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BLOG POST: Gibson's Race to the Bottom to Get to the Top

  • Gibson declares bankruptcy.  Wow.  This is enough to send shivers up your spine if you’re a guitar lover as I am.  Once you shake it off and look at the facts of the filing though there’s many reasons to be optimistic that this has the potential to be another watershed moment in the annals of guitar history.

    First, here’s the real meat of yesterday’s Chapter 11 press release:

    Gibson reached a “restructuring support agreement” with senior secured noteholders and principal shareholders — Chairman and CEO Henry Juszkiewicz and President David Berryman — “that clears a pathway for the continued financing and operations of the musical instruments business as well as a change of control in favor of those noteholders.”

    As background, for the latter part of the 60’s, 70’s and early 80’s, Norlin Music, an Ecuadoran conglomerate, owned Gibson Guitars. Much like CBS did to Fender throughout this period, Norlin did to Gibson. Gibson was a cash cow to be leveraged as a resource to fund more important business ventures. By the mid-80’s, Gibson Guitars Corporation was in complete disrepair. Norlin Music had extracted everything they could from it and now wanted out. Suffering from nearly two decades of absentee corporate management, Gibson needed a savior.  By 1986, Gibson manufactured only one guitar model.  Hard to believe.  The company was dying on the vine.  Much like Dan Smith was for Fender, Henry Juszkiewicz and David Berryman were for Gibson; tasked with restoring a downtrodden guitar brand back to its former glory.

    Henry and David set to work. Along with an investment group backing them, Henry Juszkiewicz and David H. Berryman acquired Gibson Guitar Corporation. Henry was the rock star guitar player and chief strategist/salesperson; David, the behind the scenes finance/ops guy.  Henry became CEO; Barry, president. Over the next 5 years Henry and David did yeoman’s work to save Gibson from itself bringing the guitar brand back to prominence. Henry and David made it a priority to refocus the company on making great guitars.

    In a 1994 interview with David Bryan of the New York Times, Henry and David said of the 1986 acquisition and turnaround, their immediate focus was on “improved quality, an emphasis on popular, classic guitars rather than constant innovation, and restored ties to musicians and retailers.”  And they did it well.

    Apart from the subsidiary Baldwin piano brand, Gibson operated very much as a singularly-focused guitar maker.  They restored the reputation and mystique that Gibson guitars had briefly lost in the 70's and early 80's – at least new Gibson guitars as their used ones were hot commodities!  Thank you, Jimmy Page among others.

    Gibson began to thrive again making excellent guitars through the 90’s and into the 2000’s.  In 2010 though something began to change.  Not anything terrible.  Henry began to think diversification.  Gibson was arguably too enmeshed in guitars and the relative ebbs-and-flows that come with it.  Meanwhile, Henry wanted Gibson to evolve into a diversified company to better position it given their heavy reliance on guitar sales.  Not a bad idea really.  Let me explain.  Henry’s mistake in creating this life style brand (as he awkwardly referred to it) isn’t because it’s a stupid idea.  I don’t believe so. The problem is that he never checked in with his core audience to get their feedback and explained what he really meant by this.  Henry failed to appreciate his guitar community's concerns that the guitar brand will be both diluted and under emphasized if competing businesses are brought under the Gibson umbrella.  Henry didn't bother to do a road show with retailers, wholesalers, distributors and consumers to make sure they understood his plans.  This communication to the "community" is as important as the business strategy itself.  Knowledge is power.  Not knowing why Gibson's embarking on an acquisition spree of companies that aren’t guitar gear related can get the chattering class, well, chattering. And it did.  Gibson began acquiring electronics companies that make headphones, speakers and turntables. These acquisitions would provide the product mix and revenue balance that would allow Gibson to more easily absorb the ups-and-downs of the guitar business.  In a matter of a few short years, Gibson went on a buying spree snapping up Phillips Audio, Onkyo, TEAC Corporation, Cerwin Vega and Stanton, professional audio equipment from KRK Systems, even pianos from their wholly owned subsidiary Baldwin Piano, and music software from Cakewalk.

    According to Nate Rau from USA Today, Gibson brought in $300 million in total sales and showed an earnings-before-taxes-and-interest margin of 12.9 percent in 2010.  But, by 2015, the company was doing $2.1 billion in annual revenue. Profit margin tanked to 4 percent. Gibson Brands was generating an awful lot of revenue but they were operationally inefficient. 12.9% profit margin isn't that great either, but 4% is troubling, especially if you don't have a lot of cash on hand which Gibson clearly didn't.  In the end, however sound your business strategy is, if the acquisitions you’ve effectuated, have you so constricted that you can’t properly invest in the business itself because of the debt burden, the acquisitions you made and the business strategy you’re executing frankly suck.

    The company was improving but Gibson eventually ran out of time. The bankers could wait no longer.  Rumored to owe more than $500 million in debt payments, Gibson had to file Chapter 11.  No other choice.  It’s a bit anticlimactic because they’re still working there right now, only change is afoot as the creditors will soon make changes to the management team and determine what assets stay and what go.  Look for TEAC and Onkyo to be the first to go.

    Obviously, servicing all that debt while trying to integrate the newly acquired businesses was the problem.  There’s only so much money to go around and, if you know anything about the guitar business, it’s not the most liquid business.  This matters when you’re servicing half a billion dollars in debt. 

    My question is, where was Gibson’s CFO and investment bankers when it came time to evaluate these acquisitions?  Was Henry’s influence too strong to stop him from overextending the company?  How couldn't they have foreseen this coming? 

    Either way, it's impressive that Gibson guitars didn't suffer during this 2010-2017 period.  I’m sure most will disagree with me.  Sure there's always anecdotes where a new guitar arrived from the factory with issues - every guitar maker runs into these problems from time to time - but, overall, the Les Paul, Explorer, ES-335, Firebird, J45, SJ-200, etc. never deteriorated in quality.  Henry should get some credit for insulating the guitar brand from potential neglect while the company struggled to get its sea legs. 

    I find it hard to believe that Henry and David would sacrifice the quality of their guitars knowing what they went thru in the last 80’s to get Gibson back on track.  Maybe I’m wrong.  Guitars are why they came to Gibson in the first place.  Plus, Henry and David already made their money.  Despite all its debt, Gibson is a three billion dollar business.  You don’t think they’ve extracted enough money already to sail the seven seas yet?  Why then would they sacrifice their reputations to shortcut their beloved Gibbys. If they kept their egos in check - open for debate - I don’t think Gibson guitars were ever short-changed. Maybe the price points for each guitar increased an unhealthy amount because Gibson needed to milk the business a little more than usual, but that’s a different issue entirely. Just my opinion.

    How IS the Gibson guitar business doing?

    According to the bankruptcy filings, Gibson’s guitar sales rose 10.5 percent from $110 million (January 2017) to $122 million (January 2018) during the same 12-month period.  Also, Gibson has 22 percent market share in electric guitars; 40 percent for guitars selling for more than $2,000.  Gibson’s guitar business is just fine.  They’re here to stay.

    Something I thought was interesting given everything that's transpired over the last 24 hours is what Henry said to close out that 1994 NYT interview regarding taking Gibson public.  It's a strange foreshadowing:

    "On one hand [taking Gibson public] appealing because it would be a quick way to do it," he said. "But then I don't know if I could operate the way I want having to answer to other people."

    To close, it will be interesting to see if this becomes another watershed moment in guitar history as is 1949, 1984 and 1986.  In 1949, Ted McCarty took over Gibson and quickly brought us almost all of the iconic electric guitars that exist within Gibson to this day. 1984 is when Dan Smith took over Fender Instrument Corporation from CBS to remake the company all over again as a guitar-first business; CBS had neglected Fender (1964-1984) in much the same way Norlin did to Gibson until Henry and David took it over in 1986 bringing it back to the glory days of the 50’s and 60’s.

    Time will tell.  Hope you enjoyed this.  I did writing it!

    Cheers,

    Tim

     

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