In an unusual turn of events, a US company has raised concerns about a New Zealand software firm’s pending sale to a Japanese buyer, saying competition in the DJ hardware market would “all but die” if the deal gets the green light.
The developments come as the Overseas Investment Office (OIO) delays its decision for a second time and the Commerce Commission continues inquiries into the deal.
On July 12, Yokohama-based AlphaTheta - owner of the Pioneer DJ brand - said it entered an agreement to buy Serato for US$70 million ($113m) plus earn-outs, pending approvals.
Though little-known at home, Auckland-based Serato (staff - 160; FY2023 revenue - $40.4m; operating profit - $10.5m) dominates the global market for DJ software.
AlphaTheta is ultimately owned by Tokyo-listed conglomerate Noritsu. In a July 31 market filing, Noritsu said it had been expecting the deal to close on August 1 - but it was now delayed, on an open-ended timetable, because “approval from the New Zealand authorities (Overseas Investment Office, Land Information New Zealand) is taking time.”
At the time, the OIO told the Herald it now expected to make a decision by August 29.
That date came and went. On August 30, OIO head of regulatory practice Rebecca McAtamney said: “The application is currently going through the final stages of assessment, and we cannot provide a definite date by which a decision will be made.”
On the same day, a Commerce Commission spokeswoman said, “The Commission is still considering the competitive effects of the proposed acquisition.” The watchdog had no further comment.
The two regulators use different criteria.
The Overseas Investment Office applies national interest and good character tests.
The Commerce Commission assesses whether a deal will lessen competition.
‘All but die’
Today Serato’s software is sold with DJ mixers and controllers made by Theta, plus multiple decks in the stable of brands owned by US firm InMusic, including Akai Pro, Denon DJ, Marantz, Numark and Rane.
InMusic, owned and founded by American entrepreneur Jack O’Donnell and headquartered in Rhode Island, set up a hub in Auckland in 2018 after buying Kiwi firm SoundSwitch.
And it was the head of InMusic NZ, Morgan Donoghue - a former Serato chief commercial officer - who told the Herald last month he had concerns that Pioneer’s competitors in DJ hardware would not retain access to Serato’s software, or retain it on the same terms.
As news of the second OIO delay came through late last week, Donoghue referred the Herald to InMusic’s owner.
“We don’t want a rushed decision, so we’re pleased the OIO is taking its time to be thorough,” O’Donnell said.
“The outcome of the OIO’s investigation could have massive local and international impacts on the global DJ tech market.
“We also know that the Commerce Commission is looking at Pioneer’s potential acquisition of Serato from a competition perspective. If this deal goes ahead, then we believe that competition in the DJ market would all but die, driving up prices and quashing innovation.”
Serato CEO Young Ly said he had no further comment.
Earlier, Ly told the Herald he had been surprised that his former colleague Donoghue had raised questions about the deal.
“We have worked tirelessly with our partners, including inMusic, to give them confidence about our combined future together. This includes going on the record with them [with a joint Serato-InMusic statement on July 17] to express to their users and communities that our partnership and ongoing support of their hardware will continue into the future.”
Donoghue said he knew and trusted Ly, but the pending new owners were a lesser-known quantity: “We know the Serato guys, we’ve worked closely with them for years, we have a great relationship with them. We’re just worried that Pioneer buying them out would change everything,” he said.
Donoghue said he was also worried about the potential impact on NZ’s tech ecosystem with Serato’s pending sale to an offshore owner. Several founders and ex-managers have successfully launched start-ups, including Melodics and ChargeNet. This talent would be lost if roles were offshored.
Ly did not address Donoghue’s tech ecosystem point, but the local tech community has long argued offshore investment gives NZ-based firms the wherewithal to attack global markets more quickly, and the proceeds from such sales are recycled into a new wave of start-ups.
Cases in point include the likes of Xero (which drew some of the money Sam Morgan made from selling Trade Me to Fairfax, and that Rod Drury banked selling AfterMail to a US firm), and Mint Innovation, founded by LanzaTech alumni.
Industry rumours about the new owners cutting jobs even before the deal closed were incorrect, Ly said.
“We had a new leader come on board in our marketing group 12 months ago. He’s been challenged with realigning the marketing team to better fit changing market conditions. The net impact of these changes will actually grow the team.
“These changes and any associated redundancies, which are never easy, are entirely separate to [the AlphaTheta] investment - which is yet to be finalised.”
Overall, the restructure had seen a net gain of two staff, Ly said.
He anticipated further staff would be added under AlphaTheta’s ownership, which he said would allow Serato to accelerate its global growth plans.
Serato’s numbers revealed
Like nearly all privately held firms, Serato has kept its financials close to its chest.
But a market filing by Noritsu details some of the Kiwi firm’s recent numbers.
Ly has previously detailed how Serato was initially challenged by the pandemic as lockdowns laid professional DJs low amid event cancellations and nightclub closures.
But the firm pivoted to new products catering to amateur DJs and their home equipment. It also benefited from an event boom as the world re-opened, Ly said.
The CEO’s broad sketch is backed up by the numbers in Noritsu’s filing, which say Serato had an operating profit of $8.5m (and a net profit of $6.1m) on revenue of $32m in FY2021 (ending March 31, 2021, all amounts in NZD).
That dipped to an operating profit of $5.7m (and net profit of $4.8m) on revenue of $30.1m in FY2022.
In FY2023, Serato rebounded and then some, with an operating profit of $10.5m (and net profit of $6.5m) on revenue that jumped to $40.4m.
Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.