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TROUBLE BREWING AT SOUND UNITED’S PARENT COMPANY?
Jim Austin
In early November, Strata-gee.com reported that at least one major shareholder is unhappy with the current leadership of Masimo, the medical-equipment company that bought Sound United—home of B&W, Classé, Definitive Technology, Denon, Marantz, and Polk Audio. The shareholder’s unhappiness is a direct result of the company’s decision to acquire Sound United, which dramatically suppressed the company’s value, which hasn’t recovered.
Masimo is a successful company—the market leader in pulse oximetry devices (those little clip-on sensors that measure blood oxygenation via a fingertip)—but CEO Joe Kiani has never clearly explained the decision to invest in Sound United, and some investors feel he overpaid. After the acquisition, Masimo shares fell by 37%, from $228.84 to $144.20. Shares then rose to a post-acquisition peak of $169.38 in August but then slid to $124.06 by late October. That means that Masimo’s valuation lost more than $5 billion, apparently as a direct result of the Sound United acquisition. So, a $1 billion acquisition has resulted in a loss of $5 billion in equity.
Hedge fund Politan Capital Management LP, which now owns almost 9% of Masimo shares—more than the 8.5% owned by Kiani, who in addition to being CEO is also board chairman—is suing Masimo over recent changes to its bylaws that were aimed at preventing Quentin Koffey, Politan’s CEO, from taking a seat on the board.
The irony is thick. Politan’s business strategy is to buy into companies it thinks are undervalued then address the issues that led to the undervaluation. Masimo’s acquisition of Sound United led to the company’s undervaluation and attracted Politan’s interest and investment. By orchestrating a change in leadership at Masimo and then, presumably, selling off the problematic asset—Sound United—Politan hopes to make a killing.
In the lawsuit, Politan is critical of the Sound United acquisition: “The stunning decrease in value reflects much more than mere market skepticism of the acquisition. A decrease of more than five times the purchase price demonstrates that the market fears that a complete
