The consumer electronics (CE) industry continues to undergo significant change and foster innovation despite a weak economic backdrop and lingering high unemployment. In 2012, the industry continued to attract a significant amount of capital, ranging from early-stage VC to private equity, and strategic merger and acquisition activity. A few sectors dominated the CE M&A landscape in 2012: audio technologies, mobile telecommunications and content, and home automation, as companies and investors poured capital into intellectual property-rich companies that offered technological differentiation or held valuable market share.
Indeed, the capital and merger activity in the CE industry in 2012 was economic Darwinism at its best: emerging companies with innovative solutions and technologies attracted capital and strategic acquirer interest. Meanwhile, commoditized sectors that are largely price-driven suffered from a challenged consumer environment and continued to consolidate or witness casualties, retail continued to be challenged by the online world, and all things Apple continued to exert strong consumer gravitational pull.
In the audio technology space, well-capitalized industry players continue to acquire technology to gain a competitive advantage in high-growth segments. In May 2012, Apple acquired Italy’s Redmatica Srl
, a producer of music editing software for iPhone, iPad and Mac devices. Also, Gibson Guitar continued to transform itself by acquiring a 17 percent stake in Onkyo Japan
(and a majority interest in Onkyo USA) in order to broaden its product line and bolster its research and development capabilities, fresh off its acquisition of pro-audio product maker The Stanton Group in late 2011. Similarly, DTS Inc. acquired audio technology company SRS Laboratories in a $148 million transaction
to expand its reach into the fast-growing streaming content and mobile application markets.
Conversely, HTC Corp. and Avid Technologies, faced with challenges in their core businesses, made strategic decisions to divest premium assets, with HTC selling back a 25 percent stake in Beats Electronics (HTC retained 25 percent ownership) and Pro-Tools maker Avid exiting the consumer segment by divesting music technology hardware and software company M-Audio to inMusic.
While M&A activity in the high-end home theater market was slow in 2012 following several years of consolidation, one notable transaction involved the sale of the iconic McIntosh Laboratory
by D&M Holdings to FineSounds SpA, based in Milan. FineSounds, which is financially backed by an Italian private equity firm, adds McIntosh to its portfolio of audio brands which includes Sonus Faber, Audio Research and Sumiko, among others.
Venture capitalists and private equity funds seized the opportunity to invest in the audio technology sector in 2012. Notable transactions included wireless audio system maker Sonos raising $135 million
from an investor group led by KKR, Redpoint Ventures and Elevation Partners, Jawbone
maker AliphCom raising roughly $40 million and gaming headphone manufacturer Steel Series completing a recapitalization with private equity firm Catterton Partners.
Transaction activity was particularly robust in the mobile segment throughout 2012, spanning the wireless ecosystem from carriers to devices to content and application delivery. Industry heavyweights jockeyed for position while VC investors and other acquirors focused on start-ups and fast growing companies.
The industry’s largest announced deal of 2012 was Japan’s SoftBank’s acquisition of a 70 percent share of Sprint Nextel
for $20 billion. This transaction provides SoftBank with an attractive portfolio of airwave spectrum assets and positions Sprint to better compete with AT&T and Verizon. Google, in a move to secure a trove of IP assets relevant to its Android mobile operating system, acquired Motorola Mobility for $12.4 billion. Facing a legal battle with Apple over technologies used in the iPhone and iPad, Samsung acquired CSR’s technology and handset division which gave the Korean giant control of the U.K. chipmaker’s patents in Wi-Fi and Bluetooth connectivity components.
In another unique technology- driven transaction, Apple acquired mobile and network security leader AuthenTec
for $356 million (interestingly, one of Apple’s largest transactions ever), providing Apple with fingerprint detection technology which analysts believe could be a foundational technology for Apple’s Passbook mobile e-wallet application. Also, mobile power product developer Lilliputian Systems raised $60 million from a consortium of investors to commercialize its USB Mobile Power System which is a lightweight portable system for powering and charging mobile phones and other CE devices.
Signaling a wave of emerging features for tablets and smartphones, numerous technologies attracted investment capital in 2012 including mobile payments and security, face recognition software, GPS and navigation technologies and mobile content.
The home automation sector continues to grow as traditional security, cable and telecommunications companies integrate home automation technologies and manufacturers seek ways to round out their product lines.
In one of the largest private equity transactions in the CE sector in 2012, The Blackstone Group acquired home security and home automation services company Vivint Inc.
in a $2 billion transaction. Following the acquisition, Vivint, which already offered an all-in-one security, energy and home management technology suite, launched a $75 million fund to offer residential solar financing and installation.
Two notable transactions reflected home technology companies filling gaps in their capabilities. First, lighting giant Leviton Manufacturing acquired Home Automation Inc
.—a manufacturer of affordable security/home automation solutions—for an undisclosed amount. Reflecting a similar strategy, Savant—known best for its Apple-based home automation systems—acquired lighting control company Lite- Touch from Nortek
, providing it with a “missing piece” as well as opening access to new distribution channels.
What to Watch In 2013
We expect a continuation in 2013 of the CE trends seen in 2012 and will follow new technologies like 3D printing, next-generation televisions and the rising importance of audio in entertainment. We see further consolidation in industries such as telecommunications and AV retailing where scale is critical and competition is fierce. In fact, the industry’s biggest retailer is in play. Former Best Buy CEO Richard Schulze hopes to take the retail giant private in what may be a roughly $9 billion transaction. Stay tuned to see how these trends will develop.
Gary Rabishaw is managing director at Intrepid Investment Bankers LLC