A bidding war has broken out for Otix Global, maker of Sonic Innovations hearing aids and one of the world’s seven largest hearing-aid manufacturers, with William Demant Holding today matching GN ReSound’s $58 million (USD) acquisition bid. GN ReSound last week had topped William Demant’s initial $50 million bid to acquire the struggling U.S.-based company. Today’s $58 million, $10-per-share matching offer by William Demant, parent of global hearing-aid brands Oticon and Bernafon, demonstrates it remains intent on acquiring the Sonic Innovation brand to increase its share of the global hearing aid market. There was no immediate response from GN ReSound parent GN Store Nord on whether it will keep the bidding war going by responding with another higher bid.
No matter which acquirer wins, the number of major global hearing aid companies will be reduced by one, as the long-term consolidation of the industry continues. Both bids must be reviewed by Otix Global shareholders, who will vote on the acquisition offers. But shareholder approval of one of the bids is likely, because the Otix board of directors was receptive to the initial William Demant offer, and now the $10/share price that both potential acquirers are willing to pay is well above the $3-$5/share trading range of the stock in the past year.
Otix Global experienced strong revenue growth through 2008, when its sales topped out at nearly $125 million, before suffering severe declines in 2009 and 2010. In addition to the global recession, which depressed sales of all the hearing aid companies, Otix Global suffered from regulatory changes in Germany which limited its ability to support sales of its hearing aids through hearing health care professionals, and by competition in the U.S., where one of its largest resellers started marketing two competing brands alongside the Sonic Innovation hearing aids from Otix. On September 13, Otix Global announced it was discontinuing its German operations. It closed 2009 with $95.8 million in revenue, nearly 25 percent less than in 2008, and in the first six months of 2010 its sales were 15 percent less than in the first six months of 2009. Otix Global also continues to hemorrhage cash, with $2 million in net losses in the first six months of 2010 added to $1.5 million in losses recorded for 2009, on top of additional losses in three of the previous four years.
In the meantime, GN Store Nord and William Demant are exiting the recession with relatively strong positions. William Demant reported 20 percent organic growth in its hearing aid business in the first half of 2010 over the same period in 2009. GN Store Nord has announced a strong earnings outlook following a successful corporate restructuring in 2009 and is in negotiations to collect a 2.9 billion DKK windfall ($542 million USD) following settlement of a claim in a dispute over billings for telecommunications services in Europe.
Not too long ago, the shoe was on the other foot for GN ReSound, which itself was nearly acquired in 2007 by global hearing aid market leader Sonova Holding AG, owner of the Phonak, Unitron, Hansaton, Lyric, Sona and other hearing aid brands. That merger was derailed by a German antitrust court ruling which, though subsequently overturned, left GN ReSound intact with parent GN Store Nord committed to the GN ReSound hearing aid business an intent on gaining market share as one of the world’s six largest hearing aid manufacturers.
The consolidation in the global hearing-aid industry has many causes: among other things, the current distribution channels, mainly independent audiologists and hearing-center retail chains, have tended to favor a choice of fewer premium brands that compete on features and channel support rather than price; also, while technical barriers to new manufacturers entering the market for digital hearing aids are lower than in the past, cost of sales are high in part because significant investments in marketing and customer support are required just to overcome initial patient resistance to the stigma that continues to be associated with hearing aids.
However, the six major manufacturers that dominate the global hearing aid market — Sonova, William Demant, Siemens Hearing Instruments, GN Store Nord, Starkey Laboratories, and Widex — have focused mainly on developing and delivering premium products with high prices and high margins. A new pair of digital hearing aids with all the bells and whistles today can set you back anywhere from six-to-eight thousand dollars. In the meantime, there is a huge, under-served segment of the global population that increasingly needs hearing assistance but that will not pay or cannot afford the premium-priced products.
Given that the digital signal processor, microphone, speaker and other components of a hearing aid collectively cost no more than several hundred dollars wholesale, and given that more and better software tools are coming on stream all the time to enable delivery of less expensive sound-processing software, there is a huge opportunity for entrepreneurs with modest amounts of private capital to attack the underbelly of the market now dominated by the six major manufacturers. When that happens, don’t be surprised if there is further consolidation among the Big Six, as pricing pressure drives down profit margins for all but the strongest players, who will have to continue sharpening their focus on the high-point of the market pyramid skimming the cream from the highest-paying customers in the premium market segment.