Going public turns up cash for company to explore new territory
This article was corrected on March 23. 2005
Dolby Laboratories ended 40 years as a private company in February with a high-frequency bang.
The company, with arguably the best brand in audio, roared to a 35% gain in its first day of trading, breaking a drought of public flotations and making a billionaire of founder and namesake Ray Dolby.
The sound pioneer’s perf was music to the ears of its underwriters and Wall Street in an IPO that harkened back to a friendlier time for tech companies.
But when CEO Bill Jasper made the rounds for the company’s pre-IPO road show for analysts and investors, one question repeatedly dogged him: “Why are you doing this?”
Dolby had spent 40 years as a low-key, profitable, private enterprise. It had always been able to generate sufficient cash to fund its operations without tapping the markets or forcing Ray Dolby to court outside investors. Along the way it built a brand synonymous with high-quality audio. So why subject a gem like Dolby to the short-term demands of the market and the costs of compliance required by the Securities and Exchange Commission?
The answer, put simply, was to give Ray Dolby, now 71, an exit strategy that didn’t involve selling the company. Dolby, a Cambridge-trained physicist, sold 17 million shares, netting $306 million. Closing price put Dolby’s remaining 68 million shares at $1.65 billion.
But Dolby’s retirement nest egg aside, the offering was an opportunity to take on markets beyond audio, use its stock as currency for some big acquisitions, and solidify its position as arbiter and creator of digital sound standards just as Hollywood makes the leap to digital film distribution.
“A bigger profile will help us as we move out of being an audio-only company and get into video compression and content creation,” Jasper says.
With stock as currency, Dolby will be able to cherry-pick technologies to expand the portfolio or neutralize those that look like a threat. “I think there is technology that is just below the radar scope that may end up in today’s world being a viable threat to the Dolby name,” says David Menlow, president of IPOFinancial.com.
Some possible acquisition targets include Sonic Solutions, maker of DVD-creation software; SLS Intl., maker of high-end theater sound systems; and SRS Labs, producer of a competitor to famed Dolby Surround technology.
Founded in 1965, Dolby began with technologies that reduced the noise inherent on recordings compressed onto small audiocassettes. Today, the company makes money by licensing the technologies in DVD players, theater sound systems and other consumer audio devices.
Dolby has reaped royalties from 1.6 billion devices so far. And while its biggest cash cow — royalties from DVD players — will soon diminish as markets saturate, Jasper says there’s still a lot of room to grow, in part due to the increasing popularity of recordable DVD players.
But Dolby disclosed in its offering that slower DVD player sales are a potential concern for the company, as are the possibility that new standards will be adopted that don’t require Dolby technology.
One market Dolby is making sure won’t get away is Hollywood. Company already handles the sound of most high-end theaters. But Hollywood’s anticipated transition from 35mm to digital film distribution will require that cinema owners spend $25,000 per screen on new projectors, servers and sound equipment — all, the company hopes, based on Dolby tech.
“Once studios and theater owners agree on a business model, then there will be a rollout and we will be positioned with the equipment,” Jasper says.
Dolby estimates studios would save between $1 billion and $2 billion by not having to ship 35mm prints. But even if they can agree on who pays for the switchover, Jasper concedes conversion will be slow. “If you could outfit all cinemas overnight, that would be ideal. But it’s not going to be 4,000 screens in a year — it will be a few hundred a year.”