The Money Behind Fender

It's funny how the music economy works. In the 50's through the 70's Wall Street could care less about the music business, but when the CD came out in 1981 and the labels began to resell their catalogs at a big profit, every major label but one (BMG) was gobbled up by a conglomerate. The recorded music business hasn't been the same since.

The same thing sort of happened in the musical instrument business. When every kid bought a guitar through the 60's thanks to the popularity of the British Invasion, suddenly there was a great deal of money in that end of the business. Fender, who was the revenue leader at the time, attracted a buy-out from CBS in 1965, which eventually ended in disaster. In trying to streamline the business, Fender's quality took a dive and it took a long time for guitar players to regain confidence in the company.

What's not known is that Fender was almost out of business by 1980 and had a $10 million loss on only $40 mil of revenue, but then-president Bill Schulz organized a plan for CBS to inject some cash for a new five year product development plan. Three years later, CBS lost interest, and Schulz was able to organize a leveraged buyout for only $12.5 million, but the company was seriously bootstrapped, since it didn't even own a factory at this point. It was still a great brand though, and within 3 years, Fender was in black again.

In 2001 a private investment company, Weston Presidio, bought 50% of Fender, with the idea of eventually taking it public, which is the goal of any venture investor. That almost happened earlier this year, but it was cancelled on the eve of the initial public offering. The company was trying to raise almost $400 million, but there was so little interest from the investment community that the IPO would've looked even worse than the Facebook offering. When investors looked at the MI market, they saw it shrinking, with no room for growth and Fender's market segment saturated.

Fender isn't the only major MI company with a big venture investor though. Did you know that Mitt Romney's Bain Capitol owned Guitar Center until earlier this year? The interesting thing is that this had been a very bad investment for Bain, as they'd been losing money like crazy with GC since the buy-out. You know who owns it now? Weston Presidio! That means the same company owns both Fender and GC.

Here's the thing - the record industry was ruined by Wall Street investors, and it could happen again in the MI part of the business. The one good thing about the fact that the business is shrinking and that means it's less attractive to the Wall Street bunch now. This is a business where love of music and art comes first. It's a place where big money interests doesn't mix.

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