The Turbulent Aftermath of Masimo's Acquisition of Sound United

In April 2022, Masimo Corporation acquired Sound United for over $1 billion, specifically $1.025 billion. This acquisition included well-known brands such as Marantz, Bowers & Wilkins, Denon, and Definitive Technology. The aftermath of this purchase was tumultuous, leading to significant changes in leadership, including the departure of the founder and CEO, and involving activist investors and legal disputes with Apple.

Sound United was established in 2012 by Kevin Duffy. The company expanded its portfolio by acquiring Definitive Technology in 2016 and the D&M Group, which includes Denon and Marantz, in 2017. In 2020, they entered the luxury market by acquiring Bowers & Wilkins. The financial details of these acquisitions remain unclear, raising questions about the valuation of Sound United at the time of Masimo's purchase.

Masimo Corporation was founded in 1989 by Joe Kiani, an Iranian immigrant who started the company in his garage in Irvine, California, with a $40,000 loan. The company specializes in innovative medical monitoring technologies, with notable products like the Masimo SE signal extraction technology and the non-invasive Radical-7 hemoglobin measurement device. Masimo went public in 2007.

Masimo's acquisition of Sound United was part of a strategy to enhance its consumer product distribution channels. Sound United was seen as a key asset for Masimo to leverage its established consumer channels to promote its expanding portfolio of consumer health products, including the Masimo W1 smartwatch, which offers continuous health monitoring features similar to those of the Apple Watch.

The discussion begins with the introduction of a consumer brand's baby monitor designed to track infants' vital signs, including oxygen saturation, pulse rate, and skin temperature, providing parents with real-time health data. This innovation aims to tap into retail markets like Best Buy and Euronics, with the company considering acquiring Sound United for access to these channels. The speaker expresses skepticism about the necessity of spending a billion dollars for such access, suggesting that hiring personnel to approach retailers might be a more cost-effective strategy.

The acquisition of Sound United allows Masimo to merge its expertise in advanced signal processing, biosensing, and photonics with Sound United's audio and home automation technologies. This synergy is intended to foster innovation in consumer health products, potentially integrating health monitoring features into audio devices. The speaker recalls a personal experience with earbuds that monitored heart rate, highlighting the potential for new products that combine health monitoring with audio entertainment.

Sound United's acquisition brings a portfolio of iconic audio brands, such as Bowers and Wilkins and Denon, which provides Masimo with immediate scale and brand recognition in the consumer market. However, the speaker questions the connection between Masimo and these audio brands, pondering who would think of Masimo while purchasing high-end speakers. The strategic vision of Masimo's founder, Joe Keani, is also mentioned, along with speculation about the desire to integrate their health monitoring technology with HEOS, a whole-home audio system.

Despite the ambitious plans, the consumer side of Masimo is not very profitable. The adjusted gross margin for their consumer products, including Sound United and the smartwatches, averages around 133%, while the other side of their business has a gross margin of about 52-53%. The consumer brand contributes approximately 30-31% to Masimo's overall revenue, with recent quarters showing revenues of about $150-160 million each. The speaker calculates that even if all consumer revenue were attributed to Sound United, it would take over 13 years to break even on the acquisition, raising concerns about the long-term viability of this strategy.

The discussion revolves around a business strategy focused on selling low-margin products at scale. The speaker suggests investing heavily, specifically a billion dollars, to gain access to Best Buy, rather than hiring personnel to make direct calls. Despite concerns about low margins, the emphasis is on achieving scale in sales.

Masimo Corporation faced a significant stock price drop of 35% on February 16, 2022, following the announcement of its acquisition of Sound United. This led to a loss of $5 billion in market capitalization, compounded by the acquisition cost exceeding $1 billion, totaling a $6 billion loss in market value. The stock, which peaked at $77 before the announcement, fell to around $33, and currently trades at approximately $231, largely due to the performance of Sound United's consumer products portfolio.

Pittin Capital, led by Quinton Coffee, acquired nearly 9% of Masimo's stock in August 2022, criticizing the company's governance and the Sound United acquisition. In March 2023, Pittin initiated a proxy fight, nominating Coffee and Michelle Brennan for board seats. By June 2023, shareholders elected Coffee and Brennan, marking a significant victory for Pittin after a contentious battle against Masimo's attempts to fend off the activists.

In March 2024, Pittin announced plans for a second proxy fight, nominating William Jellison and Darlene Solomon to further influence Masimo's board. The campaign escalated in April 2024, targeting Masimo's founder and CEO, Joe Keani, over issues of oversight and access to management. Legal battles ensued, with Masimo postponing its annual meeting from July 2025 to September 9, 2024.

The culmination of the proxy battle in September 2024 resulted in Masimo shareholders voting to elect Pittin's nominees, Jellison and Solomon, while ousting founder and former CEO Joe Keani from the board. This shift effectively gave Pittin control over the board, leading to Keani's announcement of his departure from the company he founded in 1989, which he had taken public, marking a significant turning point for Masimo.

A significant shift in Masimo's governance occurred, with Pittin now positioned to influence the company's strategic direction, particularly regarding the potential spin-off of Masimo's consumer business. This change reflects a broader strategy to separate high-margin healthcare operations from low-margin consumer divisions.

Less than a year after acquiring Sound United, Masimo restructured its operations by creating a separate consumer division. This move aimed to isolate the consumer business from the healthcare sector, allowing for clearer financial visibility. The restructuring was speculated to be a precursor to divesting Sound United, as Masimo sought to distance itself from lower-margin consumer products.

In July 2024, reports emerged that Masimo received an offer of up to $950 million for its consumer business, which included not only Sound United but also various products like smartwatches and baby monitoring devices. This offer was approximately $60 million less than what Masimo had initially paid for Sound United, indicating a significant shift in the perceived value of the consumer segment.

By November 2024, updates suggested that Masimo executives were considering treating the consumer audio business as a discontinued operation. This classification would affect how financial performance was reported, although it did not necessarily imply that operations would cease. Masimo was actively exploring options for the audio brands, indicating a strategic move towards separating from its consumer audio business.

During the escalation of a proxy battle in August 2024 between Pittin Capital and Masimo Corporation, Masimo alleged that Pittin's founder, Quinton Coffee, had threatened Bob Chapek to influence his decisions regarding his role on Masimo's board. This incident highlighted the contentious nature of the corporate struggle, with Masimo portraying it as an attempt at intimidation, although Pittin disputed these claims.

Masimo is embroiled in a significant legal battle with Apple, claiming patent infringement related to blood oxygen monitoring technology. This dispute led to Apple temporarily pulling some of its watches from the market. The legal proceedings have been tumultuous, with a peculiar ruling awarding Apple $250, affirming Masimo's claims but not providing any financial compensation. The ongoing legal issues illustrate the challenges faced by Masimo, particularly following its acquisition of Sound United.

The narrative surrounding Masimo's acquisition of Sound United and the subsequent fallout raises questions about the future of the company. The founder's dismissal and the ongoing legal challenges with Apple underscore the precarious position of a healthcare company navigating the complexities of consumer electronics. The speaker reflects on the absurdity of the situation, suggesting a potential exploration of other recent acquisitions in the audio industry.