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Avid Acquires Pinnacle Systems

On March 21, Avid Technology and Pinnacle Systems announced that Avid entered into a definitive agreement to acquire Pinnacle in a cash and stock transaction.

What will become of Pinnacle products such as Liquid Edition? One option for Avid may be offering Pinnacle”s products as solutions for lower-end segments of the market.

The press release states, “Under the terms of the agreement, Pinnacle shareholders will receive .0869 shares of Avid stock and $1.00 in cash for each Pinnacle share. At closing, it is expected that Avid will issue approximately 6.2 million shares and pay $71.3 million in cash, for a total estimated value of $462 million based on Avid’s stock price of $62.95 at market close on Friday, March 18, 2005. Upon completion of the transaction, the 6.2 million shares to be issued to Pinnacle’s former shareholders will represent approximately 15 percent of Avid’s outstanding common stock. The acquisition is subject to satisfying a number of closing conditions, including shareholder and regulatory approvals, and is expected to close in the second or third quarter of 2005.

“The purchase price represents a 30 percent premium over Pinnacle’s closing stock price of $4.97 on March 18, 2005. Assuming a closing date of July 1, 2005, Avid expects the transaction, excluding acquisition-related charges, to be dilutive to its pro-forma earnings per share in the third quarter and accretive in the fourth quarter, resulting in full-year 2005 pro forma earnings per share of approximately $2.70 per diluted share. In 2006, Avid expects the transaction to be approximately 10 cents accretive, resulting in pro forma earnings per share of approximately $3.20 per diluted share. After payment of the cash portion of the purchase price, Avid expects its cash position to be $280-$300 million at the end of 2005.”

The press conference is still available in audio form on the Avid Investor Relations website at http://phx.corporate-ir.net/phoenix.zhtml?c=82844&p=irol-audioarchives. (Windows Media Player is required.)

The announcement was a bit startling and unanticipated. Wall Street appears to be questioning the purchase price more than the acquisition itself — as are many, including myself. Of course, the big question is why Avid decided to do this. There are many possible reasons, and it seems unlikely that Avid will explain its actions in the near future. This leaves many pondering. There are strict SEC regulations about what Avid can reveal and when.

In any case, here are some given and hypothesized reasons for the move:

  • Avid wants to get into the consumer media marketplace. David Krall, Avid’s president and chief executive officer, has pointed out that the consumer market is growing, and there is an acquisition trend for integration of the consumer content creation market segment. (Sony Pictures Digital has acquired Sonic Foundry’s desktop software assets, InterVideo has acquired Ulead, Sonic has acquired Roxio and InterActual, etc.) Krall also has stressed the importance of Avid “owning” the first experiences of a potential future professional content creator.More importantly, Pinnacle Systems is generally considered one of the best consumer suppliers, with an outstanding distribution channel and good consumer shelf space. Avid has made several past attempts to gain a share of the consumer content creation market, and it has made an excellent choice with Pinnacle if this is a long-term goal for the company.
  • Avid wants to increase its share of the broadcast market. Several times I have mentioned the emphasis Avid has placed on the broadcast market. With pressure on broadcasters to convert to digital, and considering that it makes sense to convert news operations to networked IP operations as the digital transition is made, Avid has not only removed a major competitor from the scramble for sales, but has also selected a company that has several products complementary to the Avid product line.Pinnacle Systems broadcast servers have sold much better than Avid’s pricey and specifically targeted Unity servers. Other Pinnacle Systems product families, such as the popular Deko computer graphics line and the MediaStream family, may also bolster broadcast market penetration.The Deko CG line is popular with broadcasters and already has limited integration with Avid’s broadcast solution via MOS and MXF compatibility. It should be no problem to more fully integrate this technology into Avid’s NLE and productivity tools solutions. It should be pointed out that Avid has had problems marketing a CG line, abandoning its powerful standalone arquee product.Pinnacle MediaStream is an excellent application that will be a valuable new product for Avid. Most agree that it complements, rather than competes with, Avid’s DMS ProEncode solution, as well as the third-party Web + Interactive Delivery solutions available with Avid DNA products.There is also a question about what will happen with Avid’s relationship with Sonic. Some of its products are integrated into Avid’s NLE solutions. Now that Avid owns Pinnacle Systems’ DVD authoring product family, how will that shake out?
  • Pinnacle Liquid Edition and the other Pinnacle Liquid products are Avid competitors. What will happen to this former FAST Electronics product line? Will the hardware in Pinnacle’s hardware-based products offer any technology benefit to Avid and its nonlinear editing family? For example, how important technologically will Avid consider the native editing capabilities of Liquid Blue?Pinnacle appears to have made an error in not making its postproduction products AAF-compliant, but they are MXF-compatible with the same basic metadata architecture. Therefore, if this needs to be done, it should be fairly easy for Avid, an AAF Metadata Interchange leader, to accomplish.The low-cost Liquid Edition product has proven successful — especially in the low-end broadcast news market segment. In the press conference about the acquisition, David Krall again mentioned that Pinnacle Systems could be used to offer a solution to low-end broadcasters who have found Avid’s present solutions too high-priced. Will Liquid Edition become the lowest-priced NewsCutter?It is important to note that Pinnacle NLEs use an “industry standard” user interface. Many regard “industry standard user interface” as code for “an interface similar to that of an Avid NLE.” Thus, a more Avid-like “look and feel” should be easy to accomplish — mostly cosmetic — because the operations are already quite similar.Nevertheless, many are predicting that the Liquid products will just go away.
  • Pinnacle Systems’ Intellectual Property is a valuable asset. There has been little said about Pinnacle Systems’ IP. Pinnacle Systems co-founder Ajay Chopra (now chief operations officer and director) has said that each Pinnacle product contains a key nugget of intellectual property imbedded within. I believe there has not been enough acknowledgement of the value of this substantial body of intellectual property.

Some Pinnacle Systems products, such as Deko 1000 HD (above) and the other Deko CG apps, may help improve Avid”s standing in the broadcast market. The Deko line already has limited integration with Avid broadcast offerings via MOS and MXF compatibility.

For example, Pinnacle is generally acknowledged as a leader in long-GOP MPEG technology. Avid has tried to master this technology for years with limited success. This technology has many potential benefits for Avid in broadcasting.

Pinnacle Systems has achieved some recognition for its IC design (the K2 chip) and integrated boardset design. The K2 technology can be found in the live production switchers. (Note: Pinnacle Systems has announced that it has discontinued this product.) The boardset design includes Pinnacle’s ShowCenter set-top boxes, the CinéWave board, and both TARGA boards and FX technology.

While neither set-top boxes nor live switchers have been considered part of Avid’s offerings before, will Avid see the potential of such products and benefit from this technology? Pinnacle Systems has also profited from being an OEM manufacturer (for such things as TARGA boards). Will Avid reap similar benefits? Whether the answer is yes or no, Avid benefits greatly by gaining both the IP and the immense engineering talent that come with the acquisition.

One excellent technology that might be withdrawn from the marketplace is Pinnacle’s HD Elite codec. Clearly this conflicts with Avid’s DNxHD codec efforts. Having said that, Pinnacle appears to have an excellent HDV codec — apparently much better than Avid’s solution — and this is probably a major benefit for Avid. It is needed as soon as it is available.

Conclusion

Avid execs believe that 90 percent of the revenue of the two companies is complementary. “We think it would be hard to find a more complementary combination,” David Krall says. Almost 30 percent of the income from the combined company will come from the acquisition, he says.

This is also an excellent opportunity for Avid to diversify into the consumer marketplace and to carve out a wider market segment in the broadcast space.

As with many company acquisitions, there is concern that many of the Pinnacle products will go the way of Illusion, Elastic Reality, Parallax Software, Motion Factory, and other acquired products. No one can say at this time what will be kept and what will go away, so it is all just speculation. In fact, people may be asking questions until July, when the acquisition is expected to become final. We may also know more after a specific SEC filing.

The question remains, “Is this acquisition worth the $462 million?” That is up to Wall Street to answer. What can be said is that depending upon how this deal progresses and is managed, Avid could benefit significantly. As one stockholder wrote, “I believe David Krall knows what he is doing.”

Bob Turner has been a video editor since 1976, and has used just about every piece of editing equipment ever made. He can be reached at
bob.turner3@comcast.net.

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