Now that private equity firm CID Capital has made a major investment in Westone Laboratories, watch for the Colorado company turn on the burners with a further expansion of its hearing-assistance products into new consumer markets beyond the hearing-aid industry.
Not that long ago, Westone was little more than a staid maker of ugly but essential custom ear molds for hearing aids. But in recent years the company has introduced a slew of new products including earpieces for professional musicians, custom earplugs for swimmers, hearing-protection technologies for military and industrial applications, assistive listening products for hard-of-hearing consumers, and more. If you’ve been to AudiologyNOW or one of the other big hearing-aid conventions, you’ve probably enjoyed Westone’s product demonstrations where you can hear live musicians perform as you listen through the same kinds of headphones and custom earpieces professionals use on stage.
Westone CEO Lynn Kehler says the private equity investment will enable the current management team “to rapidly accelerate new product development, aggressively expand distribution and pursue potential acquisition opportunities. We also have a unique opportunity to leverage our extensive hearing healthcare and professional audio music background to offer the same premium quality products and listening experience to the broader consumer earphone market.”
All of which is music to my ears, as I continue to look for examples of companies born in the hearing aid business that are willing to commit management energy and financial capital to delivering great technology and products to a much broader base of consumers. Westone was founded in 1959 and prospered under several generations of Morgan family leadership. But several years ago the family owners named Kehler CEO. A professional manager who had previously been CFO of Westone, Kehler led the expansion drive while seeking a way to provide liquidity for the family. According to the news release from Westone and CID Capital, the investment “will allow the Westone management team to continue to build the company with a new investment partner while allowing members of the family that founded Westone to diversify and pursue personal interests.”
An Indianapolis investment firm with deep Midwest roots, CID Capital takes majority positions in small firms and often helps family-owned companies transition to professional management while providing the financial backing management needs to invest in growth over the long term. While the parties didn’t disclose the size of the investment, the Westone deal appears to be a great marriage of an investor with deep pockets and staying power with a management team committed to a long-term strategy to create new markets with new products and technologies.
Rather than trying to go public or being acquired by a much larger company, staying independent with the backing of an equity partner is a great strategy for success in the hearing-technology business. More innovation is needed and markets need to be created and given time to build, and patient capital is just what the doctor would prescribe for a management team that’s on a roll and only in need of some financial backing to move ahead with its long-term strategy.
All too often a private equity investment foreshadows major negative changes. When the equity firm finances its investment with debt to be repaid through the company’s current cash flow, management often needs to cut overhead dramatically, selling off lower-profit lines of business, and milking the cash-cow profit lines to pay off the debt. With short-term increases in profit margins, the company may increase in value, and the equity firm can make a quick killing by taking the company public or selling off what’s left. But if the company fails to increase in value quickly, the venture can lose market share and gradually waste away. In either case, lines of business with great long-term prospects but low current profits are often simply shuttered and employees with irreplaceable experience cast aside.
But CID Capital appears to be anything but a Wall Street slash-and-burn private equity player. It’s nice to see a private equity deal that rewards family owners for their years of hard work, leaves a strong current management team in place, and provides incentives for a good company to make an even bigger mark on a business that is positioned to drive positive change for an entire industry. Especially when it’s a company doing interesting new things in the hearing assistance business. Let’s keep an eye on Westone Laboratories.