Would a Hikvision / Pelco Deal Make Sense?

Published Feb 05, 2013 05:00 AM
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A persistent industry rumor says Hikvision and Pelco are in talks to do a merger / acquisition. Who knows the truth. Even if there are some talks, that does not mean anything will come of it.

In this note, we examine if it would make sense. It might happen, it might not but if it did, would it be a good deal and for whom?

Hikvision's Huge Growth

Hikvision has been growing enormously, fueled by China's bubbling surging economy, and now does over $1 billion USD total revenue, pretty much all in video surveillance. This is ~4 times the size of their 2009 revenue of ~$340 million USD (see Hikvision's financials). That's both unprecedented total revenue and growth rate for a large surveillance company. Moreover, they are extremely profitable with net income over 25% (top Western companies are typically in the teens).

Plus, Hikvision has a massive valuation and a lot of cash on hand. Today, the company is worth ~$10 Billion. To put that in perspective, that's more than 5 times Axis's valuation and probably equal to every video surveillance company in the Americas. Plus, Hikvision has close to $1 billion USD cash in the bank.

Hikvision's Challenges

Now, if you knew nothing about video surveillance, you might conclude that this company has groundbreaking technology and innovations that far surpass its competitors. However, that's far from the case. On a pure product / technology perspective, the company is middle of the road, at best, more in line with solid companies like ACTi and Vivotek.

Hikvision has been the one of the best and, judging by its financials, the biggest success in China. For example, in the last few years, Hikvision has expanded into Chinese massive Safe City projects including an $800 million integration project. Indeed, almost all Hikvision's revenue comes from inside of China. While Hikvision has been working hard to expand into the West, they are still trying to make their way, fighting without their core 'home field' competitive advantage.

Hikvision's Potential Motivation

Hikvision wants to be a top tier global player. They have a huge valuation and a lot of cash. One way to accelerate expansion would be to buy an established player, rather than take years and the risk of expanding incrementally into foreign markets.

Pelco would deliver a very well known brand and an established channel sales structure that Hikvision could tap into for 'global domination.'

Schneider Electric / Pelco Background

Schneider Electric owns Pelco and has for the past 5+ years, acquiring Pelco in 2007 for ~$1.5 billion USD. At that time, Pelco did ~$500 million in revenue. We suspect that Pelco's revenue today is still similar to that range as the overall Western market for traditional CCTV providers has been week over the past 5 years.

Schneider's Motivation

We suspect Schneider might listen but doubt they would be hugely motivated unless Hikvision offered a great price. On the one hand, the Pelco acquisition does not look like a huge success. On the other, it is a solid complimentary asset in the overall Schneider portfolio. While Schneider paid 3x Pelco's revenue in 2007, that premium is far out of line for mature companies today (March got acquired recently for less than 1x revenue by another Chinese manufacturer).

Perhaps Hikvision, with such a strong financial position now, is willing to significantly overpay to motivate Schneider.

Will It Work?

Making a deal like this work is a huge risk, unless Schneider is willing to give Pelco up at fire sale prices (which we doubt). Even if Hikvision acquired Pelco, there is huge overlap in product development / offerings. Would they gut the product side and just use their sales and marketing? If so, that's an incredibly high cost for such an effort. However, since Pelco has so many existing customers, they would like need to continue most of their existing offerings. And even if Hikvision could lower the cost structure with their Chinese based manufacturing, it would be nearly impossible to come close to the profit levels they enjoy within China.

This makes for a juicy rumor and a fascinating what if, but it does not make a lot of sense to us. If it happens, it will certainly be quite a spectacle, for better or worse but we suspect Hikvision is better off building its own International team organically.

UPDATE: Deal Fell Through

Multiple sources tell IPVM that the deal was in advanced negotiations but ultimately feel through.

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