Following the announcement that Grass Valley acquired Snell Advanced Media (S-A-M), we’ve had a lot of people ask us about the strategic rationale for the deal, what it means for the industry, and whether it makes sense for Belden to acquire a competitor with significant product overlap.
Although we have our opinions, there is only one person who can provide a definitive answer to these questions – Belden CEO John Stroup.
If you really want to know what he thinks, you can hear directly from Stroup at the “2018 Devoncroft Executive Summit: The Business of Media Technology,” during a panel discussion featuring CEOs of leading industry technology suppliers.
I will be moderating this panel, and the M&A plans of Belden / GV are sure to be one of the discussion topics.
More information about the 2018 Devoncroft Executive Summit, including a direct link to register is available below.
In the meanwhile, we thought it would be interesting to reach into the archive and review what Stroup shared with the audience at the April 2017 Devoncroft Executive Media Technology Business Summit.
Last year, Stroup took part in a technology supplier CEO panel discussion, along with Johan Apel, President & CEO, ChyronHego; Ramki Sankaranarayanan, CEO, Prime Focus Technologies; and David Ross, CEO, Ross Video. The panel was moderated by Joe Zaller of Devoncroft Partners.
The discussion covered a range of topics including the structure of the media technology industry, the economic performance of technology vendoirs, the demand environment in the media technology industry, the benefits of achieving economic scale, and the inevitable consolidation of technology suppliers.
When reviewing these comments, please keep in mind that this interview was done about a year ago, and some things (such as the completion of standards) have advanced considerably since that time.
Zaller: Arguably you have the biggest balance sheet out there, and you can invest in a lot of things. How are you bringing that into media in terms of where you invest?
Stroup: I think knowing how much to invest in R&D in any business is a significant challenge. And for the businesses we have at Belden, we probably have a greater challenge with [Grass Valley] than we do with any other business. I think that’s because there is a lot of volatility in demand, there is a lack of predictability in demand, and that puts a lot of stress on us as executives and leaders about where we place our bets.
I would say that the other thing is that of all the industries we’re in, the economic capabilities of the vendors are the least developed in the broadcast industry, and that creates a lot of stress for us. We would obviously prefer that all of us [vendors] were making good economic investments [but] we’re all investing in everything, and that doesn’t lead to particularly good economic returns; and I think we’re all searching for a level of scale because I think this is a business that requires a lot of scale from a commercial point of view – globally that you need to generate the kind of revenue that gives you the scale from an R&D point-of-view.
So, what we’ve been trying to do with our team is teach them different ways to evaluate how much to be spending, where to be spending – in total, by portfolio, new product, customization, and try to create some rigor and framework around it, so we’re not doing anything that’s reckless. I think, as we heard earlier, some vendors have gotten themselves into problems. Certainly, Belden does not want to trade warrants for orders. My board wouldn’t like that. So, we’re trying to be careful about where we place our bets.
Zaller: “[Belden/GV is] one of the natural consolidators in this industry, but the way you define “broadcast” today is 40% of your overall portfolio. Does that make you too “overweight in broadcast” from the Wall Street analyst view to do something transformative (M&A) in the broadcast sector?”
Stroup: “Externally we talk about our broadcast platform, which is about 40% of our revenue. In fact, roughly half of that is infrastructure / media equipment, the other half is broadband. Two different worlds by the way, the broadband business is enormously predictable. Very nice steady margins; and it grows – consistently. It has been a significant source of funds for us to invest back in the Grass Valley business.
“I agree with everyone up here: the consolidation is absolutely going to continue. It has becoming increasingly difficult for companies to do well in this industry, if they are small. And more importantly, they aren’t going to be able to get capital. If you look at a lot of the private equity owned companies…when I talk to the private equity owners, it’s like ‘this is the last time. I am going to get out of this one and then I’m done. I am not going to go back in.’”
Zaller: “That is specific to this industry?”
Stroup: “Absolutely. Private equity firms, in general, have a horizon of approximately of five years, and they want to double their equity. And it is difficult to double your equity in five years in this industry given the lack of predictability in demand. So I think there is going to be an issue for capital.
“Yes, we view ourselves at somebody who is well-positioned to consolidate. A little bit different than you David (Ross), we would prefer larger companies. We feel that the integration effort is the same whether it’s a $10 million company or a $200 million company, and so we would like to leverage that investment. And we’re particularly interested in acquiring companies that we think are under-managed and are not performing at a level that we think they could perform at. And for us, that’s what is most attractive.”
Zaller: With the consolidation in the customer base, deals are becoming larger and more binary. What have you done strategically to position the company to be one of the consolidators?
Stroup: This is a difficult challenge, and part of our strategic initiative is to try to do the very best we can to predict where that customer situation is going to go and what the landscape is going to look like. And we try to give our preferred attention and our investment into those customers that we think are leaders, and customers that are going to be on the right side of consolidation. We have to be careful about when and how we make investments in companies that we think may not have the wherewithal to be a consolidator, and we try to be thoughtful about that.
Zaller: We’re seeing some end-users waiting for standards to be completed before they make their next investment. Some customers need something today, but don’t want to go through a whole capital depreciation cycle. Have you looked at new selling models to help these customers?
Stroup: We had a hypothesis that our customers were in fact interested in migrating more of their cost from CapEx to OpEx, so we experimented with ideas like leasing models, service models, reduce the CapEx
At least to this point when the rubber hits the road, we haven’t seen a lot of change in how customers want to do things. I think it goes back to the fact that the amount being spent in total hasn’t changed that much, but the priorities are changing, and so if we have a model for cameras for example where a customer can lease the camera or maybe the CapEx can be a smaller percentage, that isn’t going to push them over the top if in fact cameras are not the priorities this year. So, we certainly have the financial wherewithal to do models like that. It’s something we’d be willing to do, but we haven’t really haven’t seen it be responsive to what customers are saying they want at this time.
Zaller: What about the transition to IP and cloud technologies in the broadcast sector? How does it compare to other industries where Belden operates?
Stroup: Penetration of IP in broadcast is still relatively nascent. But in factory automation and industrial applications, it’s probably a decade ahead in terms of the adoption of IP. [For cloud] I think that as more and more people get familiar with purchasing products as a service or cloud-based products that we use every day like Salesforce.com, people begin to realize that in some cases the amount they are spending for that service over an extended period of time ends up being considerably more than if they had made their own capital investment. And I think the CFOs of our customers are trying to make sense of that.
Zaller: Would you consider selling your hardware products on an “as a service” basis? If someone is using your product every month, what difference does it make if they pay you $100,000 up front or $500 per week?
Stroup: We’d prefer the latter. We’d prefer a more predictable revenue flow, and so moving to that is better.
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