If the story is to be believed, the massive Guitar Center/Musician’s Friend/123Music empire is in serious trouble. Saddled with a debt of $1.4 billion – yes, BILLION – they are in serious danger of not being able to pay even the interest on that debt, to the tune of $127 million, which is going to come due in a couple months. So what does that mean for you and me?
Well, first a bit of background. It seems that Bain Capital – yes, the venture capitalists that Mitt Romney was involved with – bought the company a couple years ago. They then began pulling massive amounts of money OUT of the company and laid the debt (the price of the acquisition) on Guitar Center. This way of doing business is insidious but sadly all too common in the world of venture capitalists, called by some “vulture capitalists.” Their game plan goes like this. Buy a large company, transfer the cost of the deal to that company, then begin pulling out every penny that would have been used to pay down the debt and either paying it to their shareholders or executives, or use it to buy MORE companies and start the process again. Then, when the debt is overwhelming to the bought company, let it go belly up, stop paying small and medium size vendors (who do not have enough clout to go after Bain) and pick the bones clean by liquidating whatever tangible assets the company may have.
Thousands of people lose their jobs, small and medium size vendors are severely or fatally hurt, but Bain rumbles on. This is just sick, folks.
Complicating matters is the fact that Fender and Gibson are themselves in dire straits (no pun intended, musically speaking!) and have inexorably tied themselves to Guitar Center and Musician’s Friend by offering dirt cheap product, in many cases much lower than what can be bought by mom-and-pop stores, and giving GC/MF outrageously liberal terms. The rumor mill is whispering that GC/MF is NOT paying anything close to what they owe Fender and Gibson and they too are tottering on the brink of insolvency.
And worst-case scenario goes like this. Bain lets GC/MF die. Fender, Gibson and who knows how many other recognized names in the music business die too. Suddenly we are left with few options when it comes to buying our equipment other than offshore manufacturers who in many case make inferior products. To make it even worse, as with Walmart vs. your local hardware store, GC/MF has succeeded in putting hundreds if not thousands of mom-and-pop music stores out of business in the last decade. So now where are you going to go to buy anything from guitar strings to having the opportunity to actually TRY that new guitar you’ve been hoping for?
It will be very, very interesting, to say the least, to see how this all plays out (another bad pun, sorry). Will Fenders and Gibsons become much sought after relics of the free market system? Will thousands of those instruments suddenly show up on the market at deep discounts as GC/MF crashes and burns? Your gut reaction may be that this would be a good thing, but think that through. What will happen if you need warranty work? Will those manufacturers take ALL their manufacturing overseas, eliminating thousands more American jobs? Assuming they can survive at all….
I find it interesting that in the discussion that’s going on right now, Martin’s name hasn’t entered into it. I think this is a great thing and it’s very likely that Martin owner and CEO Chris Martin’s far-sighted business practices have at least partially insulated his wonderful AMERICAN company from the firestorm that is brewing. Yes, they sell to GC/MF but my guess is that Martin will be less severely affected if that worst-case comes to pass.
Time will tell. A very short amount of time.
Peace & good music,