When Allied Barton merged with Universal Services of America a couple years ago, I stated that the combined company would be expected to generate revenue of $4.5 billion, making it the largest in North America and third largest in the world. I pointed out that the then-new Allied Universal would provide seamless coverage for larger companies but might prompt smaller companies to move toward more local firms to get more personalized attention.
I envisioned that the merged company would offer more to rank-and-file employees in terms of wages and benefits but that management positions would be eliminated; that Allied Universal would look to acquire other, larger companies; that the merged company would have greater power to obtain government contracts; and that the newly merged company would create downward pricing pressure, leading to a drop in profit margins.
Two years later, most if not all of this has come to pass. And now that Allied Universal has acquired the fourth-largest company in the market, U.S. Security Associates, it’s probably time for another round of similar dynamics. With revenues of more than $1.5 billion and more than 50,000 employees, the addition of U.S. Security will bring greater national presence and customer service capabilities in the U.S., widen Allied Universal’s presence in Canada, and provide a footprint in Central America, Mexico, and the United Kingdom.
The National Impact
After the acquisition, expected to be consummated during the third quarter pending typical regulatory approvals, Allied Universal will see revenues rise from $5.5 billion to $7 billion, about 29 percent of the $24.5 billion outsourced contract security market, and with about 200,000 security professionals, the newly merged company will enjoy plenty of cost savings—an estimated $55 million in annual synergies.
Larger clients like the Fortune 50 companies, which typically only use the national mega-companies, will have one fewer choice in the marketplace, with only three companies in the $1 billion-plus range, but they might like the newly-scalability and reach of Allied Universal, leading to more business. On the other hand, smaller to medium-sized accounts will have another reason to consider whether they want a more personalized touch and switch to one of the many more numerous firms in the $300 million and below range.
Impact on Employees
The synergy savings will mean that an appreciable number of employees will be let go, some of whom will start smaller companies and others of whom will resurface at existing smaller to medium-sized firms. I foresee a greater number of smaller companies being created at the local level thanks to this talented pool of people with industry experience.
Employees who remain with the newly combined company will be in that much better position for higher compensation and benefits packages, as well as opportunities for advancement through the ranks that larger organizations tend to provide, along with a higher possibility of union representation.
Additional Mergers via Private Equity
Private equity players are likely to become more involved in the guarding market, making a play to consolidate smaller to medium-sized companies. With the transitions over the next year, there will be an opportunity to integrate these companies, pick up management talent, and perhaps collect some new accounts where customers want more of a local touch than the mega-firms can provide.
On the other hand, this will be challenging. The newly expanded Allied Universal will continue to price aggressively, and they will be able to given their greater critical mass. Allied Universal will have the capability to take jobs at very low profit margins, with a fixed cost-per-hour considerably less than smaller companies.
Expanded Advantage re: Government Contracts
The newly enlarged Allied Universal will also enjoy that much more political and economic power when it comes to winning government contracts. Moreover, with the expansion covering not only a greater presence in the U.S. but also internationally, that ability to commandeer public sector contracts will grow in more than one dimension—you might say both latitudinally and longitudinally.
Profit Margins Locally vs. Nationally
While Allied Universal might be tempted to leverage its enhanced market position to boost profit margin, it’s likely the company still will be in a competitive enough environment that they will have to grow organically—and thus will price more aggressively, especially on the local level. On the national level, however, because potential customer companies have fewer choices, Allied Universal could try to increase their profit margin.
Over the past 10 or 15 years, larger customers have gone from using many different regional security vendors to just one or two, as their purchasing departments have sought better pricing. But it’s possible that as mega-firms continue to merge, these larger customers might decide to reverse that trend and return to a region-by-region approach, to give themselves more choices.
Going into the Future
While it’s hard to say with perfect precision how the Allied Universal acquisition of U.S. Security Associates will impact the industry going forward, as I don’t have a crystal ball, I believe it will benefit small and medium-sized companies in picking up both employees and customers, and enhance the potential of them making their own acquisitions with help from private equity.
I see Allied Universal making continued acquisitions, but these are more likely to be on the technology side, rather than man-guarding. To the extent Allied does acquire additional man-guarding, I have questions about whether this will be domestically or whether it will make more sense for them to expand internationally. Likewise, will they decide to do an initial public offering in the next couple of years? Stay tuned …