Case Studies:

RAE Systems, founded in 1991, develops and manufactures a variety of multi-sensor gas detection monitors and networks to help protect workers, civilians and the environment.

In late 2010, RAE was struggling as a public company, with a share price down more than 50% versus just one year earlier. Under the shadows of a complex and unprofitable joint venture in China and a self-disclosed FCPA violation that had occurred several years earlier, the company was facing a losing battle in communicating its innovative technology and growth potential to public markets.

Vector’s outside-in research revealed a strong core gas detection business hidden underneath the complex external face of the company. We believed that a divestiture of the non-core Chinese joint venture would reveal a business with double-digit growth, and a global restructuring of the organization could bring the company to profitability. Furthermore, our outside-in diligence convinced us that the company was well positioned to transform itself from a device manufacturer into a wireless and software-enabled safety solution provider.

Vector established a public position to initiate a dialog with the company, representing 4.9% of RAE’s outstanding shares. To help understand and overcome the complexity in China, and to diligence the market opportunity there, we established a partnership with a leading Chinese private equity firm that participated as a minority co-investor. And finally and most importantly, we built a close relationship with RAE’s founders and current CEO and CTO, who controlled more than 30% of the company, providing strong allies in the take-private process. The combination of the strategies above gave us an overwhelming advantage in a competitive process, resulting in a take-private transaction that closed in June 2011.

Within twelve months of the transaction, RAE completed the sale of the non-core joint venture in China, completed construction of a new, low-cost manufacturing facility in Shanghai, divested the legacy property in Beijing, and completed a restructuring that established strong core profitability. Meanwhile, Vector helped the company hire a new COO and a new CFO with decades of experience managing global industrial businesses. Finally, the company established new corporate governance procedures, financial controls, and quality control processes to ensure regulatory compliance and improve quality around the world.

RAE today is a market-leading safety solutions provider, with the most innovative gas and radiation detection portfolio. With a wide range of wirelessly connected devices and a new software platform, the company is positioned to capitalize on next-generation market trends. These high-end solutions provide a stable and strong gross margin of approximately 60%. RAE’s core business has now profitably grown at a double digit rate for several years in a row. With an innovative product pipeline and a growing sales team, the company is well positioned to continue its rapid growth and to achieve further margin expansion.