Recently, LOUD Technologies–parent brand of Mackie, Tapco and EAW, among others–announced that it had acquired St. Louis Music in a deal valued at more than $30 million, according to an 8-K filing. The move reflects an inexorable truth in the pro audio business in general, and for live sound in particular: the large will get larger and the not-so-large had better start looking for partners. Because when the winds of Wall Street blow, it's like no SPL you've ever encountered. Publicly traded LOUD is the successor company to Mackie Design, which went public in 1995. What had been a highly personality-driven enterprise–founder Greg Mackie's was a familiar face at trade shows and in ads–rode the swell of public tech companies in the late '90s, its share price hitting more than $20 before the tech bubble collapse of 2000. In 2001, the company showed its first loss, leading to Sun Capital Partners, a Boca Raton VC firm that specializes in rescuing teetering companies that it perceives as leaders in their market sectors, to take a majority stake in the company in January 2003. (A year later, the stock price had doubled, to more than $3.)
During the same period, some companies grew by acquisition, including Harman and Yamaha; others expanded into new market sectors, including Peavey and Fender. All of these companies have a significant interest in the live sound business.
St. Louis Music, founded in 1922 and still owned by the same family, had considerable strength in its musical instrument brands, including Ampeg and Alvarez guitars. However, a crowded MI market and a growing live sound one led to the company adapting one of its brands, guitar amp maker Crate, into Crate Audio, which marketed live sound mixers and related products into the MI marketplace, with mixed results.
The tech bubble aside, the attractiveness of live and installed audio created its own house of cards situation: like the best ride at an amusement park, it was in danger of being inundated by its own success. This is where Adam Smith's unseen market hands came into play. As the number of players in the game increased, the distribution channels constricted, as mega-retailer MARS tanked and rival Guitar Center emerged as the Wal-Mart of music gear. The dynamic of fewer distribution outlets and the trend towards smaller, cheaper and more entry-level products compelled consolidation. (It's telling that Hoover's lists Yamaha and Fender as LOUD's primary competitors, rather than Telex or Harman.)
Now, Darwin is about to get another economic workout. The LOUD/St. Louis Music merger gives LOUD a beachhead in the musical instrument market at a time when that sector is becoming the core customer group and point of access for an increasingly consumer-oriented pro audio landscape. Ken Berger, LOUD senior VP of marketing, asserts there is little overlap between the merged brands, mainly between certain Tapco and Crate Audio products. However, what the Crate Audio brand does provide is a stronger thrust into "value-line of products for the MI retail channel," he says.
An inevitable consolidation of engineering and marketing aspects of both companies will add to the efficiencies achieved by increased reliance on overseas sourcing. (Which can be a slippery slope. Less than two months before the acquisition announcement, St. Louis Music signed a consent decree with the Federal Communications Commission, terminating the FCC's investigation of the company's alleged improper importation of class B digital devices. The decree, under which St. Louis Music admits no transgressions, called for implementation of stricter compliance procedures and a $42,000 "contribution" to the U.S. Treasury. Berger stresses there was no correlation between the decree and the timing of the merger. "Electronics manufacturers encounter these types of issues from time to time, and it's not something that should in any way be considered out of the normal course of business operations," he states.)
We're now looking at a battlefield dominated by vertically integrated giants, all aiming at an increasingly smaller target in the form of limited distribution channels. Breadth of markets seems to equate to steadier aim: adding the MI component gives LOUD an advantage over its other publicly traded SR rival, Harman. Yamaha, which acquired Steinberg earlier this year, giving it a stake in the fast-growing software-based recording sector, is a huge player in live sound and also has a significant MI base. Pro audio initiatives at Peavey, an MI powerhouse, continue doggedly. And there is a gem of low-hanging fruit out there, in the form of Solid State Logic, which is up for sale and whose IP and brand would give any of these companies one more sticking point in the market. (SSL is not a factor in live sound, but the name of the game now is market breadth, not specialization.)
Insiders say the jockeying in the live sound sector is far from over, but note that Sun Capital's willingness to fund the St. Louis acquisition indicates Wall Street's assessment of a healthy industry. "It's a smart extension of a good franchise," said one, speaking off the record. "You wouldn't have seen this unless Sun saw the long-term benefits, some of which are already here, like lower-cost offshore manufacturing."
But unlike software-driven market sectors, where start-ups can still come out of left field or dorm rooms, the hardware-based SR business now has little room for the mom-and-pop entrepreneurs that started it back in the day. That's not good. That's not bad. To paraphrase John Lennon, it just is what it is.
