Volume 31 | October 17, 2023
Hello, and welcome to Brief #31!
I am fresh off of the largest security specifier show, CONSULT, in Louisville, Kentucky (USA), where I had the privilege of moderating a conversation between Rob Lydic of Wavelynx, Michael Wong of Genea, and Sanjit Bardhan of HID. It was on the consumer as a new stakeholder, and there was a healthy discussion with the specifiers and the broader ecosystem in attendance. I'd summarize the overall takeaway as: "Things are changing at a pace not seen before; it is all over, and there is a need to rethink much of what's being done."
And speaking of Wavelynx, the PE firm behind iLOQ and acre, Triton has invested (heavily) into Wavelynx. You can read more about it here. Although some will consider this a competitive move against HID, it reflects the market opportunity more than anything and a savvy PE firm looking to make a return on its capital. Also, this says a lot about a well-known but often not discussed player in our industry: Tzachi Wiesenfeld. Congratulations to Hugo, Rob, Mike, and the team at Wavelynx.
And speaking of PE firms, this Brief is titled The Need for PE: The LenelS2, Onity, and Supra Story. The purpose of this Brief is to explain why a strategic buyer of LenelS2, Onity, and Supra would be terrible for the companies, industry, and customers and how a PE firm would be great. More on that below. Strap in.
As a reminder, you have access to all the videos from the Access Control Summit. More on how to access them is below. Mark your calendars as ACS Europe is set for 4/29 - 4/30 in Birmingham UK. Why Birmingham? Because we are colocating it with The Security Event. More to come on that news.
Here is how to access the 17 videos, 10 panel discussions, and 7 1:1 Fireside Chats.
The videos are hosted on your membership page:
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Just log in.
If you go to https://www.leeodess.com/
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Click "Login" in the top right corner, then select "Sign In."
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Hover over "Individual" or "Corporate" (depending on your membership) in the top right corner, and a menu will appear.
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Click on "ACS23 Video."
The URL for the videos is https://www.leeodess.com/acs23-videos.
Upcoming Engagements & Exclusive Opportunities
We have a whirlwind of events and exclusive meet-ups I'll be part of in the coming months. Let’s connect, collaborate, and meet up:
1. Securing New Ground, New York (USA)
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Dates: Today and tomorrow! October 17-18
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Collaboration: We've teamed up with SIA to curate at the show interviews and content. Interested in being interviewed? I’ll have my gear with me. Just reach out!
2. SECTECH, Stockholm, Sweden
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Dates: October 24-25
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Agenda: I'm heading to Stockholm to connect with top access control and smart lock firms, delving into market intricacies and emerging trends.
3. ISC East, New York (USA)
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Date: November 16
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Don't Miss: I'll be moderating "From Physical Security to Proptech Solutions: How Today's Security Technology Enables Smarter Buildings Tomorrow." Join Dan Cremins (Delta Electronics) and Josef Ĺ achta (Sharry) in room 1A07 from 11:30 AM to 12:15 PM.
4. Exploring India
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Dates: November 27 - December 1
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Connect: If your are operating in India, let me know and let’s meet. Looks like I am going to be in Mumbai and Bangalore.
5. Security Investor Conference, New York (USA)
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Dates: December 13-14
6. Intersec, Dubai
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Dates: January 16-18
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Exclusive: We're collaborating with Intersec on the Thought Leadership Pavilion. If you're attending or considering participation, let's discuss how you can be a part of this unique initiative.
Looking forward to inspiring interactions and promising partnerships!
Thank you for being a member. Our community is continuously growing, and I appreciate your trust in me. I am grateful for this opportunity and will strive to continue delivering. If, for any reason, I am not meeting your expectations, please feel free to let me know.
Thank you!
PS: I am sure some of you may forward this on but please do so sparingly and encourage others to sign up here. Thank you!
Click Here To Go To ACS23 Videos
The Need for PE: The LenelS2, Onity, and Supra Story
A key takeaway from ACS23 was recognizing the tremendous opportunity in front of the industry and the necessity for change to capture it. But recognition was not just about acknowledging the need for change. It was the action already taking place by many of the companies in attendance because the changes are imperative. This distinction is important. Far too often, our industry has fallen into disbelief that change is net negative, that being slow to adopt technology is a feature of our industry, and that iterating off of yesterday (pick your poison) is the best path forward, even as we recognize that tomorrow is very different and needs very different thinking. We have been somewhat paralyzed.
Not anymore.
I'll spare you a recap of my thoughts on what is happening in the market, and the impact these changes will have on us as they are documented in my book The 6 Phase Changes Shaping Access Control. I have also covered it in over 150+ newsletters, Briefs, articles, and countless podcasts, webinars, and presentations.
But to take those assumptions and beliefs and apply them to a recent conversation I have been having on Slack and in person with some of the Access Control Executive Brief members on who should buy LenelS2, Onity, and Supra, it is obvious to me who needs to be the acquirer and who does not.
[Backgrounder: Carrier Global Explores Strategic Alternatives For Its Fire And Safety Business Unit]
Lets get into why.
At ACS23, I was privileged (earned) to interview Kumar Sokka, GM of LenelS2 (video here), and Fayyad Sbaihat, President of Onity and Supra (video here). It gave us all a front-row seat into what two fresh minds in nascent and meaningful businesses can bring regarding strategic thinking, an art of the possible vision, and a modern culture.
Both Kumar and Fayyad are impressive.
But it will take more than Kumar and Fayyad for the opportunity at LenelS2, Onity, and Supra to be realized, and a PE firm would be the suitable ingredient for success.
Let's start with the "who I hope does not" acquire them as I plan to spend the majority of time in this Brief making the case for "who should."
Full stop: If LenelS2, Onity, and Supra were to join forces with a large strategic, it would be the end of anything spectacular at LenelS2. So people don't get twisted, I'm not saying the end of LenelS2. What I said was the end of anything spectacular. LenelS2 would continue to be in business, and they'd grow moderately. They would be one of many unspectacular physical access control companies we all talk about using the opening line of "I remember when…"
This spectacular opportunity needs to be met with stunning change, and that type of change will only come from a PE firm.
For Onity and Supra, it would continue as the status quo, but it would be devastating for LenelS2 in comparison.
Why am I so bearish on a strategic? Here is why:
The leading strategics to acquire the businesses are known for their limited investment in innovation, laser focus on legacy EBITA growth tactics, and a lack of expertise in software architectural roadmapping - and let's not forget their leadership team's preference for playing it safe rather than taking risks - it would be the opposite of what a PE firm would do.
And these reasons are precisely why our industry needs a PE firm to acquire LenelS2, Onity, and Supra. Such an acquisition has the potential to be truly remarkable and landscape-changing. This acquisition mirrors the same potential Blackstone brought to LiftMaster after acquiring them in 2021 from The Duchossois Group Inc. By all accounts, they are starting to change the fabric of the legacy behemoth. Is it happening at the speed everyone wants? No, but I can tell you from my conversations that it is 100% happening.
Equally as important, is an aggressive investment in order for LenelS2 to compete with well funded brands such as Brivo and Verkada.
But the story of why a PE firm's acquisition is far more compelling than all the reasons a strategic acquisition is not. So let's get into the positive. In no particular order:
Capital infusion into important initiatives (the ones that a strategic won't and Carrier was never going to make): PE firms provide the necessary capital to make critical investments in technology, infrastructure, R&D, and the global market expansion that LenelS2 on it’s own may have needed help to afford and those that Carrier would not prioritize. A strategic buyer is not going to make these investments either given the cost of acquisition and most of their investment history.
Example investments needed for LenelS2 are in software development, international expansion (as an asserted effort beyond multinational enterprises), and a native video platform. A PE firm could and would prioritize this and others.
Operational expertise: Many PE firms have extensive experience streamlining operations, improving efficiencies, and scaling businesses. Their involvement can lead to improved operating performance. I would guess that many of LenelS2's current expenses could be cut or redistributed elsewhere to fund the R&D and market expansion needed. A fresh set of eyes with new mindsets could do a body good. LenelS2 has iterated off of a legacy strategy that has done them well in the $10B industry mindset but won't work in the $70B market opportunity.
Strategic direction: PE firms often bring a fresh perspective to the business and can help refine the company's strategic direction to adapt to changing market conditions. And this goes without saying: it is needed. Kumar and Fayyad have done exceptional work in the short time they have been there, and I give Jeff Stanek a ton of credit in finding dynamic operators and leaders, but the need for change is more profound and broader than them. The change all but starts at the top at Carrier. Although disruptive to the internal business, a fresh look would jump-start the change.
Network and resources: PE firms have vast networks and can connect the legacy business with tangential market experts, new partners, and even customers the business might have yet to access. It is not a secret that money knows money, and after an acquisition like this transpires, the acquirer works overtime to make it successful. The first stop is usually their own portfolio companies and network. Money influences action, and we underestimate to what degree. There is another factor at play here that LenelS2, Onity, and Supra could use, and a PE firm would bring along with their network and is a resource - it is called swagger. Short of a rebrand, the swagger a PE firm brings when they walk their newly acquired company into their network, especially one over $1B, is no joke. It is hard to calculate, but it is momentum you can only buy if acquired.
Focus on value creation: I often write that the incentives in our industry by the leadership teams have more to do with our lack of innovation, change, and technology adoption than anything else. We just don't like to talk about it because it's uncomfortable. PE firms are incentivized to increase the value of their portfolio companies, given that their ultimate goal is typically a profitable exit. This focus often aligns their interests with the long-term growth and success of the business rather than their bonuses, promotions, or self-preservation. I can’t imagine the Carrier executives were incentivized to grow at the rate of the $70B market opportunity someone like LenelS2, Onity, and Supra could take advantage of. They were incentivized to grow incrementally, and their investment strategies that trickled down into their product portfolio management and go-to-market strategies supported that.
Risk management: With their broad experience across different industries and companies, PE firms can bring best practices in risk management to the legacy business. And more importantly, the ability and appetite to take on healthy risks would increase. LenelS2, Onity, and Supra can benefit from more "risk" injected into the business, and I put risk in quotes because what I am inferring is shallow risk in the grand scheme of things. I could argue it's called "known vs unknown risk," as our industry values known risks more significantly than unknown, even when the known risks are inevitably bad for the business.
Good for strategic buyers. Just not yet: It is interesting that a PE firm acquiring them may significantly benefit a strategic buyer. For all the reasons I explain here, a PE firm can turn LenelS2, Onity, and Supra into an even more significant, agile, modern machine that would drive even more exponential value to a strategic buyer. If a strategic buyer were to acquire them, they'd bolster an entity still waiting to generate revenue at the scale we are discussing. A strategic would need more resources or stomach to invest than a PE firm would.
Long-term perspective with short term returns demanded: Like the incentive point above, this long-term and short-term perspective point is mission critical to why a PE firm is the right fit for LenelS2, Onity, and Supra. Unlike public companies that often focus on quarterly results, PE-owned businesses can take a longer-term approach to growth and investment while working towards and short-term exit that is based on growth and stability. A long-term perspective is not something LenelS2, Onity, and Supra have had the privilege of working with. I'd love to see what they can do with it.
While the reasons for a PE acquisition listed above are all positive, I am not blind to the fact that some PE acquisitions turn out to be negative for the acquired business. Outcomes can vary based on the specific goals and approaches of the PE firm, as well as how well the acquired business integrates with those goals and strategies. For instance, here are some things to keep in mind that could make a PE firm's acquisition of LenelS2, Onity, and Supra a disaster (and frankly, apply to any acquirer):
The short-term focus is where PE firms often look to exit their investments within a set period, typically 5-7 years. Those focusing on short-term horizons might only sometimes align with the best long-term interests of the legacy business. I see this as low risk as PE Firms are holding onto companies longer than they have historically and 5-7 years is a lot longer than the quarterly horizons strategics typically take.
Debt burden: PE acquisitions often involve leveraged buyouts, where significant debt is used to finance purchases. This debt burden can handcuff the acquired business with high-interest payments and reduce financial flexibility. It will be interesting to hear how this deal is structured, but I am sure it will be manageable for whomever buys it.
Hair cuts: To improve profitability quickly, PE firms might aggressively cut costs, potentially compromising the quality of products/services or leading to layoffs. Like many businesses that have been around for awhile, LenelS2 is bloated with legacy work and could use some forced change, so this cost-cutting exercise, although painful and impactful for some, would benefit the business.
Break up: A PE firm might sell off parts of the business or valuable assets to recoup its investment, which can change the core nature of the legacy business. For instance, would they keep Onity or Supra and go to the market alone with LenelS2? You could make a hard case that the parts are worth more than the sum.
Loss of company culture: Efforts to streamline and restructure might disrupt the existing company culture, affecting employee morale and potentially losing long-standing company values and the market. Our industry is funny about this one. We love our brands but quickly hate them when we see much change. I'm bullish that this won't happen here, but there will be churn. How it's managed will be critical.
Key talent turnover: PE firms often bring in their management teams (starting with a CFO) or consultants, which can lead to a loss of institutional knowledge and disrupt continuity. It's a risk that can be managed through agreements and incentives.
The risks above don't hold a candle to the risks a strategic buyer would introduce to LenelS2, Onity, and Supra. Included risks of a strategic buyer outside of the ones I listed at the beginning of this Brief are familiar to a PE firm, but even more devastating to what is need for LenelS2, Supra, and Onity to meet the market opportunity. They also include a loss of identity, history, and culture. Not to mention, included in that would be a cultural clash or a loss of the very elements that made LenelS2, Onity, and Supra successful in the first place. Those elements would manifest into a shift in strategic focus as the strategic acquirer would prioritize its core products or services over those of LenelS2, Onity, and Supra. These decisions would likely come from centralized decision-making by a group with no business or history of running a business like LenelS2. Understanding and expertise are needed for all the nuances of the Lenels2 business. And let's remember the financial strain this will put on most strategic buyers. Most strategic buyers will face additional investment financial challenges and will divert resources from Lenels2 business or even put its operations at risk. This happens all the time when a strategic buyer acquires a company under the pretense that it is a tremendous inorganic way to grow EBITA. And lastly, the operational disruption this would have on the strategic buyer and the acquired companies can't be understated.
Let's not forget that the lengthy integration process will be challenging and disrupt the day-to-day operations of LenelS2, Onity, and Supra. Very few strategic acquisitions have been successful, and the integration is typically reason number one.
So despite the operational synergies, market/product/service expansion, shared resources, financial strength, and cultural alignment that a strategic buyer could bring to LenelS2, Onity, and Supra, the risk outweighs the reward and the market, we as an industry, need a PE firm to see the potential in this sleeping giant and make a throated attempt to acquire it.
I have spent much time thinking about this, and every time I do, I end up back at The Need for PE. This massive opportunity needs to be met by massive change.
