Starkey Upheaval – Could This Lead to a Potential Sale?

Editor’s Note: Today’s post comes from HHTM’s Editor-In-Chief, Wayne Staab, Ph.D., providing our readers with an interesting analysis of just who might be interested in Starkey Hearing Technologies in the event that the company becomes available for sale. 

Buy or Sell?With the recent upheaval at Starkey Hearing Technologies, speculation has arisen about the climate for a potential sale.  The reason for the speculation lies with the founder, Bill Austin, and his age (73). Although he has been reported to decline such a possibility, the current situation at the very least increases the chances that he might entertain discussions according to Lisa Bedell Clive, a Bernstein Analyst.{{1}}[[1]]According to Lisa Bedell Clive, Bernstein Analyst, in a September 22, 2015 Report[[1]]

If a sale were to occur, there are a number of scenarios that could be envisioned, and would impact the hearing aid industry dramatically.  While no knowledge of Starkey’s future plans is available, reports help fuel the speculation.

The Cause

Reports of the unexpected management turnover at Starkey have been reported on this site and in other media. Although rumors abound as to the reason for this major change, this post is more interested in looking forward and to speculate as to what may lie ahead, and if a sale becomes a possibility, who might the players be and how such a purchase might play out among existing competition, or a new entry.

Setting the Stage

Starkey is the 5th largest manufacturer of hearing aids globally, headquartered in Eden Prairie, Minnesota. Founded in 1967, Starkey has in excess of 3,600 employees in 21 facilities and doing business in more then 100 markets worldwide.

Starkey Hearing Technologies develops, manufactures, and distributes hearing aids via four distinct brands – Audibel®, NuEar®, MicroTech™, and its original brand, Starkey.

Who Could Be Interested?

Most certainly, all of the major hearing aid manufacturers (the remaining of the Big Six – William Demant, GN Store Nord, Sonova, Sivantos, and Widex) would be expected to take a look.  Any of their purchase plans would have to be examined in light of potential anti-trust issues here in the U.S., or evaluated in regard to required outside funding, assuming that sufficient cash is most likely not available.

Additionally, a Starkey acquisition could be of interest to a company stated to be looking to enter the hearing aid space – Samsung.

Samsung logoSamsung is aiming to develop and unveil their hearing aid at the beginning of next year (2016), when it reveals Samsung Electronics’ next strategic smartphone model, the “Galaxy S7.”  This seems to be part of a plan to use the hearing aid business as a stepping stone to tap into “Mobile Health Care.”

In April of 2015, the Korean press reported that Samsung had a potential interest in moving into the hearing aid market as part of their efforts to address aging populations, and in line with their pronouncements they have made in the past about medical devices as one of their five growth pillars for the future.

This expression followed a series of pronouncements by senior members of the company since 2013, although little progress has been made. Samsung’s reported purchase of $14 million U.S. of hearing aid chips has yet to provide evidence of a developed hearing aid.

Aside from Samsung, why not Johnson & Johnson, or Proctor & Gamble, both of which have been following the hearing aid industry with cautious interest for a number of years?  Or, what about Cochlear, who was reported to offer $2.8 billion Euro for Siemens in 2010?  However, analysts’ reports at the time suggesting that Cochlear focus on selling the world’s best cochlear implant rather than spending billions on a hearing aid company may have Cochlear re-evaluating such a strategy.

There could certainly be other interested parties as well, but most likely, interest would come from companies where such a purchase would impact their financials in only a small way.  Certainly, Samsung would fit this bill.  And, most likely, interest from any new market entrant would be driven by the impact on sales to the aging population.  A number of other companies could be suggested, but are more likely to be excluded if the aging population is not a part of their marketing plans.  Regardless, any new entrant would have a negative impact on the major hearing aid industry manufacturers.

Why Might a Competitor Consider a Starkey Purchase?

This question was posed and expanded upon by Bernstein in a Proprietary Investor Report published September 22, 2015.  The primary reason is that it could be the easiest, least expensive, and fastest way to grow business.

Building organically can be a lengthy process. On the other hand, acquiring a competitor might provide a more efficient way to build revenues, profit, and market share.  Certainly, M&A (Mergers and Acquisitions) have been the primary growth strategy among most of the Big Six (Widex excluded, without further knowledge).  Some additional reasons to purchase include:

  • Geographical expansion, especially if it is in an area, or to a market, where share is weak and Starkey is strong, such as in the U.S.
  • Starkey might have assets of interest. Think of the patented Halo, for example, or of a stable of talented employees, solid client lists, equipment, technology, etc.
  • Reduce costs and increase profits by synergies of combined products.
  • Protection against a competitor from acquiring Starkey and using the purchase against them.

Certainly, Starkey’s domestic share of the total U.S. market (independent dispenser sales, VA, and Audibel) would be the most likely attraction. Spinning off other duplicate activities could be expected to manage a cash purchase.

With these issues in mind, the following provides very brief, and speculated scenarios (from Bernstein), related to any hypothetical purchase, discounting any sell-offs of Starkey, or part of a buyer’s own business, to achieve the purchase.  Of course, any of the other imagined players would be interested in purchasing any divested assets, reducing potential anti-trust exposure.

Sonova

Sonova logoA Starkey purchase would solidly confirm their #1 position in the industry in hearing aid sales, and overall sales.  As the largest hearing aid company, they would be expected to have the least problem with the costs associated with a purchase.

William Demant

William Demant logoStarkey’s Audibel retail network could be particularly attractive, in light of Demant’s big push into own-retail stores.  A purchase would be consistent with their past M&A activities.

GN Store Nord

GN logoGN Retail stores (Beltone), added to Starkey’s Audibel stores, would provide a nice expanded foothold in the US for GN retail sales, but GN seems to have cooled off to M&As.

Widex

Widex logoAs is Starkey, Widex is privately held, and of about the same size.  A purchase could boost their standing, but what to do with the Audibel retail chain could present a dilemma.

Up to now, Widex seems to have not overtly pursued their own retail outlets in the U.S., suspected as a means of finding favor with the independent hearing aid retailer market (about 39% of the U.S. market).

Sivantos

SivantosA Samsung purchase would put Sivantos at the most risk of the Big Six because a relatively high percentage of their sales comes from the Asia-Pacific area, the same logical market that Samsung might likely occupy initially.

The existing debt from the Siemens purchase would seem to make Sivantos an unlikely purchaser.

Amplifon

Amplifon logoWhile not considered to be an active player in a purchase, Amplifon (or others, including the remaining Big Six) could become involved if certain Starkey divestments were to occur.

Estimated Selling Price

Bernstein’s estimation of the amount it might take to purchase Starkey is between $1.0 and $1.5 billion, U.S.  How any potential purchaser could manage these numbers, would be a determining factor.

For incumbent hearing aid manufacturers, such an acquisition would have a significant financial impact, and most would require some level of equity component.  But, for a large company, such as Samsung or others, this would be a drop in the bucket.

 

Summary

All this is speculation, based on a “what if” scenario.  But, what if………..?