Custom Industry Surprised At $365 Million Harman/AMX Purchase Price

The custom electronics industry expressed surprise Wednesday -- at the news and the valuation -- that Harman International has agreed to buy control company AMX for $365 million. Harman said in a news release that it plans to integrate AMX into its Professional division, which is known for audio and more recently, lighting, after the company’s buy last year of Martin Professional.

Harman’s vision with the AMX buy is to “extend our reach beyond the car into the enterprise, where we already have a substantial audio presence,” said CEO Dinesh Paliwal in a prepared statement. The release didn’t address the home control space, but a company spokesman told Consumer Electronics Daily, that it’s “premature to discuss this now,” saying more detail will be available later, but saying “the focus of this investment is on b-to-b in the enterprise space.” In the news release, Paliwal called AMX the “global technology leader in enterprise control and automation as well as audio and video switching and distribution.” With the addition of AMX, Harman will be positioned to provide “complete audio, video, lighting and automation solutions to our customers globally, with an emphasis on commercial vertical markets.”

The purchase “makes sense from a commercial perspective,” James Gist, chief sales and marketing officer for JBA Consulting Engineers and a former AMX executive. Harman is making a push globally to get its gear “in all the big commercial venues,” and adding AMX gives Harman the control and video switching elements to add to its portfolio, he said. According to industry sources, Harman’s Professional group uses the CobraNet platform for audio, which delivers over Ethernet up to 64 channels of uncompressed digital audio through a category 5 cable.

Gist said the $365 million price tag was lower than he would have thought, especially after AMX acquired AutoPatch, an AV signal switching and distribution equipment company. The valuation “doesn’t bode well for the likes of Control4 and Crestron,” he said, because it “doesn’t support a big market.” Dividing the commercial market between AMX and Crestron, which likely has a larger share, Gist questioned whether commercial control business even totals “half a billion dollars” overall. “Maybe it’s $600 million but it’s not a $1 billion-business,” he said. On Control4’s most recent earnings call, meanwhile, CEO Martin Plaehn said it, too, was looking to increase its commercial business (CED May 5 p1).

Richard Glikes, president of custom electronics buying group Azione Unlimited, called the move “great” for Harman, at a “low price.” AMX’s control expertise will work well for Harman in its commercial business “and maybe even for resi, but that will be more of a challenge,” Glikes said. With “Harman muscle,” though, it would be a “strong message to have a brand like AMX as the center of your [control] offering,” Glikes said.

Harman can leverage the control business on both the commercial and residential fronts using its deep engineering resources, Glikes said. Harman “could have the top end and bring it into the middle if they were so inclined,” he said, and it could integrate its high-end JBL Synthesis, Revel and Lexicon brands with a proven control system. A problem with start-up control companies developing systems from scratch is that “somebody has to be the guinea pig,” Glikes said, but AMX is “well past the guinea pig stage,” he said. “It’s a proven system and the gear definitely works,” he said.

AMX and Harman dealer Eric Thies, CEO of DSI Entertainment, said $365 million “seems like a lot of money for that company.” The matchup “might be good synergy,” though, Thies said, citing Harman’s big presence in the commercial world with brands including Crown, AKG Acoustics and JBL.

A positive outcome for the industry from the acquisition could be a boost in innovation from AMX backed by the financial brainpower of Harman, Thies said. Harman “might breathe new life into AMX” and force more competition in the control system market, he said. Thies would welcome more innovation in a market where his biggest concern is “that the Internet of Things will start eroding away at control systems,” he said. With the muscle of Harman, AMX could throw “resources and R&D to do innovative things in control and force everyone to step up their game,” he said.

But for now, AMX, and it appears, Harman, seem more focused on commercial control than residential, and the commercial space doesn’t require the same pace of innovation as the residential side, Thies said. While AMX was one of the early pioneers in home control, it has pulled back from residential in recent years. “They seem to be a company that’s sort of struggling with their identity,” Thies said. “They're sort of committed to residential but not really.” That “indecision” has hurt AMX in the market, he said. The idea that Harman has the potential to prop up AMX’s position at the residential level is “exciting,” he said.

On the fate of AMX employees, Harman told us it expects the “core AMX management team to join Harman.” In the new release, Harman cited AMX’s more than 600 employees across operations in 19 locations worldwide.

Neither Harman nor AMX were answering detailed questions Wednesday but the possibility of Harman entering an increasingly crowded home control space piqued the interest of industry watchers.

Troy Peery, president of TP Programming and Design, an independent AMX programmer on the commercial and residential sides, sees AMX’s IP-friendly NetLinx programming language and controllers as attractive for Harman. “I'm betting Harman saw this as an opportunity to get an inexpensive product from AMX and open up more distribution channels,” he said. On AMX’s decision to be acquired, he said the company might have seen “the writing on the wall” due to Crestron’s dominance in digital distribution. Peery speculated Harman could launch an AMX-based offering akin to a Control4 or a Savant system. “They're not going after the exclusive high-end stuff anymore; they're going to make it more of a commodity,” he said.

Peery questioned whether high-security clients might be hurt by the purchase. A possible result post-acquisition is that AMX dealers have “less and less control over what you can do with the AMX product,” he said. Depending on levels of support for hardware and software, he said, AMX “may not be able to be implemented into a lot of government spaces because of security concerns,” he said. “If [Harman] markets AMX as a commodity-type product, then everybody and their brother have access to it.”

Gist of JBA Consulting downplayed the likelihood of a retail component to the strategy, citing the “craze of Nest being bought by Google.” AMX’s strong suit is digital switching and digital signage, Gist said, and Harman’s play is in commercial. “There could be something under the covers that none of us is aware of that has some killer application for residential,” Gist said, but most of the innovation today in home control “seems to be coming from start-ups,” he said. Traditional control companies have a deep set of legacy solutions to support making it hard “to be as agile as you need to be in the consumer market,” Gist said.

With big-name, big-budget companies such as AT&T, Comcast, Google and Microsoft going after the home market, the company that “wins the home is not your traditional home automation company today,” Gist said. On Kickstarter alone, “every week there’s another connected device,” he said. In residential, “whoever can create that killer app that’s ubiquitous and gives you control across all those connected devices in one flexible, easy-to-use application is the winner,” he said. “I don’t know that that will ever happen,” he added.

Harman’s Professional division has been the laggard of the company’s three product divisions. The company’s Infotainment unit, including automotive, had sales of $735.6 million for the March quarter, followed by the Lifestyle division with $468 million revenue, according to the company. Professional logged $200.4 million for the period. Harman shares closed 2.3 percent higher Wednesday at $105.84.