ATC-Serato deal at risk - Commerce Commission could kill $113m DJ software sale

Serato chief strategy officer Nick Maclaren (left) and CEO Young Ly. Though little-known in NZ, the 160-strong Serato dominates the global market for DJ software. Photo / Dean Purcell

The $113 million sale of Auckland-based DJ software maker Serato to Japan’s Alpha Theta Corporation (ATC) appears to be in peril.

ATC has to convince the Commerce Commission the deal would not substantially lessen market competition.

In an unusually pointed Statement of Issues released by the ComCom this morning, the watchdog says it’s “not currently of the view” the deal passes that test - the benchmark for approval.

Serato built a highly profitable business (see financials below) making software that can be used with multiple brands of professional DJ hardware, or decks used by amateurs at home - or anyone on a laptop.

ATC (ultimately owned by Tokyo-listed conglomerate Noritsu) is the owner of the Pioneer DJ hardware brand.

US company InMusic, which owns a clutch of DJ hardware brands, including Akai Pro, Denon DJ, Marantz, Numark and Rane, has raised the fear Alpha Theta will hog Serato’s software for its own Pioneer decks, or at least restrict or make it more expensive for other DJ hardware makers to access.

It wants the deal blocked.

Serato chief strategy officer Nick Maclaren (left) and CEO Young Ly. Though little-known in NZ, the 160-strong Serato dominates the global market for DJ software. Photo / Dean Purcell

Through barrels of double-negatives, the Statement of Issues indicates the ComCom is leaning InMusic’s way.

“Based on the evidence currently before us, we are not satisfied that the Proposed Acquisition would not be likely to substantially lessen competition in one or more relevant markets,” the Statement of Issues says.

“It is unclear whether competition from the remaining competitors in the market would be sufficient to constrain the merged entity.

“We are also not currently satisfied that the Proposed Acquisition would not substantially lessen competition due to vertical effects for DJ hardware. Based on the evidence currently before us, it appears that the merged entity may have the ability and incentive to foreclose rival hardware providers through its control of a important input, Serato’s DJ software, and any foreclosure may be likely to substantially lessen competition. "

Then-PM Jacinda Ardern visits InMusic's Auckland office in 2020. The US firm, which counts Akai Pro, Denon DJ, Marantz, Numark and Rane among its stable of DJ hardware brands, set up shop in New Zealand in 2018 after buying Kiwi firm SoundSwitch. At the time, founder Jack O'Donnell put its revenue at $400 million. Photo / Getty Images

The deal could see ATC gain access to sensitive information from Pioneer DJ’s rivals. There could be less incentive for DJ hardware makers to innovate if there is “a risk a major competitor could appropriate those ideas” and, on the flipside, their hardware would be less attractive if they did not work with an ATC-owned Serato.

Serato chief executive Young Ly said, “We’re taking the time to review the Statement of Issues and will continue to work in good faith with the Commerce Commission. We firmly believe that this acquisition will accelerate the NZ tech industry as a whole while enabling DJs and producers through greater product innovation.”

Serato CEO Young Ly: "We firmly believe that this acquisition will accelerate the NZ tech industry as a whole while enabling DJs and producers through greater product innovation." Photo / Dean Purcell

InMusic founder and chief executive Jack O’Donnell said “Looking at the new Statement of Issues it’s very clear that the Commerce Commission really understands all of the problems that this sale would create. We applaud them for how thorough they have been.”

One industry observer was more blunt, telling the Herald the Statement of Issues represented a “brutal repudiation” of ATC’s application.

Decision delayed for third time

The ComCom has been chewing over the deal since October 10. A decision has been pencilled for March 10, but there have been two decision date delays already and ComCom says this could happen again. The landscape has been further complicated over the past week with news the United Kingdom’s Competition and Markets Authority (CMA) is now looking into the transaction (although it has yet to open a formal investigation).

Serato co-founders AJ Wilderman (left) and Steve West first met in the late 90s at the University of Auckland. The pair stepped back from the day-to-day running of the firm years ago but remain the major shareholders.

Serato’s numbers revealed

Like nearly all privately held firms, Serato has kept its financials close to its chest.

But a market filing by Tokyo-listed Noritsu - the ultimate owner of would-be buyer ATC - detailed some of the Kiwi firm’s recent numbers.

The filing said 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.

A Noritsui filing put the ATC-Serato deal at US$70m ($114m). The Overseas Investment Office - which earlier approved the takeover - said the transaction was worth between $100m and $120m.

Serato was founded in 1998 by Auckland University buddies AJ Wilderland (aka AJ Bertenshaw) and Stephen West (these days best known as the co-founder of EV charging network pioneer ChargeNet). Wilderland, West and various early managers and staff own the company today.

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.