It’s confirmed: Gibson is leaving Memphis

[ptchristopher3]

On the original subject, it seems very insightful as mentioned by others that Gibson paints themselves in a corner with the extreme number of models to keep the wheel of consumer (not necessarily, “player”) interest up.

I do not envy those trying to get this company back on some sort of reasonable track.

[Jim Soloway]

A few thoughts ...

First, and by far most important thought is that some folks here should dial things back significantly. Honestly, I'm more interested in the good will on this forum than I am with the profitability of Gibson under the ownership of Kohlberg, Kravis & Roberts.

Second, those who think the solution for Gibson is a major overhaul of their product line should probably remember that Gibson's core guitar business was actually profitable during the entire time of their demise under the previous ownership. The problem was that they had invested a huge amount of borrowed money into creating a life style brand that was essentially DOA. However profitable the guitar business was, it could not begin to make a dent in that debt. That debt is now gone by virtue of the bankruptcy process.

Third, KKR only had to put up about $75 million in operating cash to take over the company. They, like all the other creditors had to write off the previous debt, so if they can get back their $75 million plus a bit, then they've made money on the deal. I would assume (hope?) that accomplishing that goal is probably going to be a higher priority than the preserving the legacy of the historic brand ... as it should be.

I've been saying the same thing for a while now ... this is mostly a waiting game for anyone who actually cares about the outcome. This is not about KKR bringing in the bean counters to plot the course of the company ... KKR ARE THE BEAN COUNTERS. What's more, it's now their own beans being counted. They'll do the most in depth analysis possible of the company's past, present and future; weigh that in the context of the current market conditions and then decide the options that offer the combination of security and return that most appeals to them. That will, in turn, provide the map to which they set the course of the company.

[ptchristopher3]

A few thoughts ...

[...]

Second, those who think the solution for Gibson is a major overhaul of their product line should probably remember that Gibson's core guitar business was actually profitable during the entire time of their demise under the previous ownership. The problem was that they had invested a huge amount of borrowed money into creating a life style brand that was essentially DOA. However profitable the guitar business was, it could not begin to make a dent in that debt. That debt is now gone by virtue of the bankruptcy process.

[...]

This comes up repeatedly as a seemingly key point. But does this mean that an investor/owner is going to be satisfied with the presumed isolated and continuing profitability of a Gibson only-guitar company?

Was the previous borrowing and development of other products pure folly? Or is the stand alone guitar business not attractive to an investor vs. the promise of growth in other industries?

Will Gibson as a guitar-only “profitable” company with a decidedly limited outlook be an attractive investment long-term?

Maybe as a sleepy and stable part of a conglomerate? Why? The pressures of the business and the seeming decline in general of guitars make it possibly unattractive as a part of a conglomerate.

OR...

Maybe as the beloved project of true believers? You know, like “the” Heritage? Oh and wait, wasn’t rockin’ Henry a true musical believer? That sounds even less likely.

I definitely note the remarkable brand-loyalty and deeply (if oddly) personal excitement amongst some consumers. And I understand that the accounting and allocation of corporate costs made the guitar business “profitable” - which may even have been the actual case.

But I do not at all get the position that “wait Gibson guitars were profitable so all will be fine”.

It looks like a serious challenge, and will be interesting to follow.

[Jim Soloway]

This comes up repeatedly as a seemingly key point. But does this mean that an investor/owner is going to be satisfied with the presumed isolated and continuing profitability of a Gibson only-guitar company?

Was the previous borrowing and development of other products pure folly? Or is the stand alone guitar business not attractive to an investor vs. the promise of growth in other industries?

Will Gibson as a guitar-only “profitable” company with a decidedly limited outlook be an attractive investment long-term?

Maybe as a sleepy and stable part of a conglomerate? Why? The pressures of the business and the seeming decline in general of guitars make it possibly unattractive as a part of a conglomerate.

OR...

Maybe as the beloved project of true believers? You know, like “the” Heritage? Oh and wait, wasn’t rockin’ Henry a true musical believer? That sounds even less likely.

I definitely note the remarkable brand-loyalty and deeply (if oddly) personal excitement amongst some consumers. And I understand that the accounting and allocation of corporate costs made the guitar business “profitable” - which may even have been the actual case.

But I do not at all get the position that “wait Gibson guitars were profitable so all will be fine”.

It looks like a serious challenge, and will be interesting to follow.

I never said that "Gibson guitars were profitable so all will be fine". What I am saying is that the new owners bought the whole shooting match, debt free, for just putting up $75 million in operating capital so they have some breathing space to make money, even if it's just as a stand alone company. My personal opinion is that they will do what they can to stabilize the company, try to return to profitability and then sell the whole thing for closer to its perceived value to someone who is better positioned to make more of the brand than KKR.

[Wildcat]

Spot on Jim. This is a common occurrence today. You just need the cash (muscle) upfront to do this. Venture capitalism at its best.

Guitars, oil and gas wells, widgets.. All the same to them. Its purely business in nature with risk. But obviously they did their analytics as you mentioned.

Investors that are motivated by a undervalued asset, purchase at a good price, low to moderate risk, then turned around in a relatively short period of time for a nice profit.

I went to college for the wrong major. Geology, Rocks??????

My personal opinion is that they will do what they can to stabilize the company, try to return to profitability and then sell the whole thing for closer to its perceived value to someone who is better positioned to make more of the brand than KKR.

[ptchristopher3]

I never said that "Gibson guitars were profitable so all will be fine". What I am saying is that the new owners bought the whole shooting match, debt free, for just putting up $75 million in operating capital so they have some breathing space to make money, even if it's just as a stand alone company. My personal opinion is that they will do what they can to stabilize the company, try to return to profitability and then sell the whole thing for closer to its perceived value to someone who is better positioned to make more of the brand than KKR.

Yes, I definitely understand what you are saying, and I am sure this is a likely flow of events for the investors.

My comment remains that there may not be some intrinsically successful guitar-only package to be made from the company. And that the apparent profitability of the isolated guitar business, leaves the very strong possibility of some huge challenges.

Surely you and KKR are better able than I am to see a way for them to make money on this in some relatively near-term.

But I do wonder exactly who would find themselves capable and suited to the longer-term task.

[Woody Sound]

I wonder about starting up a company and it made 4 guitars only. These guitars would be exact replicas of Gibson. An ES175, Tal, L5 and Super 400. The L5 and Super could be acoustic or CES. Make these guitars only concentrate on them to make exact specs, no customer orders and just turn them out in top shape. Could this type of a guitar company survive?

I would argue for the ES-350 instead of the Tal. Jmo.

[Woody Sound]

Yeah, I remember when a person trying to make it could walk in and plunk down $1k and walk out with a new L5CES. A grand was a lot of samolians, but not so many that you couldn't save up summer job money and get an L5. It was a couple of Les Pauls...and many of us owned a couple of Les Pauls.

Good point. As a poor college student I was able to scratch together enough to buy a used Johnny Smith. I seriously doubt that could be done today. In fact, it's hard to do so now as a comfortable "responsible" adult!

[skiboyny]

I'm just glad that Gibson is continuing. I wouldn't hold my breath thinking that they will make big quality improvements or lower price moves. Gibson has probably the best brand recognition there is, coupled with a very revered and recognizable sound. Their recipe for manufacturing guitars really hasn't changed much through the years. They have always made some stellar instruments along with some dogs and they all go out the same door shamelessly. I believe for many reasons that will continue. It's a time proven business model and it still works.

[Jim Soloway]

Yes, I definitely understand what you are saying, and I am sure this is a likely flow of events for the investors.

My comment remains that there may not be some intrinsically successful guitar-only package to be made from the company. And that the apparent profitability of the isolated guitar business, leaves the very strong possibility of some huge challenges.

Surely you and KKR are better able than I am to see a way for them to make money on this in some relatively near-term.

But I do wonder exactly who would find themselves capable and suited to the longer-term task.

A few (more) thoughts ...

First, they are now debt free. KKR put in $70-75 million for operating capital and I'm sure they want that back, so let's describe that as debt (since that's effectively what it is). I believe their debt previously was in the area of $375 million (it may have been $500 million with $375 due for repayment but I'm going by memory). So they've effectively shed about $300 million in debt. Plus the $70 million that KKR put in has no payback date or schedule, so for operating purposes they can behave as though they have no debt at all.

I assume that the brands they purchased have some value, just not anywhere near the amount that Gibson paid. So let's guess that they can get $0.05 on the dollar for the brand names, distribution channels etc. That would be about $15 million. I understand that they still own a bit of real estate they can sell, if so let's toss in an additional $5 million.

All of that goes to KKR. That all brings down the cash investment by KKR down to about $50 million. Because of the bankruptcy, that $50 million represents the real world equivalent of the market value of the company. Assuming (Big Assumption) that the core business of Gibson plus Epiphone can break even without causing new debt, then they have time to stabilize and improve the operations of both. If they can turn a profit of $5 million per year, then they're getting a really nice return in an era of 3% interest rates.

Moving on to the "life brand" project ... I don't think any one really questioned the value of Gibson as a marketing brand. It was just was done incredibly poorly. It was all done with acquisitions and no licensing and other than some instrument companies, all of the acquisitions were seriously distressed when they were acquired. Even the instrument companies were mostly shuttered by Gibson leaving a bunch of failed electronics operations that Gibson was unable to resuscitate. That doesn't make the Gibson brand name meaningless or valueless, especially if the company is no longer seen as being in imminent danger of closing its doors. If KKR's management team can restore some of the luster to the core business and show that the company is capable of competing successfully in the guitar market, then I would think that the value of the brand as a marketing identity would increase in value, especially in the right hands.

If KKR could get $100 million in three years for the whole shooting match, they will have a really nice return on their investment, and that doesn't include any of the profit that the guitar business turns in those three years. .... Or they could just forget all of that and sell the whole thing tomorrow for $80 million to Yamaha who I suspect could make money off of all of it.

Just some thoughts.

[ptchristopher3]

So the temporal difference between acting as if they have no debt, and the eventual realization of the effective debt of 70 to 75M back to KKR is the “time” they bought to get the act together.

KKR alone knows what this difference is.

KKR would likely attach some cost to liquidating assets, so your 50M might be a little enthusiastic, but point definitely taken - there is an arguable possibility that sales of Zakkkk Wyldey Les Pauls could make for an acceptable return from the KKR point of view (which is the one that counts for now). And that attractive return could extend both the time for Gibson, and the eventual perception of value both to KKR and a possible new owner.

I do question the value of the Gibson brand beyond guitars. I note and wonder at the absurd personal attachment to the brand by some consumers here and other places. But would they buy anything else from Gibson? Toasters, lessons, clothing, memberships in some sort of something?

You are likely more insightful than I am on this, but what exactly would you brand as “Gibson”? Everyone wants an absurd margin product for such branding - perfume being the arguable ultimate. But what do any of us see as a product to which they can attach the G brand?

Thanks for the views and analysis.

Chris

[Wildcat]

Once again Jim your analysis is spot on, insiteful and oh so right to the heart of the matter.
Thank you for the clarity without the emotional turmoil associated with inevitable change that occurs constantly in our lives. As my 83 year old Junior High School teacher said to me at the age of 56. "All things change, get use to it"

A few (more) thoughts ...

First, they are now debt free. KKR put in $70-75 million for operating capital and I'm sure they want that back, so let's describe that as debt (since that's effectively what it is). I believe their debt previously was in the area of $375 million (it may have been $500 million with $375 due for repayment but I'm going by memory). So they've effectively shed about $300 million in debt. Plus the $70 million that KKR put in has no payback date or schedule, so for operating purposes they can behave as though they have no debt at all.

I assume that the brands they purchased have some value, just not anywhere near the amount that Gibson paid. So let's guess that they can get $0.05 on the dollar for the brand names, distribution channels etc. That would be about $15 million. I understand that they still own a bit of real estate they can sell, if so let's toss in an additional $5 million.

All of that goes to KKR. That all brings down the cash investment by KKR down to about $50 million. Because of the bankruptcy, that $50 million represents the real world equivalent of the market value of the company. Assuming (Big Assumption) that the core business of Gibson plus Epiphone can break even without causing new debt, then they have time to stabilize and improve the operations of both. If they can turn a profit of $5 million per year, then they're getting a really nice return in an era of 3% interest rates.

Moving on to the "life brand" project ... I don't think any one really questioned the value of Gibson as a marketing brand. It was just was done incredibly poorly. It was all done with acquisitions and no licensing and other than some instrument companies, all of the acquisitions were seriously distressed when they were acquired. Even the instrument companies were mostly shuttered by Gibson leaving a bunch of failed electronics operations that Gibson was unable to resuscitate. That doesn't make the Gibson brand name meaningless or valueless, especially if the company is no longer seen as being in imminent danger of closing its doors. If KKR's management team can restore some of the luster to the core business and show that the company is capable of competing successfully in the guitar market, then I would think that the value of the brand as a marketing identity would increase in value, especially in the right hands.

If KKR could get $100 million in three years for the whole shooting match, they will have a really nice return on their investment, and that doesn't include any of the profit that the guitar business turns in those three years. .... Or they could just forget all of that and sell the whole thing tomorrow for $80 million to Yamaha who I suspect could make money off of all of it.

Just some thoughts.

[Jim Soloway]

So the temporal difference between acting as if they have no debt, and the eventual realization of the effective debt of 70 to 75M back to KKR is the “time” they bought to get the act together.

KKR alone knows what this difference is.

KKR would likely attach some cost to liquidating assets, so your 50M might be a little enthusiastic, but point definitely taken - there is an arguable possibility that sales of Zakkkk Wyldey Les Pauls could make for an acceptable return from the KKR point of view (which is the one that counts for now). And that attractive return could extend both the time for Gibson, and the eventual perception of value both to KKR and a possible new owner.

I do question the value of the Gibson brand beyond guitars. I note and wonder at the absurd personal attachment to the brand by some consumers here and other places. But would they buy anything else from Gibson? Toasters, lessons, clothing, memberships in some sort of something?

You are likely more insightful than I am on this, but what exactly would you brand as “Gibson”? Everyone wants an absurd margin product for such branding - perfume being the arguable ultimate. But what do any of us see as a product to which they can attach the G brand?

Thanks for the views and analysis.

Chris

I'm not at all the market for co-branded products but it does exist and sometimes it does pretty well. The co-branding products that really got my attention were the Marshall bluetooth speakers. They're dressed up to look vaguely like a Marshall amp. I have no idea how many they sell but they have LOTS in mass distribution, including throughout the Costco stores in Canada, the US and Mexico. That deal alone is worth a substantial amount of money. I have no idea who actually builds those units but I doubt that it was Marshall. I assume that it's either a straight licensing deal or perhaps licensing plus distribution.

[John A.]

I'm waiting for the movie to come out, maybe Netflix

I think the Symposium is more likely to be on Cinexmax.

John

[Greentone]

The Symposium is about the raciest thing Plato wrote. The other stuff is like a bowl of goose feathers for breakfast. And, yet...I cut my teeth on the Socratic Dialogues.

Yeah, Symposium is for TV...maybe on LOGO.

Hmm? The Apology and The Phaedo make for good drama. (I can see it now: "Phaedo, The Musical, starring Nathan Lane and Matthew Broderick")

[John A.]

The Symposium is about the raciest thing Plato wrote. The other stuff is like a bowl of goose feathers for breakfast. And, yet...I cut my teeth on the Socratic Dialogues.

Yeah, Symposium is for TV...maybe on LOGO.

Hmm? The Apology and The Phaedo make for good drama. (I can see it now: "Phaedo, The Musical, starring Nathan Lane and Matthew Broderick")

"The safest general characterization of the European philosophical tradition is that it consists of a series of footnotes to Plato." (Whitehead)

The Republic was required reading (twice) in my college's core curriculum, and then I made the tragic mistake of majoring in the footnotes, alas, so I got more than my fill. The older I get, the dumber I get, though, so the more the socratic method makes sense to me.

John

[wmachine]

..........Just make one friggin' ES 335 the right way, offer different cosmetic options and upgrades, cut the bullshit about degrees of authenticity, and deliver it via a production and logistics set up that allows for sane prices.
John

John, I can generally agree with the "too many options" aspect. And I believe too often new models are brought out to try to create a demand, rather than satisfy an existing demand.
But in the case of the ES-335, there does seem to be a pretty distinct difference in demand between two variations. You can call them, name them, and market them however you want:
1. Pretty much the target of the reissues, ones that will play and sound like vintage ones.
2. New/late model regular 335s. The demand for these are for brighter, more cutting sound. Ones that want these "complain" the reissues are too muddy (to over simplify).

To me, the "cutting back" solution would be better to get rid of some of the more "modern" models like the 339, and ES Les Paul. To me, those are much more "comfort" driven than sound driven. And some of their popularity is due to nothing more than less cost.
That's just me, but I understand if it is popular and sells, they'll make it no matter what the reason is.
But when Gibson comes to me for advice is when I know the end has come for them.

[Woody Sound]

John, I can generally agree with the "too many options" aspect. And I believe too often new models are brought out to try to create a demand, rather than satisfy an existing demand.
But in the case of the ES-335, there does seem to be a pretty distinct difference in demand between two variations. You can call them, name them, and market them however you want:
1. Pretty much the target of the reissues, ones that will play and sound like vintage ones.
2. New/late model regular 335s. The demand for these are for brighter, more cutting sound. Ones that want these "complain" the reissues are too muddy (to over simplify).

To me, the "cutting back" solution would be better to get rid of some of the more "modern" models like the 339, and ES Les Paul. To me, those are much more "comfort" driven than sound driven. And some of their popularity is due to nothing more than less cost.
That's just me, but I understand if it is popular and sells, they'll make it no matter what the reason is.
But when Gibson comes to me for advice is when I know the end has come for them.

I think the "new" smaller ES's & CS's are some of the best newer designs Gibson has come up with. (Along with the ES-275.)

My problem is the confusing model designations. I *think* this is correct, I could very well be wrong:

ES-336 carved body, plain (renamed the CS-336)
CS-336 carved body, plain
ES-346 carved body, medium fancy
CS-356 carved body, very fancy
ES-339 hollow, center block, plain
ES-359 hollow, center block, very fancy

[LtKojak]

I think the "new" smaller ES's & CS's are some of the best newer designs Gibson has come up with. (Along with the ES-275.)

My problem is the confusing model designations. I *think* this is correct, I could very well be wrong:

ES-336 carved body, plain (renamed the CS-336)
CS-336 carved body, plain
ES-346 carved body, medium fancy
CS-356 carved body, very fancy
ES-339 hollow, center block, plain
ES-359 hollow, center block, very fancy

I completely agree with you, Woody. And while I'm at it, I'd like to add to the list of hits the Johnny A. model. Both the Gibson and the Epiphone are exceptional instruments. Kudos to Johnny A as well!

[Wildcat]

Well said.

The entertainment value of the not-at-all-perceived-self-contained-irony of this stament is simply off-the-charts!

Some members of this very forum rarely fail to deliver, time and time again, every time, all the time, the added-value of entertainment. God bless their souls!

[Jabberwocky]

I think the "new" smaller ES's & CS's are some of the best newer designs Gibson has come up with. (Along with the ES-275.)

My problem is the confusing model designations. I *think* this is correct, I could very well be wrong:

ES-336 carved body, plain (renamed the CS-336)
CS-336 carved body, plain
ES-346 carved body, medium fancy
CS-356 carved body, very fancy
ES-339 hollow, center block, plain
ES-359 hollow, center block, very fancy

ES-390 hollow, no centre block, plain and figured!

[Wildcat]

Ah lets just face the fact we are getting old. Hell in the not too distant future I'll be wearing a diaper and drooling into a cup in some God forsaken home for the criminally insane.

I think the "new" smaller ES's & CS's are some of the best newer designs Gibson has come up with. (Along with the ES-275.)

My problem is the confusing model designations. I *think* this is correct, I could very well be wrong:

ES-336 carved body, plain (renamed the CS-336)
CS-336 carved body, plain
ES-346 carved body, medium fancy
CS-356 carved body, very fancy
ES-339 hollow, center block, plain
ES-359 hollow, center block, very fancy

[plasticpigeon]

I wonder about starting up a company and it made 4 guitars only. These guitars would be exact replicas of Gibson. An ES175, Tal, L5 and Super 400. The L5 and Super could be acoustic or CES. Make these guitars only concentrate on them to make exact specs, no customer orders and just turn them out in top shape. Could this type of a guitar company survive?

When I mean exact duplicates that is what I mean. Nothing but exact down to all the specs so that you could not tell them apart. The beauty is complete specialization with no distractions and really nothing new to market as such. I suppose it is crazy but I would love to be part of that arrangement. I guess there would not really be a sizable market to keep the need workers going but hey, could it make a go and I just am a pessimist.

I think this is what the archtop tribute brand from Japan does, and they look superb, and I bet the workmanship is top notch. I think it doesn't have to be a Gibson replica though, I think that if someone can produce instruments of high quality that are absolutely beautiful, then they will sell. I don't see much beauty around at the moment. Products are often spectacular, innovative, high tech, imposing or even awe inspiring, but seldom beautiful to my eye, we could do wih a revival of the search for beauty I think.