In a blockbuster deal announced October 2, the Phonak Group agreed to a share-purchase agreement with GN ReSound in an acquisition worth a total of $2.65 billion. Pending the customary regulatory approval of the sale and the fulfillment of the purchase requirements, this means that the Phonak Group will include Phonak, ReSound, Unitron Hearing, Interton, and Beltone as hearing instrument manufacturers and distributors, and GN Otometrics (including Madsen, Aurical, and ICS Medical) and Phonak Communication Systems as special equipment and communication devices manufacturers—probably making it the largest group of companies in the hearing industry. Although the ReSound brand name and its products will remain as a distinct entity within the Phonak Group (eg, like Unitron Hearing), the conclusion of this deal in the first half of 2007 will transform the “Big 6” hearing aid manufacturers into the “Big 5” (Siemens Group, William Demant Holding/Oticon, Phonak/ReSound Group, Starkey Laboratories Group, and Widex).

The sale of GN was not a surprise, as the company’s board of directors announced in July the hiring of JP Morgan to review its business units to see if it would be better to sell off its group of companies or if they “could create similar value to GN’s shareholders by continuing its current strategy based mainly on organic growth supported by minor acquisitions and investments in distribution and retail” (see August HR News, p 8). The real suspense revolved around which company would emerge as the purchaser, with speculation favoring the William Demant Holding, Phonak, or Siemens groups from within the hearing industry, and swirling (unverified) rumors about interested parties outside the industry that included Toshiba. The GN ReSound Group has earned respect for its products, services, and distribution power, and the company has been profitable. Thus, its price tag and synergies with a potential buyer relative to product lines, research and development (R&D), distribution, and corporate financials and culture were probably the main considerations weighing into the bidding process.

Does this deal harken a “third period” of consolidation in the industry? The first period of consolidation, from 1998-2000, came largely as a result of the dawning of the digital era which dictated greater economy of scale and higher R&D budgets in order for hearing aid manufacturers to remain competitive. Larger manufacturers began purchasing or merging with smaller ones, and a race for new improved products ensued. A second period of “forward consolidation” from 2000-2002 featured manufacturers securing distribution capabilities, partly to help finance their higher R&D expenses and to add stability to their manufacturing flow.

At the heart of the two periods of consolidation is the necessity of product innovation and robust distribution. For example, GN devoted 9% of its revenues to R&D, and other companies in the industry have followed suit in a high-stakes “microelectroacoustic” technology race. Product life cycles have been reduced from about 2-4 years during the mid-90s to less than 9 months in some of today’s product categories. In fact, GN stated “the need for critical mass in the industry is constantly intensifying because the demand for more frequent and faster product launches in all price categories is constantly increasing, necessitating ever-greater investments in development, marketing, and sales.” Likewise, the increasing buying power and influence of distribution chains, both here and abroad, have played a major role in executives’ decision making.

Although somewhat dizzying for people in the hearing industry, the pace of technological advancement and changes in industry structure have proven to be greatly beneficial for the average consumer—who is getting the most sophisticated products ever at extremely competitive prices.