ABS Capital Locks Up Alarm.com In All-Equity Deal

Sponsor: ABS Capital Partners

Target: Alarm.com

Seller: MicroStrategy Inc.

Purchase Price: $27.7 million

ABS Capital Partners had the advantage of an inside track for its latest acquisition, the purchase of Alarm.com, a McClean, Va.-based provider of wireless and web-enabled security technology. It turns out the target was previously overseen by Richard Terkowitz, a partner at the Baltimore-based growth buyout firm. Terkowitz was a director at Alarm.com’s parent company, MicroStrategy Inc. when the Alarm.com unit was created in 2003.

“I knew the CEO very well and liked the business,” Terkowitz told Buyouts. When Alarm.com became sizable enough to fit into ABS Capital’s investment criteria, the firm approached MicroStrategy, a publicly-traded developer of business intelligance software applications, about an acquisition. As it happened, Alarm.com had been on the block for several months.

ABS Capital secured the support of Alarm.com management, along with a $1 million investment from Egis Security Fund, and was able to complete the all-equity deal on Feb. 13. MicroStrategy said in a statement issued on Feb. 17 that it received $27.7 million in cash for its ownership interest in Alarm.com. Terkowitz declined to disclose the company’s annual revenues but said they were greater than $20 million, which is the floor of ABS Capital’s target acquisition criteria.

Alarm.com is an example of the type of deal ABS Capital Partners could pursue more often in the downturn: corporate divestitures. In 2007, the firm did a management-supported carve-out of Innovation Interactive, a digital marketing business, from parent company Livedoor Japan.

ABS Capital was attracted to Alarm.com because of a belief in the company’s growth potential, its subscription model and the differentiation of its technology. The company has grown at a rapid pace since its formation, acquiring nearly 160,000 monthly subscribers, Terkowitz said. The growth rate of the business is already above the firm’s target requirement of 35 percent per year, he added.

The firm sees potential for further growth stemming from Alarm.com’s unique status as the only company which offers a complete wireless monitoring system. With its ability to be accessed through a wireless device or a computer, the system allows its users to monitor a variety of events through advanced services. “The examples we talk about are a device that sends the user a cell phone message if the liquor cabinet is opened when the babysitter is in the home, or with an aging parent, you can monitor weather they opened the medicine cabinet to take their medicine in the morning,” Terkowitz said.

ABS Capital expects the evolution of the Internet-savvy generation into homeowners to be a driver for growth at Alarm.com, which should also see wider adoption of its services as the number of landlines in use decreases.

The deal is the last investment in the firm’s fifth buyout fund, ABS Capital Partners V LP, a $200 million pool closed in 2006. Terkowitz wouldn’t comment on the continuing fundraising efforts of ABS Capital’s sixth fund. In December, Buyouts sister publication peHUB.com reported the fund had accumulated $350 million in capital commitments with plans to reach its $400 million target in the first quarter of 2009. ABS Capital got its start in 1990 and bills itself as a later stage growth investor with holdings in the health care, communications, business services and software industries.