Masimo, the Company that acquired Sound United in a $1.4 billion dollar deal, has seen their share value tumble overnight by 35%.
Analysts have labelled the deal by the medical Company “Crazy”, with many questioning the fit into the Company’s existing business model.
Last year, Sound United set up a local subsidiary, appointing former Samsung Vice President Phil Newton to run their operation, which sells Bowers & Wilkins, Denon, Polk Audio, Marantz, Definitive Technology, Classé, and Boston Acoustics audio systems via a mix of mass retailers and specialist audio dealers.
Masimo claims the buyout gives it access to an established distribution channel, with major retailers and a potential to cross-sell its products.
Investors and analysts weren’t impressed, with many claiming that there is “no fit”.
“So, is this deal crazy? Or crazy like a fox?” Needham analyst Mike Matson asked in a report to clients.
“We do not expect a positive reception from investors.”
Masimo shares fell 26.1% at the opening of the New York stock exchange and continued falling as investors absorbed information surrounding the deal.
The deal is unusual for a number of reasons, Matson said.
“This is the first time we have seen a MedTech company move into non-health consumer products with a large acquisition,” he said.
Further, the transaction will be dilutive to revenue growth and margins, but accretive to earnings.
The company also doesn’t expect any cost synergies, Matson noted.
Finally, there’s a huge difference in valuation between the buyer and seller, he said. Masimo’s market cap was roughly $12.6 billion early Wednesday. It’s spending $1.025 billion to acquire Sound United. In 2021, Masimo generated $1.24 billion in sales. Sound United brought in $900 million.
Wall Street, who are not convinced the deal can add value, believes the deal was good for Sound United shareholders who are in a head-on fight with Voxx Corporation, the owner of the Klipsch brand which is struggling at Harvey Norman.
One Wall Street analyst said, “we’re simply left in limbo in the near-term with too many questions/unknowns regarding the fit and acquisition rationale,”
The analysts highlighted the need for more insights into the long-term prospects of the transaction.
Another analyst said, “With lingering questions surrounding transaction strategy/integration, we suspect the acquisition will take time for investors to fully digest.”
In an earnings call Chief Executive Officer, Joe Kiani, highlighted the potential of the new acquisition to strengthen the company’s telehealth and telemedicine strategy.
“Their well-established reputation and presence in the home can be leveraged by Masimo to accelerate our success in gaining adoption of integrated home-based telemedicine solutions, first with the Masimo Watch W1,” he said.
BTIG analyst Marie Thibault said investors likely will struggle valuing the new Masimo, which will be a blended MedTech and consumer tech company.
“We commend Masimo’s willingness to make a major leap to fulfill a multiyear vision and understand the hesitancy to share more details for competitive reasons — but we are left with little concrete to point to over the near-to-mid-term that makes sense of this tie-up,” she said in her note to clients.
Promisingly, Masimo reported in-line fourth-quarter sales of $327.6 million, up 11% on a reported basis. Adjusted earnings were $1.21 per share, above Masimo stock analysts’ call for $1.10, Needham’s Matson said.
Masimo also retained its 2022 revenue guidance for $1.35 billion, implying constant-currency growth of 9.5%.
Despite these results the stock still dropped. ChannelNews first revealed the purchase yesterday.
