Polk to sell its sound overseas British deal offers opportunity, risks

November 25, 1990|By Graeme Browning

This time last year, George Klopfer Jr., president and co-founder of Polk Audio Co., a Baltimore-based manufacturer of audio speakers, was -- by his own account -- skulking around London stores playing "mystery shopper."

Mr. Klopfer would meander into the stores' stereo departments, casually tell sales people he was interested in buying a set of British-made speakers and ask which brand was the best. "I wanted to know what the dealers thought, and what people were buying," he said recently.

When he got his answer, Mr. Klopfer did what any red-blooded entrepreneur would do. He went home and began negotiating to buy the company.

At the end of September, Polk Audio announced it would acquire AGI (Electronics) Ltd. of Maidstone, England, a private holding company whose major subsidiaries include KEFElectronics, a respected loudspeaker manufacturer, and Boothroyd-Stuart Ltd., which manufactures audio components under the name Meridien.

If the deal goes through, Polk Audio will double in size and gain access to a European distribution system analysts say is one of the best in the business. It would also find its now pristine balance sheet clouded with debt and a large chunk of its stock in foreign hands.

Mr. Klopfer figures the risks balance out.

"Ultimately, we either have to become an international business or we'll become part of somebody else's business. It's just that simple," he said.

Analysts generally applaud the AGI acquisition. Not only are AGI and Polk Audio about the same size -- $30 million in annual sales -- but KEF and Meridien have the same reputation in Europe for high quality at a reasonable price that Polk Audio has developed in the United States, the analysts say.

"We like the acquisition," said Howard Rosencrans, an analyst with Great Neck, N.Y.-based H. D. Brous & Co. "It gives Polk Audio an exposure in the higher end of the market."

Mr. Klopfer refuses, however, to put a price on the combination cashand stock swap with which Polk Audio will acquire AGI. Since Polk is debt-free, analysts worry that the price could turn out to be too high.

"There will definitely be synergy" between Polk Audio and AGI. "But the financial front -- that's the great unknown," said Chris Feiss, an analyst with Alex. Brown & Co., which helped take Polk public in 1986.

In its 18-year history, however, Polk Audio has overcome a lot of unknowns.

Mr. Klopfer started the company with Matthew Polk, his roommate at the Johns Hopkins University, after the two graduated -- Mr. Klopfer with a degree in history and Mr. Polk with a degree in physics -- in 1972. They had $200 and a spare garage for their manufacturing operations.

The new company took Mr. Polk's name "because it was easier to pronounce," Mr. Klopfer said. Black-and-white publicity photos a company album from that time show Mr. Klopfer, with shoulder-length hair and droopy jeans, attaching a side panel to a speaker with a screwdriver.

"Neither of us were exactly MBAs, but we knew what we liked to hear," Mr. Klopfer said with a wry smile.

Sales rose dramatically through the early 1980s and tripled each year from 1985 to 1989. Today Polk Audio stock sells for about $7 a share over the counter.

The company had a disastrous first quarter this year -- net earnings for the three months ended July 1 were down 50 percent from the year-earlier quarter -- but it bounced back in the second quarter with earnings that rose 61 percent over second-quarter earnings in 1989.

Polk Audio also is now the third-largest speaker manufacturer in the United States, behind Harman International Industries Inc., the Washington-based manufacturer of JBL and Infinity speakers, and Massachusetts-based Bose Corp., both much larger companies.

At the same time, however, the U.S. speaker market has been maturing: Growth has slowed to 5 percent a year or less, and larger companies are buying out smaller ones.

Mr. Klopfer said he and Mr. Polk have no intention of becoming a target.

"We thought four years ago the best strategy would be to get a strong balance sheet and position ourselves for acquisitions. We did that. Now, the more we see, the more it looks to us like over the next five years Europe will be a better market than the U.S.," Mr. Klopfer said.

Isolating their search to England was easy, Mr. Klopfer said. U.S., German and British manufacturers have dominated the international speaker market since before World War II, but German manufacturers sell their products primarily in small European countries and to their own large, thriving market, he said.

Britain's speaker market, in contrast, is only one-third the size of the U.S. market, "so if you're a British speaker manufacturer and you want to grow, you have to export," Mr. Klopfer said. KEF, for example, sells 90 percent of its products overseas, he said.

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