Our monthly "Gibson in Imploding" article.

reverend1 said:
Again, I will reiterate that no money/ commission they took seems to be contributing to their issue.
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I should have given a better response: the bonuses and transaction fees are indeed the issue because they are why corporate executives take on debt, in far, far too many cases. That must seem either terribly uncommon or just unlikely ... until you see it time and time again.

It is simply human nature - I, CEO of company X, am making $2-5M a year. After a few years, I have a second home in (paradisaical location), maybe a third where the kids can ski or swim, and life is good.

But c-level execs don't hang out with the regular folk any more on a daily basis. They hang with other 'important' people. And after a while, the condo in Vail starts looking shitty next to this guy's ranch in Bozeman. A whole ranch!

And so they think "geez, how can I add a zero to my money?" Well, here's where cognitive dissonance comes in. "Growth!" is the mantra.

But you might ask, "why is that cognitive dissonance?" And it's true -- our economy depends upon growth and having great growth stories. However, it doesn't require genius thinking to realize that not ALL companies are going to double their top line when "runaway growth" of the GDP is 4%.

It used to be that investment bankers defended the bank's money. Losing a bunch of money on a bad deal was ... bad. But in the era of 7- and 8-figure payouts, split with the house, that incentive is inverted. And those nice elected officials we met at the $25,000/head fundraiser did the right thing changing the tax code so the bank can just write off any loss.

Everyone gets paid! .... uh, well, you know: everyone that matters. Board members. The CEO (and his fellow execs, to an extent). The VC guys. And the bank can write it off. Kinda sucks to be a regular ole employee, tho.

This ought to be illegal, but rich and powerful people really like being rich and powerful. And most Americans just don't care, if they can have their NFL and Stratocasters and BBQ and internet porn and pain pills.
 
Danhedonia said:
I should have given a better response: the bonuses and transaction fees are indeed the issue because they are why corporate executives take on debt, in far, far too many cases. That must seem either terribly uncommon or just unlikely ... until you see it time and time again.

It is simply human nature - I, CEO of company X, am making $2-5M a year. After a few years, I have a second home in (paradisaical location), maybe a third where the kids can ski or swim, and life is good.

But c-level execs don't hang out with the regular folk any more on a daily basis. They hang with other 'important' people. And after a while, the condo in Vail starts looking shitty next to this guy's ranch in Bozeman. A whole ranch!

And so they think "geez, how can I add a zero to my money?" Well, here's where cognitive dissonance comes in. "Growth!" is the mantra.

But you might ask, "why is that cognitive dissonance?" And it's true -- our economy depends upon growth and having great growth stories. However, it doesn't require genius thinking to realize that not ALL companies are going to double their top line when "runaway growth" of the GDP is 4%.

It used to be that investment bankers defended the bank's money. Losing a bunch of money on a bad deal was ... bad. But in the era of 7- and 8-figure payouts, split with the house, that incentive is inverted. And those nice elected officials we met at the $25,000/head fundraiser did the right thing changing the tax code so the bank can just write off any loss.

Everyone gets paid! .... uh, well, you know: everyone that matters. Board members. The CEO (and his fellow execs, to an extent). The VC guys. And the bank can write it off. Kinda sucks to be a regular ole employee, tho.

This ought to be illegal, but rich and powerful people really like being rich and powerful. And most Americans just don't care, if they can have their NFL and Stratocasters and BBQ and internet porn and pain pills.
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Listen, I understand what you are saying. However, when lookin at this from a far this is what I see.Based on what I know to be facts or at least reasonable assumptions. I don't know if anyone took any hing when issuing these bonds. Anyhow here's my interpretation of events.

- Gibson sees the guitar market shrinking

-in an effort to diversify they decided to get into the consumer electronics business. At that time their gross income was around $2 billion

-they issue bonds to finance the purchase of said businesses, I would assume that they figured there gross income would increase after aquiring these businesses and help smooth out the ups and downs in there core business.

-since acquiring these companies, Gibson's revenue has continued to decline to around $1 billion despite a more diversified portfolio.

-since they seem to be barley competent in their core business, I have no idea why they felt they could turn these other companies around.

-At the time of the acquisition of these companies they were at around 5.5 times revenue vs debt. not a good place to be but not as bad as it is now. Today their revenue has fallen to $1 billion, a 50% decline. now they are 10x revenue.

It seems to me that the core issue is hubris in thinking the they could run consumer electronics businesses better than those with experience in that arena, and taking on massive debt to finance the purchase of entities they have no experience with, and the belief that they could widen their focus without it detrimental effecting their core business.

My main point was that when you issue $375 million in bonds, on top of $145 million of bank notes due at the same time, 1, 5, 10 million in possible payouts really don't make much of a difference. you're in trouble either way.
 
I predict Gibson will soon be the proud new brand acquisition of a massive Chinese corporation.

All your guitar are belong to us!

Seriously, if not a Chinese company, a multi-national juggernaut will take the reigns and Gibson "USA" will be but a memory. Production will be streamlined down to a few iconic models and moved off shore.

The non-guitar divisions will be gutted and sold off for scrap to the highest bidder. Onkyo/Harmon Kardon will end up as a cheap label stuck on the front of some unheard of sub-brand of some Chinese or South Korean electronics company.

For those who didn't attend NAMM, you didn't see the MASSIVE presence of Chinese companies either building direct clones and knock offs ("N-Audio" was my personal favorite), or marketing themselves as the perfect "your name here" provider of anything and everything music or audio related. Unbranded wares just looking for a company to slap their name on.

Some of the stuff was pretty Gawddammed amazing too. Yeah, lots of cheap cheese ball shit, but an equal amount of "Holy shit! That's pretty awesome!" stuff too.

It's the future, embrace it or get crushed under it's wheels.
 
Thanks for your post. You are correct - the 5 to 10 million don't matter to Gibson's balance sheet.

What matters is that the 5, 10 or however many millions matter to the individuals who have the power to plunge Gibson into a bad situation, and then have a fire sale (no pun intended on the layoffs). I think we agree about their hubris, but I imagine I consider it as worse than you do because I think those consumer electronics companies more than likely had very prosaic forecasts which were not for 'massive growth!'

I've just seen this over and over and over and over ... one reason so many companies were "going private" in the aughts was that once you do, you can't be sued by shareholder groups for conflict of interest or securities violations (you can still be prosecuted ... let me know when you stop laughing about the amount of white collar crime that gets prosecuted).

So it's not that the payouts break the company/ies, it's that the people running those companies are incentivized to ruin the companies by the payouts.

I'm not 'anti-business,' but I am anti-crooked-bastard, and I have seen staggering amounts of it.
 
I'm pretty sure Gennation predicted this.

Er, uh, um... Wait, what?

Oh yeah! It was that OGG dude!.

Smart motherfucker that guy.
 
Cutting the custom shop staff seems like a mistake to me, as they seem to really know what they are doing over there. I think the same thing about the Memphis factory cuts, as those guitars were really nice stuff in my book. I guess to really say if it was a mistake one would have to look at the orders and output relative to profitability and such, but it still feels like a bad move to fire some of the most experienced builders at the company. As Gibson makes cuts like the CS staff numbers and Memphis facility, one wonders if they are moving towards trying to sell more of their faded and other entry level stuff. I'm sure they have much more sales of those models than the high end, but almost every attempt I have made at buying a low end Gibson has been impossible due to guitars that just look and feel mediocre. I think these entry models are cheap enough, but the quality and feel kind of makes them a crap values for the asking price, especially relative to the pretty awesome import market. I'm sure there are good examples out there on the cheap models, but the ones I have seen have been pretty lackluster.

I'm guessing that since this all feels like a wrong move to me it is exactly what Gibson is planning.
 
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I think this video covers the issue quite well. My comment on it was also just posted to it, but indeed, when you think about the trend in music away from the electric guitar, why did they invest so heavily into older brands that are famous for the high end audiophile gear of yore? That's not how the newer generations listens to music these days. I still love a good audiophile system, but even for me, as I've gone along, I've changed to listening to 99% of my music in the high end audio system in my car during my 30 minute commute, or through my P.C. speakers off of YouTube. And my turntable does indeed have, and has always had a Stanton stylus. Known as the "reference standard" of the 70s. Sure these companies have branched off, but my Stanton cartridge retailed for $90 back in 1977 and much less than that now. Electronic gear is much cheaper adjusted for inflation these days. Just look at how cheap a good modeling amp is right now versus a modeling amp the late 90s. Electronics keep getting cheaper, better and with slimmer sales margins. You can only win that game these days with volume versus quality, unless you're a low-overhead boutique company surviving off a niche market.

 
That video is terrible.

There's nothing - literally, nothing there in terms of reporting. Just 'a guy' and his opinion that "guitars just aren't as popular." And this is how it happens: instead of having to learn how greedy, crooked bastards pay themselves handsomely to run a company into ruin, no, that's too boring, let's say "guitars aren't as popular any more."

You know, neither are hiking boots, but Vibram has done an amazing job of staying profitable in a shrinking market. And PRS is doing well. FMIC isn't, because their dedicated sales channel Guitar Center is having .... wait for it, now: Major Problems with Leveraged Debt.

Yes, that's right! The very same looting of the till occurred at GC. GC had other issues - issues that should and would have prevented any sane person from taking out a bunch of loans. But that's how guys at Bain make their money now - transaction fees, not on helping companies achieve sustainable profitability.

The story here is that Gibson's issues have nothing to do with their operations, their guitars, the guitar market ....

It is a story of corporate malfeasance.
 
A few years back Ultimate Guitar interviewed John Hall, who owns Rickenbacker. He said he hadn’t expanded the company because Rickenbacker sold everything it produces in advance of manufacture. And he didn’t want to end up like Fender and Gibson. Unfortunately I can’t find a quote because the Ultimate Guitar redesign broke some old links.
 
Didn’t we have an almost identical thread when Fender had to pull back iis IPO once everyone saw their crushing debt service obligations from years of acquisitions and less than rosy sales projections, tied into GCs outlook? IIRC there were plenty of jokes about Gibson buying them at the time. In the years since, they seem to have managed to refinance, revitalize some subsidiary lines, like Guild, and cast off some other aquisitions...still seem to be here for the foreseeable future.
 
I'm sorry I'm strident, I am terribly frustrated that people don't seem willing to learn about how we're all getting completely screwed.
 
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