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SurfGuitar101 Forums » The Shallow End »

Permalink Fender withdraws IPO

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http://money.msn.com/top-stocks/post.aspx?post=e08b9484-f13a-4455-b61c-22a74862b9e7

Fender withdraws IPO

The guitar maker takes a look at the market and decides against going public.

By Benzinga 6 hours ago

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By Brett Callwood, Benzinga Staff Writer

Fender Musical Instruments announced Friday that it would be withdrawing its planned initial public offering (IPO) based on current market conditions.

"Current market conditions and concerns about economic conditions in Europe do not support completing an initial public offering at what we believe to be an appropriate valuation at this time," said Larry E. Thomas, Fender's Chief Executive Officer, in a statement.

Fender, based in Scottsdale, Ariz., was founded by Leo Fender in Fullerton, California, back in 1946. The company went on to create the Stratocaster and Telecaster guitars, instruments that would famously be played by the likes of Jimi Hendrix, Bob Dylan, Deep Purple's Ritchie Blackmore, Buddy Guy, Keith Richards, Bruce Springsteen, Eric Clapton and David Gilmour, among many others.

In March, Benzinga reported that Fender was looking to raise $200 million through the filing.

The IPO certainly makes for fascinating reading, with Fender describing itself as a "leading, global musical instruments company whose portfolio of renowned, music lifestyle brands brings the passion of music to life. Since the founding of our predecessor company by Leo Fender in 1946, we have built a comprehensive portfolio of brands led by the iconic Fender brand and other renowned brands such as Squier, Jackson, Guild, Ovation and Latin Percussion, which we own, and Gretsch, EVH (Eddie Van Halen) and Takamine, for which we are the licensee."

Only Thursday, Seeking Alpha published a preview to Fender's IPO and stated that much of Fender's appeal comes from the quality of the brand and the loyalty of its fans. Fender is the number one company in terms of market share in its market, and some people will buy Fender stock just to own a small part of a beloved company.

According to the IPO, "the underwriters have reserved for sale, at the initial public offering price, up to approximately 535,714 shares of FNDR common stock being offered for sale to certain of our suppliers, business partners, customers, distributors, holders of more than 5% of our capital stock and artists with whom FNDR has relationships, as well as some of FNDR's officers, directors and employees and certain of their family members."

After going public, the company was hoping to have roughly 26.4 million shares outstanding. This would have valued Fender at about $395 million, but that all goes out of the window now.

It is a smart move by Fender, which may be thinking that it has lasted over half a century as a private company and for the time being should stay that way. So why dive into the public arena when the economy is so rocky? The decision to wait seems a sound one.

It's safer to remain private

It probably does make sense for them to stay private.

Their business strategy would probably come under some pressure from the investment community if they were public.

The path to generate sustainable high return on investment is through one of three generic competitive strategies:

  1. Build a powerful brand (the strongest strategy)

  2. Dominate a niche

  3. Be the low cost producer (the least sustainable strategy)

The key is to pick one strategy and execute it well.

Fender appears to be trying to execute two strategies: building a high end brand and at the same time being the mass market leader (low cost producer).

It almost never works to mix two strategies (if the goal is high ROIC).

To put this in real world terms, consider how much grief the Fender Custom Shop gets from the average musician about the prices of the CS guitars.

It's interesting because Collings doesn't get the same criticism. People understand that Collings is a high end boutique that makes excellent and somewhat expensive guitars. Their strategy is pure: build a quality brand and price it accordingly.

Fender receives complaints about pricing because they are not a pure high end guitar builder.

Flip that around and think about Fender amps. While the vintage reissue amps do get some appreciation, many guitarists prefer Fender hand build amps from the '60s and '70s. Fender's strategy in amps is to use high volume factory automation techniques to generate efficiencies and economies of scale. This allows them to price amps for the mass market.

The result has been a horde of boutique builders that basically aim to build amps the way that Fender used to. As this has developed over time, you see builders like Carr and others developing their own unique designs that owe a heritage to Fender historic circuits.

In sum, Fender's mass market consumer cannot afford Custom Shop guitars. And Fender's affluent Custom Shop customer generally avoids their amps and buys boutiques.

It's not a consistent strategy. Fender might be better off to spin the Custom Shop into its own separate private entity that focuses on limited runs. The factory oriented piece could be ramped to enough volume to go public separately.

Anyways, just some thoughts.

Paul

As an Austinite for the past 10+ years, I've been fortunate to tour Collings factory (I think they still run every Friday) and play a few of their guitars (including a SoCo with a Bigsby... That was fun). Very good sounding, well-made guitars, and of course, a private company. It was actually not entirely unlike a smaller scale & perhaps somewhat more craft-oriented scene, compared to the Fender Corona tour (SG101 2011 shout out).

http://surfguitar101.com/forums/topic/17711/

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Last edited: Jul 22, 2012 12:33:05

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