You must have had a broken TV or avoided any business related news
website in the last week or two in order to miss the news about
DaimlerChrysler selling off the Chrysler portion of its business. In a
7.4 billion dollar deal, Cerberus, a private equity firm, bought the
struggling U.S. carmaker from DaimlerChrysler at a huge discount from
its 40 billion dollar, 1998 purchase by Daimler. The gamble is that a
private equity firm, with its deep pockets of investment capital, can
start to look three years down the road in terms of development,
without worrying as much about what Wall Street is going to say every
business quarter. Without question, the private equity movement is
changing the American business landscape, and this includes the
consumer electronics business.
In the world of high-end
audio video, just a few weeks ago another private equity firm, KKR,
announced that it is taking publicly traded Harman International
Industries, private. As the makers of Mark Levinson, Lexicon, Revel,
Infinity, JBL, and a dominant force in the car audio business, Harman
has been a successful stock in recent years. Meanwhile, a public
company, Planar, bought high-end video giant Runco last week in a
$36,000,000 deal. Nortek, a former publicly traded company, has bought
up companies in recent years ranging from the likes of like Sunfire,
SpeakerCraft, Panamax, Elan, Niles, Omnimount and beyond. D&M
Holdings has expanded past just the Denon and Marantz brands to own
Escient, Snell, Boston Acoustics, McIntosh and ReplayTV. Klipsch has
picked up more and more brands including Aragon, Acurus, Jamo and now
the assets of API, which include Energy and Mirage.
This trend is prevailing in the American marketplace and is making its
way into the once “mom and pop” audio and video business with varying
results. As PC convergence makes its retarded stroll toward consumer
relevance, can a big parent company, loaded with Wall Street or private
equity cash move quickly enough to keep up with the rapidly changing CE
market? Time will tell. Is consolidation good overall for any industry?
That’s also hard to tell. Adding in economies of scale can make a
company more profitable however just being profitable in the short term
isn’t enough to guarantee the long-term success that many of the brands
mentioned above have enjoyed with their recent buyouts and takeovers.
The thought of radio giant, Clear Channel comes to mind when I think of
industry consolidation. Before the 1996 legislation, allowing companies
to own more than a handful of TV and radio stations, the radio industry
enjoyed conservative growth and lots of diversity. By the dotcom boom
of the late 1990s, radio was booming right along with Internet stocks
to the point where Infinity (Viacom) and Clear Channel owned pretty
much every major radio station you could think of. Their profits in the
short-term soared, but with no new formats being developed, aggressive
business practices, and their best talent leaving to satellite radio –
a pay per month format – these radio properties are a shell of what
they once were. Clear Channel, despite owning all of the radio industry
trade publications (including eventually my father’s Inside Radio) and
a firm control of the media, could not sustain their high stock price
forever. Clear Channel is now in the process of being bought out by a
private equity firm. Infinity is suffering the loss of both its boss
Mel Karmazin as well as their national morning landmark, Howard Stern
to Sirius Satellite radio, resulting in revenues and ratings at former
Stern stations to plummet.
Signs don’t point to a gloom and doom scenario for the audio-video
business as it heads toward a round of consolidation and takeovers.
Stereotypically, many AV companies are engineering driven, and these
larger money firms can help them grow past their limitations while
still keeping their identities in the industry. The idea of Gordon
Gecko-style hostile takeovers isn’t really where we are heading. The AV
industry is booming now like never before and it has attracted
non-enthusiasts, Wall Street, and private money. On many levels, the
attention should be considered quite a compliment to those who built
the companies and the industry as a whole.
Sources: CNN.Money.com, NYTimes.com
