Anatomy of a Marriage: How Best Buy Acquired Integrator AudioVisions

But the acquisition of AudioVisions, a Lake Forest, Calif.-based custom integrator, by Best Buy could be where the tail ends up wagging the dog.

Late last year, Best Buy, which retails the full range of consumer electronics products from audio cables to flat-panel TVs, bought AudioVisions, a high-end digital integrator of home electronics, whose home theater, audio, lighting, and security solutions sales range from $50,000 to $2 million.

The marriage was the culmination of a seven-year engagement. Like most marriages, couples look to benefit from each others' strengths. In Best Buy's case, it hoped to leverage AudioVisions expertise in selling full solutions and higher-end services, a model that is being adopted by custom installers, digital integrators and retailers of all sizes. For AudioVisions, it was looking for a once-in-a-lifetime pay day and a national footprint.

The dating process began back in 1997 when Best Buy was looking for a way to think outside of the box: the box its consumer electronics products were packaged in. The custom installation space was still young, but it showed the potential for services revenue that could be wrapped around the sale of audio, television and home theater systems. Two years later, Best Buy was ready to take the leap into services, says Sean Skelley, senior vice president of services for the company. Around that time, someone, no one remembers quite who, introduced Best Buy executives to Mark Hoffenberg, president of AudioVisions, to discuss the custom installation business and explore a possible acquisition.

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AudioVisions had what Best Buy was looking for in a strong partner. The company was a small but growing integrator focused on custom design and installation of high-end home electronics in affluent Orange County, California, and was one of the first integrators to develop a software application to run such a business.

Hoffenberg recalled the late '90s as a time when several of AudioVisions' peers were merging with each other. "At the beginning of the dot-com boom, people looked at our industry, and saw a niche industry ready to boom," he says. "A few groups looked to roll up a few others into larger companies, and we were one of those who were approached."

One of those suitors was Best Buy. But the retail company was still easing into high-end services. In late 2000 it acquired Magnolia Hi-Fi, a retailer and installer of high-end electronics. Unlike AudioVisions, which did not have a retail model and focused on selling full soluitions, Magnolia led with retail sales and followed with services.

That acquisition delayed the marriage with AudioVisions, but the passion lingered. "AudioVisions' services looked great," Skelley says. "As we acquired Magnolia, we started to feel we weren't so far apart from AudioVisions."

Skelley kept courting AudioVisions over the next few years, deepening the companies' interest in each other and helping Best Buy understand AudioVisions' software, processes and business model.

"We knew that showing someone like Best Buy was not the same as teaching them our processes," Hoffenberg says. "We knew we had something unique. They knew how important the services part was, and we helped validate it for them."

Meanwhile, Best Buy continued to add to its services business. The company set up Magnolia "store-within-a-store" centers in about 100 of its Best Buy properties and, in 2002, also acquired Geek Squad, a tiny 14-person provider of computer services to home and small business users. Since then, Geek Squad has grown to about 11,000 full-time and part-time people, with 5,000 people joining last year alone, Skelley says. Last December Best Buy bought Pacific Sales Kitchen and Bath Centers, a Los Angeles-based retailer of high-end home improvement products with 14 showrooms in Southern California, for $410 million in cash. The company configures and sells appliances and home entertainment systems to end-users and trade professionals.

But during this time, AudioVisions was not idle. In addition to custom installations in multi-million-dollar homes, the company went after big projects, such as outfitting the entire Virgin Megastore chain with high-end audio systems, which allows customers to try a CD before buying, and is currently in a two-year deal to design the electrical backbone of a 300-unit condominium that will to give owners a full range of customizable home entertainment, lighting and security options.

The final acquisition of AudioVisions gave the integrator what it had been seeking for years: a national footprint in a $13 billion market which has no leading player.

While both the Custom Electronics Design and Installation Association (CEDIA) channel and AudioVisions have been around since the late '90s, in a way the business is still in its infancy, Hoffenberg says. "I've watched it grow over the years," he says. "I still think it is in its infancy because it has changed a lot. The average CEDIA dealer is a small boutique. For this market to mature to the point where the public notices us will require that the big guys get in."

Both Hoffenberg and Skelley declined to discuss future plans resulting from the acquisition, but they did drop a hints about how AudioVisions could expand under the Best Buy umbrella and take that company into new services opportunities. Hoffenberg, now a vice president at Best Buy, has been charged in part to see how to grow the custom install business. Part of that growth could be via acquisition of other custom installers and digital integrators, or it could be achieved organically by duplicating the AudioVisions business model. AudioVisions already has a second office in Sausalito, Calif., and under the latter plan may open others.

"It would not be unreasonable to see new AudioVisions offices elsewhere in the nation," Hoffenberg says. "Part of my job is to see how to do growth. I'm not saying we won't grow through acquisitions, but acquiring a bunch of companies is not the best way to grow," he says. "I believe that success requires standard business practices. [In this business,] we're all boutique companies. Even us. We need to unify the business processes."

Skelley says he is not aware of any Best Buy plans to acquire new service-oriented companies, and is not specifically looking to acquire AudioVisions-like companies in other geographies. "We acquired AudioVisions because of their skills, their passion for this business," he says.

Going forward, Skelley says it's still hard to tell to what degree Best Buy will integrate AudioVisions' expertise with other parts of the business. "It depends on custom dynamics and market needs," he says. "There's no simple yes or no. Even when we combine companies, there is still some separation. We still have Magnolia stories and Geek Squad sites."

However, any combination would likely be based around developing a premium brand. "Maybe adding computer services to AudioVisions using Geek Squad would be a good start," Skelley says. "Maybe [home electronics] will all talk together, including appliances. . . . We're very excited about the potential. But we'll need to prove it in the next 12 months."

Proving such a concept will require a lot of experimentation, which just happens to be how Skelley describes his company's forays into the custom installation space. "We're doing a lot of tests and experiments with [Magnolia, Geek Squad, and AudioVisions] on how to grow with them," he said. "That's why we're so quiet now. We're still experimenting. And half of any experiments fail."

Hoffenberg is up to the challenge. "There are people in Best Buy who see us as the Bell Labs of Best Buy," he says. "If you look at the business pyramid, the large base, the foundation is Best Buy. Then there are other companies. Then at the very top is AudioVisions. We're a small part of the space."

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