Steinway And Sons Pg 11-15

Stelnway & Sons: Buylng a Legend (A)

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manufacfuring Ptocess. Our number one goal was to eliminate any question of product quality. The Dealer Network Feeling that Steinway's dealer network was overextended and unfocused, Stevens also focused efforts on distribution. Early ory he promoted Frank Mazurco to the position of Executive Vice President with responsibilities for sales and marketing. Mazurco quickly set out to reduce the size of the dealer network, only keeping dealers who were fully committed to Steinway as their primary product line. Irr the Americas, for example, Steinway reduced the number of independent Steinway dealers from 153 to 93 between 1985 and 1995. In large cities that were deemed shategically important to Steinway, this involved the replacement of over 20 underperforming dealers. I:r smaller cities that cotrld not support a full-scale Steinway dealership, it involved the termination of 50 dealers. Second, for its remaining dealers, Steinway developed a "Parbrership Program" which induded; (1) formaf sales training programs, (2) formal technical support programs, (3) promotional events plaruring, (4) coordinated advertising and public relations, (5) instihrtional sales prograrns, (5) concert and artist activities, and (4 extensive merchandising support. As an example of Steinway's merchandising suppo$ Steinway aided dealers in the creation of a separate "Steinway Showroom" within the dealer's retail space. These roorns were designed to showcase Steinway pianos in a quality environment, increasing sales for both the dealer and for Steinway. The Defection of Andre Watts The importance of a high quality dealer network became painfuly obvious to the Steinway management team in early 1988 with the defection of a prominent "steinway Artist." In a televised Lincobr Center performance to cornmemorate the 25h anniversary of his debut with the New York Philharmonic, Andre Watts had chosen a Yarnaha concert grand. Reportedly, Watts was dissatisfied with the service he had received from certain Steinway dealers and was frustrated by what he felt was a lack of attention to his requests. He made this dear in a 1988 interview in which he jtrstified terminating his relationship with Steinway and mdorsing Yamaha as his piano of choice: I sit in my house and practice and prepare a program. And I start to go on the road and the instrurnents I encounter start taking away, start stealing parts of what I've built up, what I've developed ... this doesn't work, that doesn't work, you can't get ttris fixed. When you call back to New York, you may find out, very cordially, ... "that it's an independent dealer, we don't have any control over that person, I'm sorry." After a while, if there is something better, I don't see why not.12 Others would daim that the prirnary reason for Watts' defection was financial. Whereas Steinway charged for piano delivery and in-hall tuning, Yamaha waved thee fees for its concert artists. For a performer such as Watts, who played about 150 concerts per ye.u/ the resulting annual savings came close to $1fi),0fi). Regardless of the reason for Watts'departure, however, Yamaha had atbacted a high profile artist to endorse its concert grand pianos and this endorsement came at the ogense of Steinway. The Product Line Finally, Steinway began to expand its product offerings. This involved the introduction of the Boston Piano line i^ 1992, the launch of the Steinway Limited Edition pianos in 1993,and the launch of the Crown Jewel Collection of Steinway pianos in 1994. TheBostonPiano Steinway's first new product introduction was a mid-priced piano under the brand name "Boston." This new product concept was the brain&ild of Steinway's Robert Dove, who refined the concept and was subsequently given responsibility for the worldwide launch

D

The MacNeil/Ichrer NewsHour, Apli,L1, 1.988

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Sblnway & Sons: Buylng a togend (A)

and marketing of the Boston line. For Steinway & Sons, the introduction of the Boston piano line represented a significant break with traditioru as suggested by the following assessment: 1n1992 the Birminghams did something that Steinway & Sons had resisted tfuoughout its history. They introduced a mid-priced piano. Every time the idea had been raised before, it had been rejected because Steinway wanted to stay in the exdwive niche, selling only a top-of-the-line prestige piano. The Birminghams believed that they cotrld retain the high end of the market while providing a lower priced [instrunentl for "customers who were not yet ready to acquire a Steinway." They named their new piano after their hometown of Boston.r3 Importantly, the Boston piano line was "designed by Steinway & Sons," but manufactured in japan by lGwai. The intent was to produce a line of pianos that sold for about halI the price of a comparably sized Steinway and to sell that line exdusively ttuough Steinway dealers. tr the process, the line would provide dealers with a high-margin product in the mid-market price range and allow Steinway to capture sales that might otherwise have gone to Yamaha. It was believed that Kawai agreed to manufacture the pianos to make use of idle capacity. In 1995, the Boston piano line consisted of eight models of vertical and grand pianos that ranged in price from $6,395 to$29990. By 1994, Boston piano revenues had grown to $15.9 million on the sale of 2fl0 units, up from $2.7 million on the sale of 500 units nL992. Steinway Limiteil Eilitions Steinway's second new product introduction was its Limited Edition Collection. To celebrate 140 years of piano making, Steinway introduced a specially designed L406 Anniversary Limited Edition Piano in 193. Limited to 140 grand pianos, each in a mahogany finish, these pianos sold at a 25% premium to the traditional ebony Steinways. Withnr hours of being made available, Steinway dealers had purchased all 140 pianos. Based on this success, Steinway decided to introduce a limited edition piano every two years. Its L995 limited edition, numbering 145 grand pianos, was entitled "brstrument of the Immortals" and was errgraved with the names of the 73 immortal "Steinway Artists." It also sold out to dealers within hours of being made available. The Crown f ezoelCollection Steinway's third new product introduction was its Crown fewel Collection. Through L993, over 9oo/oof the pianos sold by Steinway were finished in dassic 10olofinished in walnut or mahogany. In L994, Steinway sought to shift ebony, with the traditional these proportions with the introduction of the Crown fewel Collection-otherwise Steinway pianos that were finished in exotic woods, such as east indian roeewood, kewazinga bubinga, african pommele and macassar ebony. These pianos sold at 20o/oto 30oloprice premiums to the traditional ebony Steinway. In spite of these price premiums, by 1995, the Crown ]ewel Collection repreented alnrost 30"/oof Steinway unit sales.

The Purchaseby Messina& Klrkland - Aprll 18, 1995 In spite of the positive changes made by Stevens and his management team, by the mid1r990s,the runrring of Steinway was constrained by limited frnancial resources. With the company still highly leveraged, there was a constant lack of working capital. Stevens described the situation as follows: Making pianos is capital intensive. Between lumber, serni-finished pianos and finished pianos, there is over $75 million in inventory at any given moment. Yet we were financed on a shoestring, constantly banging up against our credit line, so that even a $200,000 had to be negotiated with the banks.

13 RichardIC Lieberman,Steinway&Sons,YaleUniversityPress, 1995 12

Stelnway & Sons! Buylng a togend (A)

500-028

This was especially true during the summer when we would erperience our seasonal downfum in demand. Costs would stay constant, revenues would decrease, and we'd be left scrambling for funds. Rather than focusing on the making and selling of pianos, we'd be dealing with bankers and lawyers. It got to the point where it was really tough coming to work in the sumrner. Finally, in late-1994, for personal reasons, the Birminghams decided to sell the company. Made aware of the sale by an investrnent banking firm, Kyle Kirkland and Dana Messina became intrigued. By 1995, their small firm, Kirkland Messina, had purchased controlling interest in Selmer (in 1993), a meat processing company (n 1992), and a paper company (in 1993). hr Steinway, they saw a well-run company that could benefit from their financial expertise. hr addition, as frwtrated musicians, they saw a company that sparked their imagination. The decision to bid on Steinway was not without risks, however, as noted by Messina: When we purchased Selmer i^7993, we had little to lose. We put in 9250,000 of our own money, which represented the brllk of otrr assets, and we came away with 23o/oof. the company. By the time Steinway became available, that 23o/owas worth over $10 million. So while many people saw the b.ryrng of Selmer and the buying of Steinway as being sirnilar, we had a lot more to lose in Steinway. Nonetheless, on the strong insistence of Kirkland (the piano player among the two), they were one of 64 groups to bid for Steinway. And with a first round bid of $75 million, they were one of tm groups invited to give a second bid. Subsequent rounds saw the number of bidders drop from 10 to 4 to 1., with Kirkland Messina increasing their bid from $75 million to $90 million to $100 million' Messina noted that their finat bid of $100 million was not the highest received by the Birminghams. However, combined with their successful track record with Selmer, it was sufficient to win Kirkland Messina the bidding war.

llovlng Fonrard Upon completing the purchase of Steinway, the questions facing Messina and Kirkland qutd.ly became one of building a business. In particular, they needed to decide whether Steinway wouldlontinue its high-end, niche strategy of being the world's pre-eminent maker of high quality vertical and grand pianos? Alternatively, might it make more sense to forego this long-standing atategSrto pursue some bolder, more aggressive plan? Within these larger questions, the two partrcrs needed to decide what to do with the recently inkoduced line of Boston Pianos. Firs! did it makesensefor Steinway to sell a mid-priced line of vertical and grand pianos? Second, if it did make cense,might there be other ways to leverage the Steinway brand name to ftrrther enhance revenues? Finally, what role should Messina and Kirkland play in the running of Steinway? It was one thing to ormthe company; it was something else to run it effectively.

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500-028

Exhibit 1

Steinway& Sons: Buying a Legend(A)

The Ncto YorkTinrcsArticle, Aprtl19,7995

Steinway& Sons,Is Soldfo, $100 Million ByKENNETHN.

GILPIN

Steinway & Sons. the piano manufacturer that has been a New York institution since its founding by Heinrich E. Steinway in 1853. rvas sold yesterday for $100 million to the Selmer Company, a maker of musical instruments. A private comp.uly that is probably most famous for its Selmer sa,rophone. an instrument used by professional both arnateur and musicians including President Clinton and Kenny G, Selmer is controlled by two young former Drexel Burnham Lambert investment bankers who purchased their stake in the company in 1993. the Under tenns of the transaction, Selmer and Steinway will continue to operate as independent entities, with no changes in management, plant locations, marketing strategy or total employment. Each company employs about 1,000 people. "We are very excited." said Dana Messina, who along with his partner, Kyle Kirkland, controls Selmer. "We think it is quite an honor to become part of the team with Steinway." Steinway has been producing conceft grand and baby grand pianos for many of the world's most pianists accomplished from its factory in Long Island City, Queens. since shortly after the tum of the

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cenfury. The sale marks the third time in its illustrious history that Steinway has changed hands. In 1972, Henry Z. Steinway. the founder's great-grandson, sold the company to CBS for an undisclosed price, ending family control. Then in 1985, a group of investors led by John P. Birmingham and his brother Robert M. Birmingham, bought Steinway for a price rumored to be in excess of $50 million. Without what his disclosing group paid for the company, he said the $100 million sale price "beats inflation by a little bit" over what was paid a decade ago. In an interview, John Birmingham said "personal reasons" prompted the group to seek a buyer for Steinway about four months ago. people StiI, familiar with Steinway and the piano industry's problems. said they were amazed the compan) fetched that much. Over the last l0 years. critics have been quick to fault Steinway for what they say is a decline in the quality of its new pianos, which currently sell for as much as $75,800. In addition. the company has had to fight what some contend is a decline in demand, as well as compete with a huge supply of older Steinway pianos. The $100 million price is "an extraordinary number, and does not seem rational," said D.W. Fostle, author of "Steinway Saga," a book

about the company to be released by Scribner's on Ma1, l. According to Mr. Fostle. sales of upright pianos in the United States har.e fallen since 1988 b1, more than 40 percent. and show few signs of coming back. Competing with the huge pool of sun'iving Steinways is another serious problem. "It's as if every Ford build since 1903 is still on the road and is as good as a Lincoln Continental." Mr. Fostle said. "There is no wav to set rid of those pianos." In the inten'iew. Mr. Birmingham acknowledged that the piano market in the United States was mature, and that the company's biggest competition was from "our own used piuros." But he said the qualitl' problems had been solved. In years, coming Mr. Birmingham said the company was likely to find demand f?om aging baby boomers. as well as foreign markets. Steinway employs about 500 people in the United States. The company also has a manufacturing plant in Hamburg, Crermany. Last year the company had sales of a little more thiur $100 million. Selmer, based in Elkhan, Ind.. recorded earnings of a little less than $3 million on revenue of $ 101.I million last year.

Sblnway & Sons: Buylng a t€gend (A)

Exhibit 2

500-028

Selmer Financial Information (Prior to Acquisition of Steinway)

Flscal Year Ended December31. 1990 Income Statement Data: Net salqs Gross profft Operatingincome(loss) Net income(loss)

1991

1992 1993 (All Dollarcin Thousands)

1994

$79,798 24,900 6,725 (1,325)

$83,232 27,139 7,993 766

$8s,895 29,.158 9,233 2,343

$91,s10 28,193 3,880 (1,704)

$101,114 31,925 12,472 2,922

$12,208 7,923 4,625

$13,128 7,165 4,715

s14,437 6,797 4,385

$13,119 7,100 3,903

$ 16,638 7,752 3,198

Other Flnanclal Data: EBITDA InterestExpense Depr€ciation& amortization Capital Expenditures

812

74

31.27o 15.3olo

32.6"/" 15.8clo

$s9,507 94,984 10,119 68,961 13,798

720

879

1,112

Marglns: Gross proflt EBITDA Balance Sheet Data: Cunent assets Total assets Cunentliabilities Long-tem debt Stockholderequiv

34.37o

30.8o/o

31.6"/o

16.80lo

14.3o/o

16.5%

$s4,671 85,649 8,870

$s5,712 82,785 9,519

$56,736 88.970

$56,265 85,524

10,174

13,388

60,374 14,537

55,024 16'626

71,369

62,O57 7,253

4.226

tSelmer sold to Messina & Kirkland on August 11, 1993 Sourcq SelmerCompany

Records

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