As soon as the Avid deal was announced it seemed a lot of people were concerned about what this could mean. The potential problem with the Avid deal is simple, the model that currently exists to finance something of this scale, around $1 billion, is broken. Let’s look at this in some detail.

Short-Term Focus

Private equity firms often prioritize short-term financial gains to impress their investors. This can result in pressure on the acquired company's management to implement quick cost-cutting measures. Cost-cutting measures could include layoffs, which can lead to a loss of experienced employees, reduced morale, and a decline in overall company expertise. Probably unconnected, but two excellent Avid employees with years of experience have recently moved to other companies. Within the first year of Francisco Partners acquiring Native Instruments and iZotope, some of the best people in the business had left.

Private equity buyouts may lead to underinvestment in research, development, and innovation. In the fast moving world of pro audio investment in R&D is crucial for maintaining competitiveness and meeting changing customer demands. The speed of change around AI and ML means that reducing investment can mean market share and influence is lost in a matter of months, rather than years. As we mentioned in our recent article, iZotope used to own the sound restoration space, now smaller and more agile companies are taking market share, this will continue unless professionals see investment that leads to better tools and more timely updates.

A focus on immediate profits can hinder a company's ability to develop new products, improve existing offerings, and invest in long-term strategies for growth.

If there is a lack of innovation and product improvement, this can result in a stagnant product lineup, causing customers to seek more innovative solutions from competitors. It is too soon to say if this will happen, but STG need to understand the Avid eco-system that exists across the professional sector. Playing fast and loose with tools that audio professionals rely on wouldn’t be good for the industry or the long term viabilty of Avid’s future in the industry.

Company Culture and Employee Morale

Avid has historically rewarded its people well, partly to attract the best talent. One of the quickest ways to cut costs is to reduce the wage bill, in innovation companies some of these roles demand high salaries. We have no evidence this is planned with Avid, however it’s often the case that this is the first place savings are made.

Layoffs and downsizing, driven by private equity's short-term profit objectives, can create an environment of fear and uncertainty among remaining employees. Reduced staffing levels can lead to increased workloads, burnout, and decreased employee loyalty, negatively impacting the company's ability to provide consistent and high-quality customer experiences.

Private equity firms may make cuts to employee benefits as part of their cost-saving measures. This can erode the sense of job security and loyalty among employees, affecting their commitment to delivering exceptional customer service.

Many Avid employees are our friends, they are some of the smartest and nicest people in the industry, so we do hope STG do everything they can to retain and reward the talent.

The Customer Experience

Insufficient staffing due to cost-cutting can result in longer response times for support, increased wait times, and reduced customer service quality. Again, many of Avid’s customers are professionals who don’t have time to wait for support calls to be answered or for software and hardware to have unresolved issues. The broadcast market needs QOS assured, it works by minutes and seconds, not hours or days. The film and TV industry is the same, poor service experiences can lead to decreased customer loyalty, negative reviews, and a damaged brand reputation.

Show Me The Money!

Private equity buyouts often involve taking on substantial debt to finance the acquisition. High debt levels can strain the company's finances, diverting resources away from strategic investments. Professional audio and video solutions need long term planning over years and decades, this is not always compatible with the strategic plans of investors who want to prioritise debt repayment. This means a significant portion of the company's earnings might be allocated to servicing the debt, leaving limited funds for reinvestment in areas that directly benefit customers.

A second and common problem is that private equity firms replace the existing management team with individuals who lack in-depth knowledge of the industry. Preferring to bring in their own ‘superstar team’ who often have little knowledge of the sector. The professional creative sector has a unique set of challenges that often only those who have years of experience can navigate. Furthermore, Jeff Rosica has worked hard to connect his leadership team with his customers. Any shift to a new set of ‘suit’s is likely to lead to existing customer thinking Avid has no understanding of the sector and its needs. This lack of customer-centric decision-making can erode trust and loyalty, prompting customers to explore alternatives.

Finally, Private equity firms often aim to sell the acquired company within a few years for a profit. This short investment mindset may discourage long-term strategic planning and investment, impacting the company's ability to deliver sustainable customer value. As we’ve already pointed out, there are many reasons why this would be damaging for Avid.

Raising Large Sums Of Money

Avid has been taken back into private ownership. To do this the existing shares had to purchased by the buyer, market cap was at over $1billion. Market capitalisation, also known as market cap, is a fundamental measure used to assess the overall size and value of a publicly traded company. It is calculated by multiplying the current stock price by the total number of outstanding shares. This means the new owners had to pay this or above.

Financing a deal like this is not something that’s going to be done with a Kickstarter campaign. It means the use of existing financial models, and as we’ve already outlined, the model is not great.

What this shows is that we need a new way of raising large amounts of finance, for the timebeing there are few viable alternatives for large scale financing. One such alternative that operates in the UK is an employee owned organisation, the best known being the John Lewis Partnership. According to their website; “The John Lewis Partnership is the UK’s largest employee owned business and parent company of our two cherished retail brands - John Lewis and Waitrose, which are owned in Trust by over 74,000 Partners.”

There are other ways to construct a commercial enterprise that deviate from the norm, but in reality these are the exception, not the rule. However, they do prove it can work and on a large scale.

At this stage we don’t know what will happen to Avid, all we can say is we hope that STG buck the current trend and prove us wrong.

* This article has been updated to clarify some points