|Henry Juszkiewicz has headed up Gibson since 1986, making him one of the industry's longest-running CEOs.
What Went Wrong At Gibson
In a candid interview, Gibson’s longtime CEO explains why he took the risky move of acquiring a struggling consumer electronics business and why it didn’t work as planned, and reflects on the highs and lows of three decades in the guitar business.
The bankruptcy proceedings of Gibson Brands have probably provided the music products industry with more media attention than any other single event of the past decade. The story has received front page coverage in every major newspaper, has been prominently featured on network news, and has generated a torrent of internet commentary. Financial travails of a leading manufacturer don’t necessarily reflect well on the rest of the music products industry. On the bright side, though, the non-stop coverage indicates both the public’s interest in the guitar business and its reverence for the Gibson brand.
To recap the unfortunate Gibson saga, in 2014 the fabled guitar maker borrowed $375 million to finance the purchase of the consumer electronics division of Philips NV, a Dutch conglomerate. Philips had an illustrious history in audio, having developed the CD and the DVD. But for the past five years, its audio business had been in decline. Gibson CEO Henry Juszkiewicz was undeterred by the slumping revenues, confident that placing the consumer audio products under the halo of the Gibson trademark would create what he described as a “leading musical lifestyle company.” Plans to create a large enterprise that engaged musicians and music lovers alike came crashing down on May 1 when Gibson Brands, unable to meet debt payments, filed for Chapter 11 protection in a Delaware Court. The bankruptcy was triggered entirely by collapsing sales in the consumer audio business. The guitar business remained largely unscathed, having consistently generated positive EBITDA since 2014. This fact, however, didn’t prevent headlines like one in USA Today that declared “Gibson Guitars Goes Bust.”
A bankruptcy plan submitted to the court in early June had private equity firm KKR, which had accumulated 69% of the outstanding Gibson bonds, emerging as the majority shareholder of a reorganized company focused on musical instruments, the consumer electronics business having been liquidated. Juszkiewicz’s 36% stake and President Dave Berryman’s 49% stake would be wiped out, and unsecured creditors would receive pennies on the dollar. To ensure a smooth transition, KKR generously agreed to retain Berryman for a one-year period at a salary of $3.35 million, while Juszkiewicz would receive $2.1 million to provide consulting services for a year, plus approximately $1.5 million from profits on the sale of shares in TEAC.
"This is just my opinion,
but I think KKR really loves the guitar business
and they are taking a long-term view."
As of August 3, Judge Christopher Sontchi of the Delaware bankruptcy court gave a tentative approval for the bankruptcy plan and agreed to have it put to a vote before the creditors’ committee. The stakeholders would have until September 14 to cast their ballots. If approved, the company would emerge from bankruptcy on September 27.
However, the bankruptcy plan has recently come under fire. The Blackstone Group lending arm, which had lent Gibson $77 million prior to the bankruptcy, argues that Juszkiewicz and Berryman gave preferential treatment to KKR, and that efforts to sell the company have been “halfhearted.” In a court filing, Blackstone alleges that “KKR is being enabled in a scheme” to take control of Gibson, by “promising existing shareholders” some of the company’s value. Blackstone recommends scrapping the original bankruptcy plan and actively soliciting bids from financial and strategic buyers. Philips, which is owed a $25 million royalty payment, has lent support to the Blackstone proposal. According to Blackstone calculations, Gibson has an enterprise value of between $350 and $450 million.
Although Gibson continues to make and sell guitars, the battle in bankruptcy court is taking a toll. In the month of May, the company posted a $3.2 million operating profit on revenues of $22.4 million. However, more than $8.0 million in Chapter 11 and restructuring costs resulted in a net loss.
What will the Gibson company look like after emerging from the Chapter 11 process? What prompted the successful guitar maker to venture into consumer electronics? What finally pushed the company into bankruptcy? Gibson CEO Henry Juszkiewicz answers these and other questions in the following wide-ranging interview. Herewith, Henry Juszkiewicz on Gibson: past, present, and future.
The bankruptcy plans that have been submitted to the courts indicate that Gibson is planning to emerge from Chapter 11 as a company focused primarily on guitars. Can you give some idea of what the “new” Gibson will look like? Will you retain the guitar factories in Nashville, Memphis, and Bozeman? And what about brands like Baldwin, Stanton, and KRK?
I can’t really answer that question because we’re going through the bankruptcy process and we’re in a state of limbo. The company has no owners right now. Every decision is being determined by a judge who is only focused on very short-term considerations. All decisions have to be presented before the judge and a million people with competing interests get to weigh in on them.
I expect Gibson to emerge from bankruptcy by the end of September, and the process is more or less going according to plan. Once we emerge from the process, KKR will be the largest equity holder, and some of the other bond holders and banks will have some participation. There will be a new board of directors, and the shape of the company will be determined by KKR.
This is just my opinion, not a statement of fact, but I think KKR really loves the guitar business and they are taking a long-term view. Again, this is just an opinion, but I don’t think there will be any radical changes.
Has the Chapter 11 process had a disruptive impact on the guitar business? And if so, what are you doing to cope?
Other than a lot of negative press, it hasn’t been all that disruptive. What people don’t understand is that the bankruptcy process doesn’t do anything on an operating basis. I fly American Airlines frequently, and when they were in bankruptcy, they were still flying on schedule, people were working, and there wasn’t any outward change. It’s the same at Gibson. Management is in place, our factories are producing and shipping products, and we’re working on the budgets we put in place prior to Winter NAMM.
There is certainly concern among our employees about what might happen and a lot of innuendo in the media and online. Factually, though, business is good.
"I had been driving to build
the leading company in the musical lifestyle business.
It was a bold and risky move,
and I knew that at the time."
What will your future role in the company be?
I will not be the CEO. I knew that a long time ago, and frankly, if I continued, it would be an anomaly as these things go. I will continue to advise the company, working with a lot of people to ensure a good transition. They are listening to me, which doesn’t mean that they agree with me. But, we are having a meaningful conversation, and things are moving in a positive direction. I think things will get a lot better when the buzz dies down.
What was the initial thinking behind your acquisition of the Philips consumer electronics business?
I had been driving to build the leading company in the musical lifestyle business, combining instruments and audio to engage musicians and music enthusiasts alike. I thought we could do this by acquiring the Philips electronics business. It was a bold and risky move, and I knew that at the time. We were taking on debt to acquire a much larger business. But, [the Philips electronics business] was making enough money to service the debt. However, leverage means that even modest, unexpected setbacks can have major consequences. If we had pulled it off, it would have been a huge win for Gibson, and me personally.
"While we were selling in euros,
we were purchasing products
from Chinese factories in dollars.
Having your sales drop by a third
when you’re operating on gross margins
in the low 20% range
Unfortunately, the acquisition didn’t turn out according to your plans. What went wrong? Were there internal issues in the company that you overlooked? Did the market shift abruptly?
We had our share of serious external shocks in our first year. Philips was a leading brand in Europe—the last remaining electronics business in the EU—on the same level as Sony. 50% of the revenue came from Europe. Between January 2015 and April 2015, the euro dropped a third against the dollar.
For us, the problem was that while we were selling in euros, we were purchasing products from Chinese factories in dollars. Having your sales drop by a third when you’re operating on gross margins in the low 20% range was catastrophic.
Management that had run the business for a decade was paranoid and just wouldn’t raise prices. It’s an attitude that seems to be common in consumer electronics. Within three months after the euro had dropped, we accumulated $100 million in cash losses, which required taking on additional debt. I had to step in to direct management, something I hadn’t planned on doing, and began reorganizing the company. We were successful in repricing and made some good progress, but the $100 million loss made it difficult to resize the business and make needed investments.
I spent two and a half years flying to Hong Kong twice a month but was never able to repair the damage from that initial $100 million loss. The euro and the U.S. dollar are stable currencies. I don’t think anyone could have predicted such an abrupt swing. That was the crack that brought it down.
You’ve been at the helm of Gibson since you acquired the company in 1986, making you one of the industry’s longest running CEOs. As you look back on your career, is there anything that you’re proud of?
When we acquired Gibson in 1986, it was losing about a million dollars on nine million in revenue. We grew it into an enterprise of over $1.0 billion with the musical instrument part in the $600 million range. We achieved compounded annual growth of around 20% in an industry that was growing between 2% and 5%, and we did it without any external capital.
I also want to give a shout-out to Dave Berryman. When we took over, Epiphone was just an afterthought, with sales of just $70,000. He built it into a major brand in its own right.
We also built Gibson into a truly global brand. We became the number-one selling guitar brand in Japan, and in 1986, people laughed when we said we would sell into Japan. The Gibson brand has developed recognition far beyond the guitar business. We also had some compelling financial numbers that unfortunately, allowed me to get into trouble.
"This is a milestone point in time,
for the entire industry.
We need to break out of the way
we’ve been doing things
and find new ways to reach the consumer."
Any disappointments you’d care to discuss?
The future is what we make of it. No brand can coast and you have to constantly redefine yourself given that the pace of change keeps accelerating. I take full responsibility for not fully redefining Gibson. Historically, Gibson was never a traditional brand. The company was filled with visionaries that were consistently ahead of their time, from Orville Gibson to Les Paul. They saw the future and brought new things to players that had never existed before. When they called Les Paul’s guitar “the Log,” it wasn’t meant as a compliment. But over the past few decades, Gibson had become the “traditional” brand, which I felt was out of character. I wasn’t successful in trying to rekindle that crazy innovative mojo that had defined Gibson. The industry needs some vision, some improvement, that will get people excited. I wasn’t able to pull it off.
Speaking of Gibson’s history, you bought the company at a low ebb. The guitar market was soft, and Gibson was suffering from a series of managerial missteps. What did you see in the company?
The external viewpoint is always more important than the internal viewpoint. A brand doesn’t live in the company; it lives in the hearts of consumers worldwide. The staff at Gibson [in 1986] was pretty demoralized because the company was struggling. Before buying the company, I spent almost seven months doing research, interviewing kids, dealers, players. The feelings and respect I had for the brand were echoed by everyone I talked to. As much as I respected the brand, after I was at the company for two or three years, I realized that it was ten times more powerful. I never thought we could ever grow beyond $50 million until I understood just how powerful the Gibson brand is. It’s part of our national heritage, and it’s respected worldwide.
Any thoughts on the future direction of the industry, or the distribution channel?
This is a milestone point in time. I would argue not just for Gibson, but for the entire industry. We need to break out of the way we’ve been doing things and find new ways to reach the consumer. Our industry is small and specialized, which makes it hard and expensive to do consumer marketing. When a packaged goods company like Proctor & Gamble spends a dollar on marketing, they get a dollar’s worth of impact because 100% of the people they reach are potential customers. If a guitar company spends a dollar, it gets only a nickel worth of benefit because 95% of consumers aren’t guitar players.
This makes us very dependent on the retail channel. It’s critical for reaching the consumer. I think the industry has become too rooted in rock ’n’ roll thinking. Consumers are diverse and music is diverse—Billboard lists 20 or 30 categories that are really spread out. We have to offer a store environment where moms, kids, executives, and different kinds of musicians feel comfortable. A business that isn’t warm and embracing can’t survive.
"I was driven to do something great
and make a big impact on culture and music
and I didn’t get us there.
It has definitely been disappointing."
What about brick-and-mortar versus online sales?
As a small industry, we have the benefit of following others. There has been retail consolidation all around us for over a decade. Wal-Mart came to dominate brick-and-mortar. In the consumer electronics space, Best Buy emerged as a giant. The same thing is happening online. When the internet came on, every dealer thought that it would propel them to riches. But it’s a different game that requires a lot more than just putting up a website.
For online shopping, I think the customer needs to have a great experience in making a purchase. They need to have choice. That’s why we work with some of the largest e-commerce retailers who really do a great job. They stock our entire product line, and they provide a great experience. Adding more merchants doesn’t give the consumer a better experience. In my experience, as you add more retailers, the consumer is more likely to have a bad experience.
The comparative quality of contemporary Gibson instruments versus vintage instruments has been continuously debated. As someone on the front line, what are your thoughts?
Vintage Gibsons aren’t just about wood and strings. Like art, they are about history, the people who made them, and the people who played them. Our technologies are far superior to what the company had in the 1950s. They used to hand-shape parts; we have machines that work to tolerances of one-10,000th of an inch. With that kind of precision, there is no way that we can’t consistently build a better product. But, you can’t create a 1959 guitar today unless you can go back to 1959. For some people, the history, the scarcity, make an instrument particularly desirable.
You can’t really argue that one’s better than the other. It’s just opinion. I’m just a purveyor, so the opinions of the consumers and players are a lot more important than mine.
"I won’t be fading back and doing nothing.
I hope that I can contribute
and build a new dream this late in the game."
How are you taking this bankruptcy personally?
It is a tough time for me, mostly because I didn’t achieve the goal I set for myself. I was driven to do something great and make a big impact on culture and music and I didn’t get us there. It has definitely been disappointing. But, I’m healthy, I have a great family, and I realize that I’m in a much better position than a lot of people.
Any plans for the future?
I won’t be fading back and doing nothing. I hope that I can contribute and build a new dream this late in the game. It’s disorienting that for the first time in a long time, I don’t know exactly what I’m going to be doing.
My immediate priority is working with the new guys to ensure a smooth transition. There are some really smart guys who are dedicated to the brand, and a lot of the investment officers are actually semi-professional players. My hope is that smart people with a lot of money and a passion for the guitar will take the brand further than I could.