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Small world: Is consolidation a good thing for professional audio? [feature]

Historically an industry dominated by compact, niche-style operations, professional audio is currently experiencing a wave of consolidation through mergers, acquisitions and venture-capital investment. But why now – and what are the long-term implications?

Even if we datestamp the birth of pro audio as we know it today to as recently as the late 1950s and the development of the first studio consoles, it seems reasonable to assert that this industry is hardly in the first throes of youth. But in fact, a current trend towards greater consolidation of businesses is leading an increasing number of people to wonder whether it is only now that pro audio is truly reaching maturity.
Of course, mergers and acquisitions in this industry are certainly not unheard-of, and there have been plenty of landmark deals during the past decade – think of Sun Capital/LOUD Technology’s buyout of Martin Audio in 2007, or Music Group’s purchase of Midas and Klark Teknik in 2009, to name just a few.

It is clear, however, that the pace of change has accelerated somewhat over the last few years. In the last 24 months alone, we have seen Yamaha acquire modelling amplifier and recording software specialist Line 6; Harman purchase audio directivity pioneer Duran Audio (hot on the heels, it should be noted, of acquiring entertainment lighting giant Martin Professional too); Gibson add music recording software specialist Cakewalk to its stable; console brands Calrec, DiGiCo and Allen & Heath being brought into the same group; and, most recently of all, Uli Behringer’s Music Group further strengthening its presence in pro audio through the acquisition of TC Group, parent of Tannoy, Lab.gruppen, Lake and TC Electronic.

So, the principal question is not ‘if’ – instead it is ‘why now’ and, more problematically, ‘what are the long-term implications?’.

Pro audio in transition
Whilst there is a general feeling of economic uplift at present, the sense of uncertainty prevalent since the 2008 crash hasn’t completely dissipated, and at press time the possibility of a Greek exit from the Euro remains a forbiddingly dark cloud on the horizon. Opinions vary on the extent to which the broader financial landscape has contributed to the wave of mergers and acquisitions, but it certainly seems to be an element in the mix.

Blake Augsburger, executive vice-president and president, professional division, at Harman International (pictured), comments: “The rate of mergers and acquisitions taking place within the audio industry is contingent on variables within the industry such as maturity, technology and competition, but also on macro-economic issues as well. This includes but is not limited to the cost of capital, globalisation and compliance. There is also a cyclical filter determined by high-profile successes and failures, market sentiment and even trends.”

James Gordon, MD of DiGiCo and now also CEO of the combined DiGiCo/Allen & Heath/Calrec group christened Audiotonix in April 2015, similarly thinks the broader economic situation has had an impact, but highlights too the increased appeal of the sector as a reason for the influx of venture-capital (VC) money now enabling many of the changes.

“Post a recession, this kind of new investment cycle is very common and is occurring in lots of industries at this time,” says Gordon. “I guess as the dust starts to clear companies look at new opportunities and that generates new investment. We have certainly seen this trend in our industry before. I do think, though, that as our industry becomes more professional with a worldwide footprint it becomes a more attractive proposition for external investment.”

For RH Consulting founder and keen industry observer Roland Hemming, the explanation resides more in a cyclical change slowly taking place. “Our industry has been regarded as very young with many companies that are still owner-managed, but it is now transitioning,” he says. “However, as an increasing number approach retirement, if they have no succession strategy, then this makes them look to sell. Secondly, you have companies wanting to diversify or supply a more complete package, so again M&As [mergers and acquisitions] help companies achieve this.”

Ian Jones, managing director of stalwart independent AV technology supplier HHB Communications (pictured), also thinks we are witnessing a logical development in the industry. “Pro audio has traditionally comprised a large number of relatively small businesses operating independently, so I’d suggest that consolidation is somewhat inevitable,” he says.

In an increasingly integrated world, it makes sense on multiple levels for larger firms to look to deliver a wider cross-section of complementary technologies. But it also stands to reason that consolidation isn’t always going to be straightforward, or even immediately beneficial. To put it mildly, ‘growing pains’ are surely to be expected.

Practicalities of consolidation
It would obviously have been preferable to assess the practicalities with the architects of the most prominent deal of recent times: the Music Group purchase of TC. Unfortunately, TC and Music Group declined to be interviewed at this early stage of the process. Meanwhile, private equity firm Electra Partners – which acquired latterday Audiotonix group bands Allen & Heath in 2013 and DiGiCo and Calrec in 2014 – accepted PSNEurope’s questions but was unable to provide any comments by the time of going to press.

Fortunately, there are plenty of others to whom we can turn to analyse consolidation mechanics. Surveying Harman’s purchase of Martin Pro and Duran Audio (regarding the latter, “we saw an excellent opportunity to acquire great technology and great talent”), Augsburger confirms that “there were many practical/logistical elements in getting onto a shared ERP [enterprise resource planning] system and to a single procurement plan, but the most important aspects were ensuring customers experienced nothing but improvement in choice, service and support, and that the employees of all three groups were culturally engaged in making the acquisitions work. They were and so the acquisitions have worked. It typically takes a year or so to complete the integration.”

For Audiotonix – which features a combination of ownership ranging from Electra and fellow private-equity firm Living Bridge through to the managers and staff of the group – the consolidation of three leading mixing console brands into one group was the result of a period of careful reflection. “We looked at many options and could have taken the more traditional route of investing into a speaker or amplifier company, but in reality the skill of the team is that we know mixing consoles,” says Gordon (pictured). Selecting the companies was not particularly challenging since “all three brands have great reputations and loyal clients. When you look a little deeper into the businesses, although all three design and manufacture consoles, we address a different market or client base with them. This means the combined mixing console knowledge and experience across the group adds real value and expertise.”

In terms of the practicalities, Gordon was aware from day one that encouraging dialogue between the three R&D firms was going to be instrumental in making the new group function effectively. “Three strong R&D teams with a long history of developing groundbreaking products all working together sounded an impossible task,” he admits. “Looking back I am not sure now why we viewed this as the biggest challenge, because from their first meeting they were talking the same language and were keen to learn from each other. The level of respect between the teams has meant they willingly share ideas and want to contribute and share with the other teams in the group.”

Long-term benefits
One pleasant upside of the recent wave of M&As is that they seem to have involved relatively few losses in terms of personnel – something that can only be good news in an industry where job opportunities aren’t always in plentiful supply. But if the current phase of consolidation has been fairly painless in the short-term, what are its long-term benefits likely to be? (Pictured right: Roland Hemming.)

Over at Line 6 – which is still run as an independent company following the Yamaha acquisition – the benefits have included joint product development with its new owner (for example, on the Variax Standard guitar) and the back-up of a “financially powerful yet music industry-internal partner” that allows the company to pursue new products and markets.

“The instant benefit is a much larger internal customer base allowing sales either through under own-brand or under one [of] the other brands in the Yamaha group,” says Nils-Peter Keller, director Yamaha Music Europe’s pro audio division. “A medium-term benefit is the know-how transfer of production and design quality methodology, as well as the development of the businesses processes’ quality – which is also a bidirectional benefit. Last but not least, the addition of Yamaha’s power has made it easier for Line 6 to develop new products and enter more or other business fields.”

For Michael Hoover – president of Cakewalk, which was officially acquired by Gibson in December 2013 – the primary benefits of the acquisition reside in enhanced capacity for product development and increased access to possible new customer groups. “To start with, we get to focus on what we do best: designing, developing, testing and delivering innovative software products for musicians and producers,” says Hoover. “Our dedicated marketing team allows us to talk directly to our customers through online properties we manage on our own. Our expert staff provide a first-line support while keeping our development team constantly informed of any issues. What has really changed is our ability to reach more customers. Through Gibson’s extensive sales and distribution network and marketing and entertainment relations teams we have a much bigger and stronger voice.”

Continuing consolidation?
But while the recent wave of deals has evidently brought tangible benefits for many of the brands involved, concerns persist that increased dominance by a smaller number of very large players may ultimately inhibit the entrepreneurial spirit that has traditionally underpinned pro-audio’s greatest leaps forward. Gibson CEO Henry Juszkiewicz (pictured), however, thinks that smaller firms will continue to be viable and influential players.

“Smaller companies can address very specific needs that would distract larger companies from their more ambitious goals,” he says. “Gibson can’t imagine a future where niche companies don’t exist; if anything, we feel they strengthen the industry, introduce innovations, and keep raising the bar. We want the bar to keep rising, because ultimately it benefits all of us.”

But not everyone is optimistic. Although he believes that some smaller firms will remain independent due to “emotional attachment or [being] a lifestyle choice”, Hemming expects that “small integration companies will find life increasingly tough as barriers to market increase. Many small manufacturers will either die or be bought, primarily for their IP or for a particular market segment where they excel.”

It is also important to remember that consolidation doesn’t always pan out creatively or commercially.

“Many mergers and buyouts don’t succeed,” says Hemming. “If you want to buy another company or merge you have to think about what the overall benefit will be. It’s a cliche, but will the result be greater than the sum of all the parts? If your business isn’t efficient and focused then an M&A probably isn’t going to help. If it is, and you see another business that can benefit from your streamlined operation, then that might be worth consideration.”

So there are no shortage of potential pay-offs, and pitfalls, from taking the path towards merger or acquisition. But in an industry which appears to be nearing the end of a significant cycle – whereby an increasing number of the figures who have shaped the modern business will be contemplating retirement and ultimately passing the baton to a new generation that will have to find fresh methods of financing costly R&D – more consolidation seems to be a certainty.

(David Davies)