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"Gibson running out of time - rapidly"

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  • BRISTOL86BRISTOL86 Frets: 1920
    With gross profit margins holding at around 40% for the past five years they must have staggering operating/financing costs to be in such trouble. 
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  • crunchmancrunchman Frets: 11414
    Let's say they net profit 1kUS for every 5kUS guitar sold. That's 375.000 ugly looking customs they need to sell in 6 months time in order to cover some of their maturing debt? No wonder CFO jumped ship.


    They don't need to be able to raise the whole lot by August.  The banks would be willing to refinance it if their income was big enough and it looked like there was a realistic chance of getting it paid back.  If they could find enough money to pay off 20% of it, and show decent income levels they might be able to roll the rest of it over.

    The problem they have is that their credit rating is so low, that even if they could roll it over the interest rate they will have to pay will be so high that the sums just won't add up.

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  • BRISTOL86 said:
    With gross profit margins holding at around 40% for the past five years they must have staggering operating/financing costs to be in such trouble. 
    The article quotes 8.875% p.a. on the main 375m facility, but with the current situation they'll be lucky to refinance at anything south of 10%, and noone will lend unless there is a solid business plan that suggests they'll be able to actually make the payments on such a refinancing.

    They bet the house with the acquisitions and a plan of innovation & expansion to get the 375m in the first place. Those plans haven't borne fruit, so now they're in the shit and in a market where they get laughed at every time they try something new. 
    The Assumptions - UAE party band for all your rock & soul desires
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  • Strat54 said:
    Getting rid of Henry J would help turn things around methinks. They are in a sad state. Fender aren't far behind either.
    I was under the impression fender were doing rather well? Care to elaborate?
    "Pick your noses up!"
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  • crunchmancrunchman Frets: 11414
    strat1990 said:
    Strat54 said:
    Getting rid of Henry J would help turn things around methinks. They are in a sad state. Fender aren't far behind either.
    I was under the impression fender were doing rather well? Care to elaborate?

    Fender have actually paid off some of their debt.  In 2016 Moodys upgraded their credit rating after they paid off $40 million.

    I can't find any more recent stuff to say that it has declined again.

    As far as I know, Fender are in a reasonably stable position, unless you know something that isn't generally known.

    I'm not sure how exposed Fender are if Guitar Center goes under.  I know they have major problems.

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  • RavenousRavenous Frets: 1484
    edited February 2018
    One thing I have noticed about a lot of companies that seem to be struggling is they grew by acquisition of other companies. 
     Did Gibson "need" to do this or is it just standard business practice for growth?

    It IS standard business practice for growth, has been for the 20 years I've been watching business anyway.

    A rapid way to increase the reach of your business is to borrow money (or attract a backer) - to buy other companies - to then get access to those companies' established customers or their customer base.

    It can work if you're sensible about it.  But boy, you can look a Total Flump(TM) if you get it wrong.  I guess it doesn't work for guitar companies.

    (For example I always wondered what the hell happened to the original Steinberger after Gibson bought it. I mean they seemed to buy a product and then kill it...?)

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  • Ravenous said:

    (For example I always wondered what the hell happened to the original Steinberger after Gibson bought it. I mean they seemed to buy a product and then kill it...?)

    See also: Valley Arts, Kramer...
    The Assumptions - UAE party band for all your rock & soul desires
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  • I think you're all missing the point. If Gibson goes tits-up, what on earth are Andertons going to do for video content?
    <space for hire>
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  • RavenousRavenous Frets: 1484
    Ravenous said:
    (For example I always wondered what the hell happened to the original Steinberger after Gibson bought it. I mean they seemed to buy a product and then kill it...?)
    See also: Valley Arts, Kramer...
    Yeah - Steinie was the only one I was interested in, but I assume all of these were bought with the plan of Gibson making cheaper alternatives themselves to cash in. With hindsight that obviously wouldn't work in a saturated and conservative Guitar market...
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  • ColsCols Frets: 6953
    crunchman said:

    The quote from the Moody's guy in the last paragraph is quite informative:

    “Some type of restructuring will be necessary,” Cassidy said. “The core business is a very stable business, and a sustainable one. But you have a balance sheet problem and an operational problem.”

    Someone will take on the guitar side of the business at the end of this.

    That’s actually the first time I’ve seen any kind of indication about where, in the Gibson Empire, the financial problems lie.  Looks like there’s nothing fundamentally wrong on the guitar side, just that they’ve taken on an unsustainable amount of debt in an effort to diversify the company.
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  • crunchmancrunchman Frets: 11414
    I think you're all missing the point. If Gibson goes tits-up, what on earth are Andertons going to do for video content?


    Maybe this is the reason for the new high end British made guitars that got everyone so worked up:

    http://www.thefretboard.co.uk/discussion/123574/chapman-guitars-at-namm#latest

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  • Strat54Strat54 Frets: 2331
    Whitecat said:
    Let's say they net profit 1kUS for every 5kUS guitar sold. That's 375.000 ugly looking customs they need to sell in 6 months time in order to cover some of their maturing debt? No wonder CFO jumped ship.
    In guitar mass manufacturing you will be lucky to net 15% of your wholesale price, and closer to 10% is far more common. Makes the hole even deeper. 
    That's spot on. I checked with a friend who worked for one of the main guitar manufacturers a few years back and he said anywhere between 7.5-10% was the what they aimed for. 
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  • TTonyTTony Frets: 27346
    Ravenous said:
    One thing I have noticed about a lot of companies that seem to be struggling is they grew by acquisition of other companies. 
     Did Gibson "need" to do this or is it just standard business practice for growth?

    It IS standard business practice for growth, has been for the 20 years I've been watching business anyway.

    A rapid way to increase the reach of your business is to borrow money (or attract a backer) - to buy other companies - to then get access to those companies' established customers or their customer base.

    It can work if you're sensible about it.  But boy, you can look a Total Flump(TM) if you get it wrong.  I guess it doesn't work for guitar companies.

    (For example I always wondered what the hell happened to the original Steinberger after Gibson bought it. I mean they seemed to buy a product and then kill it...?)

    I've seen and been involved in (quite) a few business acquisitions in my time.

    The result is normally 1 + 1 = (about) 1.4

    The pre-acquisition rationale is that we'll sell our products to their customers and their products to our customers, whilst simultaneously removing duplicated overheads to cut costs.  Hence the expectation is generally that the combined entity will be about 2.5x the sum of the previous parts.  Or whatever multiple is necessary to justify the deal.

    The reality is that  you find that their customers don't want our products (which is why they were their customers originally!)  and that their products aren't really suitable for our customers (for one reason or another), and that there's a fair amount of overlap in the product lines that has to be removed.  The focus turns to the cost cutting, which (a) pisses of most of the staff and (b) pisses of many of the customers because the organisation is focused internally on its cost saving exercise.  Customer service declines and customers leave.

    The costs of rationalisation are generally higher than expected - eg severance payments - and the integration costs more than expected (IT systems!).  Plus you find lots of conflict in respective corporate cultures that take a while to resolve.

    Meantime the directors and senior managers find that they've hit all of their bonus targets for growth and company size (which were set prior to the acquisition of course), just by achieving the 1.4 number.  So, they're happy and disappear over the horizon with cash in pocket to repeat the exercise somewhere else.

    Shareholders lose out (they effectively fund the 0.6 shortfall when 1+1=1.4).   "Rationalised" staff lose out.  Dissatisfied customer lost out.  And all the value, credibility and trust that had been built up in both companies prior to that point is destroyed.


    Not suggesting that's how Gibson got into its specific predicament (because it's not, really), but that's how I've seen other businesses do it.
    Having trouble posting images here?  This might help.
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  • PlectrumPlectrum Frets: 494
    Given how abysmal Gibson's credit rating is I they'll struggle to refinance.
    One day I'm going to make a guitar out of butter to experience just how well it actually plays.
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  • FretwiredFretwired Frets: 24601
    Chapter 11 is likely to buy some time. The company cannot stave off the inevitable - too much debt, not enough revenue and shrinking demand. Even PRS are struggling at the moment.

    Remember, it's easier to criticise than create!
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  • pmbombpmbomb Frets: 1169
    edited February 2018
    From a customer's point of view there's nothing to worry about, for as long as people are willing to (over)pay for Gibson's products, they'll be made and sold somehow.

    I do think they have some pain coming - I find the massive range of near identical product, and the pointless model years, pretty baffling. Someone needs to take a hatchet to that in the same way Steve Jobs did when he rejoined Apple in '97.
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  • carloscarlos Frets: 3426
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  • RavenousRavenous Frets: 1484
    pmbomb said:
    From a customer's point of view there's nothing to worry about, for as long as people are willing to (over)pay for Gibson's products, they'll be made and sold somehow.
    Yes let's face it, many of these bigger guitar companies have changed hands over the decades & they still rumble on.
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  • BridgehouseBridgehouse Frets: 24579
    pmbomb said:
    From a customer's point of view there's nothing to worry about, for as long as people are willing to (over)pay for Gibson's products, they'll be made and sold somehow.

    Not necessarily - someone may buy it, but I don’t think we know the full story.. 

    We didn’t know the full story about Carillion, and there was no buying there - straight to liquidation, do not pass go etc..
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  • RavenousRavenous Frets: 1484

    I think it's virtually certain someone will be selling stuff with the Gibson logo on it.  The brand is historic and there will always be people who want a new guitar with that logo.  (Regardless of actual quality of course.)

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