The pressure on custom home-audio suppliers to consolidate is growing and putting more pressure on custom installers to merge, according to an investment banking company.
About 30 to 40 custom home-audio suppliers with revenues of $20 million to $50 million are "most ripe for acquisition," said Eduard Bagdasarian, a managing director of Barrington Associates, one of the largest U.S.-based investment banking firms. That's out of about 150 custom home-audio suppliers whose primary focus is on architectural speakers or audio electronics intended for custom installation, he said.
The majority of the 150 manufacturers serving the custom home-audio market serve that channel exclusively, Bagdasarian noted, but the 150 also includes about 20 to 30 broad-line manufacturers that offer specialized products for the custom home-audio market. The largest 50, he noted, account for the majority of custom home-audio sales.
Top specialty custom-audio brands include Niles with estimated annual sales of $50 million, SpeakerCraft with $35 million, Sonance with $35 million, Russound with $20 million, and Elan with $20 million, Bagdasarian said. Home speaker suppliers that have diversified into custom include Boston Acoustics with $81 million in revenue, Polk with $75 million, and Klipsch with $100 million.
Barrington engineered SpeakerCrafts' sale this year to Linear Corp., which in the past few years acquired ELAN Home Systems, Xantech, ChannelPlus, and OpenHouse.
Consolidation in the custom industry "is in its infancy," Bagdasarian contended. When custom companies achieve $20 million-$50 million in annual revenue, he said, they must make two choices: "Continue to make money at that plateau or consolidate." Getting to the next level, he said, "requires different management sophistication, resources and a broadened product portfolio."
A broader product selection is necessary to break through the revenue ceiling, he said, because the alternative would be to expand distribution, which he described as a "difficult and expensive" option. Acquisition enables suppliers to "offer a tiered brand portfolio to meet all of an installer's needs," Bagdasarian continued. These suppliers can "sell different brands with distinct identities to their dealer base."
Mergers and acquisitions can also help suppliers leverage their own resources to reduce the cost of goods, he continued. "Small guys can't source as cost effectively," he said.
A broad product line will also enable suppliers to pursue national programs with major home builders, Bagdasarian said. "That's not been done on a large scale."
"One reason to become larger is to gain credibility to pitch national home builders," he said. "Suppliers will partner with custom installers to pitch home builders nationally or regionally on a turnkey basis."
The impact of supplier consolidations will filter down to the installer level in another way, he added. "It will put pressure on installers to consolidate." Larger suppliers, he said, prefer to deal with "fewer but bigger installers" and will drop smaller installers to reduce the challenges associated with handling multiple smaller accounts. In addition, he continued, "you can get only so many installers before distribution begins to compete with each other."
"The largest installers will carry the largest brands, and lower volume installers will sift through niche-brand offerings," including audiophile brands, he said.
Currently, more than 20,000 installers serve the home audio market, he said.
Although some custom suppliers might merge, others could be targets of acquisition by high-volume consumer electronics companies wanting to buy their way into the market because of its growth, he noted. "Before, the market was too small to interest them, but with the market's growth, it's getting attention from the big players."
"A big CE company will buy a one-stop custom supplier or a stable of suppliers to help them sell their big-screen TVs," he continued.
Although $20 million-$50 million companies are "most ripe for acquisition," Bagdasarian noted, smaller companies with annual revenues of $5 million to $10 million could be acquisition targets because of the technology they offer.
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