This article is adapted primarily from Part 21 of the 22-part series (really!) that Holly Hosford-Dunn wrote from July 5 to November 22, 2011 in her Hearing Economics blog. The original version can be read at hearinghealthmatters.org/hearingeconomics/page/2.
— David H. Kirkwood, HHM.org
In a matter of months, the big shots at HearUSA went from “thinking of the many ways they were going to spend their millions to losing their jobs and getting pennies on the dollar for their shares,” according to an insider’s view of spring 2011 at HearUSA.
I always thought this series would end with two of our industry’s largest companies, William Demant Holding (WDH) and Siemens, duking it out over HearUSA. But the facts got in the way. Siemens and WDH were just doing business—a really boring story. The juicy story remained HearUSA, the adolescent in permanent crisis that would not take its exit cue. This blog post is the script notes for the Final Act of the melodrama, with HearUSA chewing up the scenery and holding onto center stage for dear life…or in this case, the publicly traded company’s Death by Bankruptcy.
The Death Scene
The curtains rise on an old, faded HearUSA clinging to the ingénue’s role, denying that it is past its prime with nothing to offer, and doing one of those ridiculously long, dramatic death scenes full of grandiosity and other delusional behaviors. This scene has been going on for 5 months, starting with HearUSA “reacting like a teenage girl throwing hissy fits,” said the insider, when Siemens called in the loans. When hissy fits stopped working, HearUSA decided to run away from home (untangle the Siemens contract) but didn’t have enough money for a bus ticket. Next, it “put lipstick on the pig” to sell itself on the street, only to find—”much to its dismay”—that the market wasn’t interested. Siemens was its only suitor, but only offering market value—about $20 on the street in this dramatized version. Desperate, HearUSA ran home, locked itself in the closet, cried piteously for help, and finally—finally—plunged the knife in by filing 36 separate documents in bankruptcy court on May 16, 2011.
Enter the Stalking Horse
The Scream+Knife strategy worked, so long as HearUSA (as a public company) didn’t mind dying on the auction block. WDH bid $80 million and loaned HearUSA $10 million. But, if nobody wanted HearUSA before, why did Demant bid so much at the death bed?
The answer lies in bankruptcy strategy. HearUSA needed a high bid to prevent Siemens from getting the company for nothing (their view). HearUSA persuaded Demant to take on the role of “stalking horse” bidder by tendering a high first bid to flush Siemens out of the bushes. In return, insiders speculate that Demant got about $10 million in break-up fees if it lost at auction—certainly enough to cover the $259,000 HearUSA owed Demant for product.
Some insiders comment that paying $80 million for a company with $85 million in revenues is not a bad deal. Perhaps, but the 2011 annual revenue forecast is only $61 million, based on first-quarter reporting, which suggests that Demant’s bid didn’t really mean it wanted or expected to get HearUSA.
Demant had little down-side: if it won, it floated the idea that HearUSA might become a distribution channel for Bernafon; if it lost, it had driven up the price for Siemens—a “worthy exercise for a competitor.”
Siemens’ reaction was not positive. The WDH bid specifically excluded the Siemens- HearUSA contract and didn’t cover the Siemens dispute over the sale of Canadian assets. In other words,if Siemens did not bid, it lost a lot of hearing aid sales, a lot of money in loans to HearUSA, and any money it ever hoped to recover from the Canadian asset sale. If it did bid, it had to bid higher than $80 million. Bummer.
Prelude to Auction & Final Thoughts
Bankruptcy court set the auction timeline for June and July and appointed an Official Committee of Unsecured Creditors to represent a bunch of people and companies who might get left out in the cold. HearUSA’s Central Office sent out fanciful PR to network members,, explaining the auction was a means of obtaining the “highest and best offer” for assets and assuring them that it was business as usual. That was an odd choice of phrases since the same letter cautioned them to expect various court orders and assured them only of payment for claims filed prior to the filing date.
The long view. Of course, there is more to the story (see the final post about the auction at www.hearinghealthmatters.com). However, from my perspective, this series details how poor cost accounting and top-heavy management took the juice out of the HEARx vision. As much as I poked holes at it, I find that, in the end, I have come around: HearUSA’s vision helped put Audiology on the map and it created jobs, probably creating more hearing aid wearers in the process. For better or worse, it was instrumental in changing product distribution channels in our industry. For better or worse, it got the attention of managed care groups and AARP. Both effects may result in job creation and market expansion, pushing technical innovation and being pushed in return.
I find myself reiterating the hope expressed in Part 8: that future good management of what remains will resurrect parts of the vision in an audiology-friendly fashion that creates professional jobs, expands hearing health care, encourages technical innovation, and optimizes the communication abilities of more people with hearing problems.
Post your comments about Dr Dunn’s series at hearinghealthmatters.org/hearingeconomics.