan is for March Networks to be an independent operating subsidiary of Infinova, retaining their own brand and organization. The companies see a number of potential benefits:

• Infinova's regional strength in the high growth Asian markets can help March Network's sales
• Infinova's manufacturing can help reduce the cost of March Network's hardware
• The combination of the companies R&D teams may help in the design and manufacturing of new products

Why This Deal Occurred

Here's the forces we believe brought this deal together:

March has been struggling to make the transition from DVR leader to IP video provider. In the past 5 years, their stock price dropped more than 75%. While they had a number of growth quarters recently, over that same time period, revenue has been roughly flat. Plus, today, March announced a terrible quarter with revenue dropping over 20% [link no longer available].

Infinova's main claim to fame is a monster IPO that provided them a huge cash warchest. Otherwise, the company is a mid tier surveillance player, both in terms of revenue (roughly the same as March) and products (generally not highly regarded). That noted, with so much cash and a huge valuation (~10 times March Networks), they had motive and ability to expand.

The acquisition price, ~$90 Million CAD, was fairly modest with March Networks being valued at a price to sales ratio of 1 (even less, if you factor in that March has ~$40 Million cash in the bank, noted in the FY2011 financial report [link no longer available]). By contrast, Infinova is valued at closer to a 10/1 ratio. It is certainly not an expensive deal for Infinova.

For March, the deal is all cash so once the deal closes they do not have downside risk of Infinova's stock going down.

The Risks

We see a number of risks in the mid to long term about the combined entities:

• Infinova is incredibly overvalued relative to any video surveillance company not traded in the Chinese stock market. We believe Infinova's valuation is unsustainable and reflects exuberance / a bubble in China. If the China stock market falls, a drop in Infinova's stock price of 80%+ would not be surprising at all. When bubbles pop, company operations can be severely disrupted. 
• Infinova has never had a strong competitive position in the market. They have primarily replicated product offerings that Pelco and AD offered. At best, there are some incremental operational efficiencies but no clear plan of how to compete against the growing power players like Axis and Hikvision or establish a clear niche that they own like Mobotix or Genetec.
• Infinova and March have both struggled to really compete against the best VMS and IP camera players. Putting them together does not solve this. Indeed, it might actually be more difficulty with engineering teams around the world and potential power struggles amongst the two organizations.

Gut feel is that this combination will see a gradual decline in competitive positioning if and until a major correction occurs in the China stock markets were I think major problems within the company are likely.

Here's March Network's CEO explaining why they did the deal. Note heavy emphasis on it being all cash. Also, while this may look like a news interview, it is a staged PR effort:

Update: Interesting critical article on the March deal from local Ottawa newspaper.