Stuck in the groove: New hurdles for sale of DJ tech firm
Japanese firm Alpha Theta has gained Overseas Investment Office approval to buy Auckland-based DJ software maker Serato in a deal worth around US$70 million ($113m).
But an opponent of the deal, InMusic owner Jack O’Donnell, said his company was weighing whether to seek a judicial review of the OIO’s decision. It would make a decision soon.
Meantime, the deal faces its next hurdle: Commerce Commission clearance.
The competition watchdog said overnight yesterday that it has received an application from Alpha Theta and Serato, asking it to approve the deal.
Alpha Theta and Serato were politely leaned on by the regulator. A spokeswoman for the commission said that after making its own inquiries, the watchdog had encouraged the parties to file for clearance.
Auckland-based Serato has built a highly profitable business making software that can be used with multiple brands of professional DJ hardware, or decks used by amateurs at home.
Alpha Theta (ultimately owned by Tokyo-listed conglomerate Noritsu) is the owner of the Pioneer DJ hardware brand.
US company InMusic, which owns a clutch of DJ hardware brands, including Akai Pro, Denon DJ, Marantz, Numark and Rane, has raised the fear that Alpha Theta will hog Serato’s software for its own Pioneer decks, or at least restrict or make it more expensive for other DJ hardware makers to access.
“We also know that the Commerce Commission is looking at Pioneer’s potential acquisition of Serato from a competition perspective. If this deal goes ahead, then we believe that competition in the DJ market would all but die, driving up prices and quashing innovation,” InMusic’s O’Donnell told the Herald on September 4.
Today, he doubled down on his criticism, saying, “If the sale is approved, there would be a complete breakdown in competition in the pro DJ tech market, not just in New Zealand, but worldwide. It would be utterly incomprehensible for the Commerce Commission to allow one organisation to have such an overwhelming amount of market share, he said.
“Through our partnership with Serato, they’ve got 20 years of our data and IP [intellectual property] that our biggest competitor [Pioneer] would suddenly have access to. That this could happen is completely absurd.”
The clearance application reiterates Alpha Theta’s earlier pledge to run Serato as an independent operation.
“It is in Serato’s best commercial interests to keep universally supporting as much hardware as possible. The intention here is business growth and our ongoing partnerships play an unwavering role in that,” Serato CEO Young Ly told the Weekend Herald yesterday, picking up on one of the clearance
application’s key themes.
“A critical dimension of our business is our partnerships with the industry’s many hardware brands which each offer something distinct to the market. This includes the likes of Rane, Denon DJ, Numark, Hercules, Reloop, Phase, Roland and others.”
In response to O’Donnell’s IP fear rival Pioneer gaining access to InMusic brands’ IP, Ly said, “Alpha Theta has demonstrated its commitment to Serato’s New Zealand-based independence through the terms of the agreement, including our ability to continue to work autonomously with other hardware partners. We have discussed this in depth with our current partners and laid out in detail our plans for how the business will continue to operate.”
What about InMusic’s fear that it
would retain access to Serato’s software, but at a higher price?
In the classic “worst foot forward” style of Commerce Commission clearance applications, which naturally veer away from expressions of market dominance, Alpha Theta talks up alternatives to Serato’s software in its filing. It says DJ hardwaremakers have their own software, too, and the wherewithal to develop more — although in another signature move by applicants, it also maximises the size of the market by including any and every gadget that can run music software.
Ly told the Weekend Herald, “Serato competes in the DJ software market — which includes laptop, web and mobile software. This market is highly competitive and rapidly evolving.”
The exact lay of the land is hard,
as many details are redacted from the public version of the clearance application, including most of the financials, and critical metrics like the percentage of revenue that Serato makes from partnering arrangements with DJ hardware manufacturers.
Uncapped payments
In a market filing, Noritsu said the deal was worth US$70m, plus earnouts. The Commerce Commission clearance application says the proposed transaction is around US$65m.
It adds that the deal includes uncapped (the Herald’s italics) consideration payments, based on Serato’s financial performance over coming years (the actual timeframe is redacted; earnout bonuses are typically based on the first two years after a deal).
Auckland pitched as global leader Ly reiterated that Serato would be able to add to its staff (recently put at 160) and be able to accelerate its global growth under multinational ownership.
“Success in the music production space for Serato will grow the larger New Zealand music technology industry.
“It’s a speciality sector with global reach and Serato’s continued success could establish Auckland as a global leader in music technology, like Berlin and Stockholm,” he said.
He also underlined that he saw a Serato sale as being good for the wider NZ tech ecosystem — which has already benefited from investments by Serato co-founders Stephen West and AJ Wilderland (formerly AJ Bertenshaw), and early hires Nicole Hoek and Greg
Rathbun (the four still own most of Serato’s shares, ahead of the possible sale).
West, Hoek and Rathbun cofounded EV charger network startup ChargeNet, while Wilderland is involved in a clutch of companies including Aerial Robotics NZ, Cool Story Bro Film and The Ticket Fairy.
‘Encouraged’ to file by watchdog OIO approval was granted on September 7, according to the clearance application published by the Commerce Commission yesterday. (Linz, which runs the OIO, has so far not published any decision. The Weekend Herald has asked Linz for comment.)
Earlier, competition lawyer Andy Matthews told the Weekend Herald that almost any deal could be wrapped up without seeking prior Commerce Commission approval.
But voluntarily requesting clearance was the commercially sensible route to take. Failing to do so risked legal action by the regulator that could see a deal unwound after the fact.
“While New Zealand operates a voluntary clearance routine for mergers and acquisitions, we strongly encourage businesses considering transactions that may raise potential competition issues to seek clearance or authorisation before proceeding,” a ComCom spokeswoman told the Weekend Herald yesterday.
“When we became aware of the proposed Alpha Theta-Serato transaction, we made inquiries to understand how it could affect competition in New Zealand markets. As a result of this, we advised the parties that in our view the proposed transaction is best assessed in a public forum under the commission’s merger regime and encouraged the parties to utilise the formal merger clearance process to enable us to assess indepth the likely competitive effects of the transaction.”
Serato’s numbers revealed
Like nearly all privately held firms, Serato has kept its financials close to its chest.
But a market filing by Noritsu details some of the Kiwi firm’s recent numbers.
Ly has previously detailed how Serato was initially challenged by the pandemic as lockdowns laid professional DJs low amid event cancellations and nightclub closures.
But the firm pivoted to new products catering to amateur DJs and their home equipment. It also benefited from an event boom as the world reopened, Ly said.
The CEO’s broad sketch is backed up by the numbers in Noritsu’s filing, which say Serato had an operating profit of $8.5m (and a net profit of $6.1m) on revenue of $32m in FY2021 (ending March 31, 2021, all amounts in NZD).
That dipped to an operating profit of $5.7m (and net profit of $4.8m) on revenue of $30.1m in FY2022.
In FY2023, Serato rebounded and then some, with an operating profit of $10.5m (and net profit of $6.5m) on revenue that jumped to $40.4m.