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Don't overestimate yourself.

More or less other people here can guess what will happen with such takeovers.

Kohlberg is not buying Steinway for $438 million. They are valuing Steinway at $438 million, if everyone tenders their shares at $35/share. How much of its own and its investors money Kohlberg is putting into Steinway isn't clear, but in deals of this nature, it could be $100 million or less. The rest of the $438 million used to purchase the open market shares is being financed by debt, and the debt isn't being taken on by the investors. The debt is taken on by Steinway, and collateralized with every asset the firm has. Nor will the interest rate be cheap, because now Steinway will be valued as a junk debt company by the banks doing the financing.

Without debt these deals don't work for private equity investors. These investors are seeking returns beyond what they can get in bonds or most stocks. When Steinway is cleaned up and fluffed up for its next buyer(s), the private equity investors consider a 20% p.a. return on their investment to be respectable. Most often, the company being bought and sold, when all is said and done, is left with the debt, and there are well known instances where the company lasts only a few years longer before collapsing under the burden of the debt. Kohlberg, fortunately, is not as rapacious as some private equity firms. They tend to keep debt levels minimal, they like to keep existing management involved, and they aren't the sort of firm to declare a fat dividend for themselves in the first six months of ownership (and that dividend can only come from the proceeds of further debt, since these companies are not that profitable so quickly).

A lot depends therefore on how much Kohlberg is putting in of its own money vs. how much debt it is loading on to Steinway's financial burdens. It also matters greatly what sort of return on investment Kohlberg is aiming for. The days of 20% annual returns on private equity deals seem increasingly part of the go-go 90s and 00s, never to return in our lifetime. A more suitable return is 10% or under, and if an investor wants real safety in something like Treasury securities, it is 3% or under.

One other strange thing about this deal is, why now? If Steinway is so attractive as a private equity buyout, it would have been vastly more attractive three years ago when the stock was 70% cheaper. It's very easy to see why Steinway management climbed aboard this deal so fast. After watching their stock recover 70% in the market, for someone to come along and pay a 15% premium on top of that is almost too good to be true.

To clarify, $438 million would be paid out to acquire all the shares if the deal goes through?

And I am shocked to see that there are some people who view the CBS buyout as such a negative thing. Without that buyout it is a near certainty that there would no longer be a Steinway company. Under private ownership both the factory and the product had been allowed to deteriorate almost to the point of no return when CBS came along and started pouring money into the place. To be sure, management could have been more stable and, perhaps, more enlightened during those years but CBS did salvage the company from oblivion and at least started it on the path back from the abyss.

ddf

It sounds as if there have been incremental improvements to the corporate structure and the business ever since the family gave up control, which sounds logical. It may have been too much for one owner to do all at once, but it seems it is a continuing process.

Alas, I cannot claim credit for such an achievement. It may be that the market is not kind to art, but Mr Kohlberg himself and his former partner Mr Kravis and others in their business have voluntarily done a great deal for art in NY and elsewhere over the years. Just sayin'.

As to piano manufacture, it is precisely the market that has given us the present array of choices of pianos at all levels. Are the choices all that unsatisfactory?

If you want a really inexpensive piano of a certain type and size, you can buy a Young Chang or the like.

If you want a somewhat more refined piano at a very competitive price, you can step up to some of the more established Chinese brands.

Then you have Kawai and Yamaha.

Or Mason or Estonia or August Forster or Charles Walter or Schimmel.

Steinway lovers can get Steinways out of either NY or Hamburg (and whatever happens to the company post-acquisition, there will still be plenty of pre-2014 Steinways on the market for generations to come).

And the market is supplying no scarcity of top-tier pianos, either. None of the other makers has the Steinway marketing machine, but a pianist who can't find a satisfactory instrument among the Bluthners, Sauters, Shigerus, Grotrians, Bosendorfers, Faziolis, Steingraebers, and others in that tier just isn't trying very hard.

It's certainly possible that the buyers in the Kohlberg deal may have some strategy for making money off the Steinway name that entails degradation of piano output. To someone who knows more about business than music, it's hard to see that happening.

The Steinway mark is the crown jewel in the Steinway empire. It would be economically irrational to devalue that mark. The mark is inextricably linked to the perceived quality of Steinway pianos. Ruin the quality, and you ruin the value of the mark, and with it the key value element in the deal. Believe me, Kohlberg is not buying Steinway so that it can sell spools of piano wire on E-Bay.

I agree that the Kohlberg folks want to profit from this acquisition. I cannot see any way they would have a plan to do so that would involve the production of pianos below the current Steinway standard.

But if they do, the acquisition will fail; there will still be many, many other great piano choices (thanks to the market); and someone else will step in to acquire the Steinway piano line at a bargain price and capitalize on that maker's name and history. In fact, I speculate that Steve Cohen's secret strategy may be precisely that.

Thinking therein lies the rationale for the whole thing.

IMHO "next buyer" is the one to watch out for.

Guarantee several ones out there are watching already..

Norbert

Hello Ed,

I am not a mind-reader so I have no idea what the new owners actually think they are up to, but I am curious about the business end of pricing. For instance, if someone is able to put out $85,000 for a Steinway B (more or less) are they then willing to put up $95,000 or $110,000? What I am referring to is a certain income level. Someone whose annual income is $60,000 will naturally be constricted in their choices, unlike someone who makes ten times that amount. So what is the financial profile of the average consumer of a new Steinway? Perhaps only Steinway knows (if they have been doing their market research).

And I bring that up only to circle around to your point about improving Steinway to its former status. The extra cost this may incur would be forwarded to the consumer, but I would think that someone who can afford a Steinway B or D off the showroom floor is not doing so to save pennies because a Bosendorfer is over their budget.

I had a student who, without consulting me, walked into Steinway during his lunch hour and bought a glossy white John Lennon Special Edition piano for over $100,000. I almost fainted when he told me. LOL. But some people have that spending power and the difference of, say, $20,000, means little or nothing to them.

I had several other students who bought new Steinways not because they really new what they were getting in terms of tone and quality (they were not advanced students) but because of the 'safety' of the Steinway label. Rather like buying a Bentley, one presumes it is well made.

As for the pricing of uprights, well, that is a completely different matter. And as I indicated in a previous post, I think Steinway needs to get a reality-check on the competition if they want to compete effectively.

Hi Del,

You are are absolutely right about that. I don't mean to criticize CBS for their business acumen, or the major role they played in resurrecting the brand. Because they did play such a role.

But you can't pretend, and I mean this with all due respect to your experience and deep understanding in this area, that there wasn't a noticeable falling off in quality of the product from almost the end of WWII to the end of the 1980s. That's a long time to make and sell not-so-great pianos at top prices. Since it was bought back, the output has been uneven and not always comparable with 1- their best products during their best years, or 2- the best products of contemporary top-tier makers.

Can't disagree with anything ClsscLib said. The new owners are going to have to find the right balance between making operations more efficient, and not damaging the brand. My only concern is that given the short term nature of these deals, they may not notice any significant damage until well after they have sold their investment and reaped their profits.

On the question of the luxury market, a lot of high end piano manufacturers noticed a significant fall-off in business when the recession hit in 2008. This was predictable because many people were buying luxury goods using home equity lines of credit as a means of financing the purchase. It was easy, and it was deceptive, because banks marketed the loans as "taking out your hard earned cash from your house". Once the spigot dried up, all elements of the housing market, including pianos, were hurt. This was a US phenomenon, but the housing bubble reached many other countries, including China. A lot of dealers said at least 30% of their business was lost when the bubble burst.

That leaves just the traditional buyers: the occasional wealthy person, institutions like churches, and music lovers. This last group does not consist of wealthy people. Music lovers will make real financial sacrifices and go into debt purposely to get the piano they love. I'm sure Steinway, who make 4000 pianos a year at different price levels, is well aware of this group of stable customers. They just have to make the Kohlberg people aware of them as well.

Hi Class,

(can I write it that way?)

"As to piano manufacture, it is precisely the market that has given us the present array of choices of pianos at all levels. Are the choices all that unsatisfactory?"

Not at all! As a matter of fact, the consumer has more choices for pianos at every range of quality and performance then they've ever had. It is easier to buy a well-made, quality piano now than it has been since before WWII.

"The Steinway mark is the crown jewel in the Steinway empire. It would be economically irrational to devalue that mark. The mark is inextricably linked to the perceived quality of Steinway pianos. Ruin the quality, and you ruin the value of the mark, and with it the key value element in the deal. Believe me, Kohlberg is not buying Steinway so that it can sell spools of piano wire on E-Bay."

You are absolutely right, and I agree 100% with that. But having said that, we must both concede that everybody has different ideas about how to achieve such a goal, sort of like what Numerian said. An investment banker or accountant will not see the issue the same way a piano technician does. As I just posted a second ago, a lack of coherent direction and some rather ham-handed ideas gave us 30 years of not-so-good quality S&Ss. Fortunately for them, the S&S marketing machine overcame whatever perceptions the public might have developed to 1- maintain prices and sales during this period, and 2- successfully promote the brand image and mystique. It's rather ominous to me how the right marketing campaign can often convince the public to buy anything of poor quality, not just pianos.

Are we going to see this happen again? That's my concern.

I've certainly been called by worse names than that! Even "evil genius" once. They got that half right.

After reading most comments on this thread I can say: I don't really have an opinion about the sale.
I know that Bösendorfer has been bought by Yamaha, and Seiler by Samick. It didn't hurt the top tier companies; but then, Yamaha and Samick are music instrument manufacturers. Kohlberg isn't.

My guess for the best-case scenario for Steinway would be: Kohlberg changes things in management, and somehow manages to restructure Steinway so that they still make good pianos, but with less cost; and the value of the company goes up. Then, after a few years, Kohlberg sells Steinway to a huge music instruments manufacturer, and everybody is happy.
I can even think of two logical choices for the next-to-next owner of Steinway: Kawai or Pearl River. No need to leave Boston or Essex to come to New York or Hamburg.

Could they build Boston's competitively in a new plant in the U.S. and market it successfully? Could that be a stepping stone to moving Steinway's factory and selling the Astoria property? Would that satisfy a private equity firm's goals, or a piano industry investor's?


[The questions above are based solely on conjecture.]

Do you believe this applies to Steinway?

It would be interesting to know what role the present owner of 40% 0f the Steinway stock, (I believe his name is Mr. Lee, the owner of Samick pianos) is slated to play with Steinway or Kohlberg.

At least someone is asking a pertinent question.

It leads to another question: Could they realistically do all of this without Chairman Lee's support?

If he really owns 40% of the stock, it would be almost impossible without his support -- and almost inconceivable that the Board would have recommended the deal.

Well, only one of them will have the money to do so...

[not a particular pleasant thought on July 4th...]

Norbert

Apologies if this has already been posted:

http://www.marketwatch.com/story/th...MWCommentaryandBlogs&mod=marketwatch