Why Dahua Should Acquire PelcoBy John Honovich, Published Jun 18, 2014, 12:00am EDT
In 2013, negotiations for mega Chinese manufacturer Hikvision to acquire Pelco broke down. At that time, we argued that it was a bad fit.
However, there is another mega Chinese manufacturer, who would make perfect sense to acquire Pelco.
In this note, we explain why Dahua's weaknesses would be perfectly complimented by Pelco's strengths and how Dahua has the resources to make this deal.
Dahua [link no longer available] is big. In 2013, they did more total revenue than Axis and more total profits than Avigilon had revenue. Here's a snapshot of their 4 year financial trend:
Dahua's market capitalization is nearly $5 billion USD and they have ~$300 million USD cash in the bank.
They generate most of their revenue in China and the rest through their patchwork of international OEMs (for US readers, IC Realtime and Q-See are two of the most well known).
Dahua has a potential breakout hit in HDCVI, their super inexpensive non IP HD offering (see Dahua HDCVI Test Results).
Though Dahua is a massive, super profitable company, they do have fairly significant weaknesses:
- Poor Name Recognition: Forget about brand, most people in the industry (especially outside of the manufacturer side) have no idea whom Dahua even is.
- Limited Internal Sales Force Outside of China: Given Dahua's dependence on OEMs outside of China, they have not developed their own organization substantially.
- Dependence on OEMs With Weak Brands: Dahua's OEMs are generally low brow / non premium brands, making it more difficult to sell up market.
- Dependence on China Domestic Market: Dahua's revenue and growth is very much dependent on domestic China sales, leaving them vulnerable to shifts in Chinese buying / government spending.
- Minimal North American Presence: Unlike Hikvision, who has been building a deep US based sales and support organization, Dahua has very little in the critical American market.
- HD CVI Limited By All of the Above: Even though HD CVI technology has great potential, all of the issues above constrain growth and expansion.
Complimented by Pelco's Strengths
Pelco's strengths compliment those Dahua weaknesses
Pelco is very well known and still widely respected by surveillance end users, especially in North America. They have a well developed internal sales forces, large existing customer base, especially in the mid to high end American market, where Dahua deployments are essentially non-existent.
With Pelco's vast analog customer base, HDCVI would be a natural up-sell and immediate large market to target. Pelco could market HD CVI far more effectively, through their English based, mature PR and sales efforts.
Pelco's revenue is still likely in the $400 million range so it would increase Dahua's overall size by ~50%, making them less dependent on the domestic China market.
Dahua Can Afford It
Dahua's nearly $5 billion USD market cap and 6x price to sales ratio provides them the foundation to pursue an acquisition. By contrast, when Schneider paid ~$1.5 billion USD for Pelco in 2007, Pelco was doing ~$500 million revenue. And since Pelco has admittedly struggled post acquisition, a fair purchase price now is likely far less (sub $1 billion USD).
Building a first rate brand and channel is an expensive and timely proposition. Dahua has an opportunity to capitalize on its Chinese manufacturing base and become a global force but without a proper international sales and marketing organization, that will not happen. Pelco provides an ideal compliment to drive Dahua's expansion.
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