Investment Trends With...
Mr. John E. Mack III
Co-founder and CEO of USBX Inc. (USBX)
and former CEO of Protection One (POIX)

SSW: John, the investment banking firm which you co-founded, USBX Inc., specializes to a large extent in the security industry. Please give us an overview of the company, your Board, your Advisory Group, and your background.

John: My background was in the security industry. I was one of the co-founders and ultimately the CEO of Protection One. In a 10-year period in the 90’s (from 91 – 99), we built the company into the 2nd largest security alarm business in the industry--going from about 17 mm in revenue to 600 million in revenue with operations in Europe and North America. The company consisted of over 1.5 million subscribers. So I had significant exposure to the security industry in the 90’s, and had been an owner and involved in the security business in the late 80’s as well. During the 90’s with Protection One, we did over 200 acquisitions of smaller alarm company’s as well as raising over 1 billion in debt and equity in the capital markets. So I have significant experience with the open capital markets, merger & acquisitions activity and certainly with the security industry itself.

We sold control of Protection One in 1997 to a large utility company in the Midwest, Westar Industries. After completing a 3-year management contract following the sale, I founded USBX in early 2000. Our goal was to build a premier middle market investment banking firm with a particular focus on the security industry.

The people who invested in the company are people who have previous investment experience with me. The Carlyle Group, Evercore Partners, Topspin Partners, who’s founding partner is Leo Guthart, the former chairman of Ademco (the largest alarm equipment manufacturer in the world) at the time that they sold Ademco to Honeywell, and various other investors who have some experience in the security industry or the investment banking industry.

SSW: Is there a recent corporate financing success story you would like to talk about?

John: One of the more recent success stories we feel very proud of is working with Frisco Bay Industries, which is the largest systems integration business in Canada. It’s a public company, and over the course of 20 plus years it was built into the leading security systems integration business in Canada. We had been in conversation with the management team there for several years with strategy discussions to help the business in thinking about different alternatives, ultimately heading toward an exit opportunity for the business. That culminated in August of 2003 when we signed an engagement to formally seek strategic alternatives, specifically looking at an M&A opportunity for the business. We conducted a very efficient, and we believe, well-run auction for the business, which ultimately culminated in a successful transaction, which was announced in December 2003 with an acquisition of the company by Stanley Works, the large tool & equipment business headquartered in Connecticut. That transaction was completed in March 2004. When we started working with the company, the stock was trading in the $7-8 range, and we were able to get a successful transaction done with the company at a little over $15 a share, creating significant value to the shareholders. I think the key success attributes were: having a unique understanding of the security industry, knowing how to position Frisco Bay and tell it’s story effectively, putting the right group of strategic buyers together that were interested in the business, and then executing a well run action process that delivered a very good outcome for our client.

The Security Systems integration sector is one that has a lot of attention right now. This transaction has also been very visible in the market place.


SSW: The recent tragedy in Madrid has heightened terrorism fears once again. What is your opinion of the resulting investment climate for security stocks in the near term and long term.

John: I believe that security stocks have seen an uplift that really preceded 9/11 and the significant focus we have on terrorism based on fundamentals today. The convergence of digital technology with security systems, has spurred capital investing in security equipment. Security systems with digital technology can yield heightened productivity because things like video surveillance can be done much more effectively today. So my starting comment world be that I think the uplift we are seeing in the security industry today, had commenced and had some fundamental elements of it that would have been in place irrespective of the events of 9/11 and the heightened concerns of terrorism worldwide. That said, the recent events in Madrid and the continued focus on terrorism certainly spur additional focus on security and investments in security, in particular by the federal government.

The Dept. of Homeland Security has allocated incrementally probably somewhere in the neighborhood of $4-8 billion dollars of new additional spending that can ultimately get out to the private sector in the form of additional equipment and services that are being offered to government. A big part of the $40 billion plus Dept. of Homeland Security budget that we hear referenced quite often consists of existing budgets that were consolidated from other departments and don’t really represent entirely new spending -- but certainly even the $4-8 plus billion of net incremental investment in technology and services is significant.

Among a couple of the sectors that are getting a lot of focus are the ID solutions business companies, which are bringing together clever technologies that incorporate better ID solutions, that include incorporating biometrics into card access solutions, as well as convergence of the historical physical security access business of carrying an access card to get access into a building, with the logical security access business, which is gaining access to a network with a password or gaining access to information on your network with some sort of network password. To replace all this you would carry a smart card with biometrics incorporated into that card. Not only will that allow you access to your building, but you can also use it to access network information. Certainly the same applies to the government as well. There is a significant focus on having effective ID’s for people. We have seen interest on the part of the US government to tighten security around the passport. And there are significant initiatives with issuing visas in the US and really governments worldwide. Clearly the notion of I.D’ing people more effectively is fundamental to trying to thwart terrorist acts. So that is one of the areas that I think is seeing heightened focus in particular.

The other area where we have noted lots of focus is in technology surrounding first responders, e.g., the Fire Department, the Paramedics, the Police Department, the first responders to an emergency. There is an issue of interoperability in their communication systems so that the Police dept., can talk to the Fire Dept., can talk to the Paramedics, can talk to “Hazmat” units when responding to emergencies. It’s a significant initiative underway with government spending in putting together technology that allows inter-operability between those systems, both voice and data and other system capabilities. So those are two areas where we have seen particular focus. Certainly there is a broad uplift in security investing as well as with a focus on terrorism, but those are the two specific ones I would highlight.

SSW: GE recently acquired Invision (INVN), an explosives detection company, at a 20% premium. What does this mean for security companies in general. Do you see more consolidation coming?

John: Certainly GE has been a significant acquirer within the security industry. They have completed a number of transactions since buying Interlogix in 2002 to get into the business. We believe GE and other large conglomerates that are in the Security Industry today are going to continue to be acquisitive, and there are a number of different trends that are causing these large companies to be interested in acquisitions. Certainly you have large industrial company’s like GE and Honeywell and others that see the growth in the security sector, the size of the industry and it’s relationships to historical businesses that these big companies have been involved in as a natural opportunity for growth in their operations. So Honeywell buying Pittway to get a bigger focus on this industry, and GE buying Interlogix and then focusing on building the business, and Bosch, a very large German conglomerate, buying Detection Systems all suggest the significant interest by these large industrial businesses. And then you have these other developments that are causing people to focus on acquisitions. You have large European security companies that are mainly coming from the Guarding business that are focused on acquisitions in the Guarding sector, and increasingly integrating electronic access control acquisitions with their Guarding businesses. And we’ve seen a more recent trend where companies involved in IT integration work are looking at the intersection of physical and logical security, or the intersection of IT infrastructure with physical security infrastructure all of which is now operating on the same network with digital systems in the security arena. All of this is causing large IT integrators to focus on acquisitions in the security space. So there are a number of different trends that intersect to causing what we believe will be a sustained focus on M& A for some time to come. But there is getting to be a smaller and smaller universe of attractive acquisition opportunities. And the last thing I would say about InVision is that it creates a focus on a broader view of what constitutes physical security. Historically, the focus on the security equipment business would not have included the notion of a bomb detection business, but more likely, card access control, alarm panels, and digital video surveillance equipment. Certainly there is a broader interpretation today, which includes things like bomb detection, IT solutions and a whole range of things. We’re also seeing a very broad definition of physical security from companies interested in broad exposure to the market.

SSW: What's your perspective on the growing trend of end users seeking to combine physical access with logical access for a simpler total solution.

John: I suggest that there is a fairly significant focus on this concept, and I actually foresee an intersection of this business opportunity as with a company like Viisage (NASDAQ: VISG), which has had a very significant run recently based on their focus in building the leading high-tech ID solutions business. Their ID Solutions business ultimately focuses on the idea of combining physical and logical security within smart card technology. These smart cards have a lot of information imbedded in the card, having to do with privileges, authority and access rights, both in the physical domain, which is to suggests access to buildings and other things, as well as logical access, which has to do with being able to use that same card for logging onto your computer, logging onto the network, and ultimately allowing you different levels of access to information on your network. This is all enabled by a system that uniquely identifies you through biometrics and other devices as the end-user who should have access to this information or gain access to the building. So I think Viisage in particular is a great example of those opportunities, and we believe will continue to have a significant focus on this notion of the intersection of physical access and logical access, so really we don’t end up with multiple access systems in our lives. We’re all frustrated with multiple access passwords, multiple key cards, I carry 3 or 4 different access cards. There are definitely some very elegant solutions in this sector.

SSW: What is your opinion about the direction of interest rates in the 2nd half of 2004 and 2005?

John: I believe, like most people now, that interest rates will be rising for the balance of 2004 and into 2005. Federal Reserve Chairman Greenspan in his comments to Congress recently suggested that he didn’t feel any significant deflationary pressure, and indeed he may start to worry about inflation shortly, and certainly that is a precursor to seeing interest rates raise. We have seen mortgage rates rise in the last few months, as well as some pressure on financial institutions’ stocks, which certainly is a harbinger of higher rates to come.


SSW: Protection One (POIX) , one of the largest security alarm companies with over 1 million customers now has new owners, The Quadrangle Group. As the former CEO of Protection One , what do you feel are the prospects for this company in the future.

John: I believe the prospects for the Protection One team are very bright. The management team of Richard Ginsberg and Darious Neven and the rest of the team they have assembled is very solid with good industry experience. There are good solid opportunities in both residential and the small to medium size commercial markets on which Protection One is now focused. They seem to have the attrition issues under control in the business. There are still solid organic growth opportunities on the residential side of the business. If the company stays disciplined about their investment multiples for creating new subscribers, which the company seems to be doing, they have a nice opportunity to create significant value with their positioning in the market as one of the few companies with a truly national infrastructure. I think there is a reasonably good opportunity for them in the small to medium sized commercial marketplace, where they are one of the few companies that can address a company who wants a national accounts kind of attention for their business. So all in all I think there are good prospects for Protection One, and I’m hopeful that the company will regain it’s leading place in the market.

SSW: Please tell us about the Security Growth Conference which your firm has recently organized.

John: USBX, Security Systems News and Mitchell, Silberberg & Knupp, three firms who respectively lead their area of practice in the security industry, put the Security Growth Conference (SGC) together. USBX is an investment bank with a practice specifically focused on the Security Industry, Security Systems News is a leading provider of news to the security industry, and Mitchell, Silberberg & Knupp is the leading law firm serving the security alarm industry. We all felt the need for a conference that would better showcase some of the leading middle market companies that are in the industry. With this in mind, we created a conference format to get 40-50 CEOs of leading middle market security companies to talk about the prospects for their businesses and what they see in the industry overall in half hour sessions. We run simultaneous presentations in a day-and-a-half format that allows those attending the conference an opportunity to see a cross section of CEOs representing different sectors of the industry, talking about what they see for their own company as well as the industry at large. The conference is a private event with invitations going to the CEOs of the company themselves, (who get to hear what their fellow CEOs are saying), as well as public and private investment funds, and various key business development executives from larger companies with exposure to the security industry for purposes of networking, and the opportunity for exposure to financial institutions for potential investment opportunities. The peer group networking amongst the CEOs has been a very successful outgrowth of the conference, and we look forward to continuing the conference well into the future each March of every year.

SSW: Thank you very much for your time, John. We wish you continued success.