The growth of patents as an asset class and continued hot sales of mobile devices were big factors in the $148 million price tag for audio-technology company SRS Labs Inc. in Santa Ana.
The pending sale to Calabasas-based rival DTS Inc. differs from some of the recent patent-related deals that have grabbed headlines, including Eastman Kodak Co.’s move to sell $2 billion or more worth of patents. Kodak in selling off its heritage in digital-photo imaging as it goes through bankruptcy.
SRS is a living, breathing research and development company working in a key segment of a fast-growing market: software and components that boost sound quality in audio devices including tablets, smartphones and other devices in the mobile category.
SRS specializes in surround sound, audio rendering and voice processing. It develops and licenses its technology to consumer electronics makers, home theater builders, computer game developers, carmakers and others.
“Given the complexity of IP licensing there is an advantage here,” DTS Chief Executive Jon Kirchner said in a conference call with analysts last week.
Buyer’s Portfolio
DTS has a product lineup of similar technology geared towards consumers, with a specialty in audio enhancement for the Blu-ray Disc home entertainment format. Its cash-and-stock offer represents a 38% premium on SRS’s stock price at the close of trading April 16, the day before the deal was announced.
“We’re bringing together two highly complementary technology and product portfolios,” Kirchner said in a conference call with analysts last week.
The two companies had combined revenue of $130 million last year. They’ll have more than 1,000 registered and pending patents once the deal closes.
Dolby Laboratories Inc. in San Francisco, which sees annual revenue of $940 million, is considered the biggest company in the industry.
The addition of SRS promises to cut operating costs while giving DTS a leg up in the rapidly growing mobile market, which is expected to grow to some 2 billion units in annual sales by 2016, according to industry forecasts.
SRS, an early benefactor of the mobile surge, launched plug-and-play products last year for Apple Inc.’s iPhones, iPads, iPods and iTunes.
DTS and SRS have competed for the years. Now the SRS customer base of leading computer and smartphone makers—including Dell Inc. and Hewlett-Packard Co. to HTC Corp. and ZTE Corp., the largest telecommunications equipment maker in China—will go under the DTS banner.
The transaction has been approved by the boards of each company and is expected to close in the third quarter.
SRS Chairman and Chief Executive Thomas C.K. Yuen controls about 20% of outstanding SRS shares and has signaled his approval of the deal. Yuen is expected to join the DTS board.
Local Presence
DTS hasn’t signal how it plans to integrate SRS operations and employees under its umbrella, but it’s believed that SRS will maintain its presence in Santa Ana and most of its 85 full-time employees.
“We’re very focused on a seamless integration,” Kirchner said. “Particularly with the people, there some real talent we look forward to working with to advance audio to a new level.”
More than half the work force at SRS is made up of engineers.
The company has sales offices in Japan, South Korea and Taiwan, and across Europe.
It recently expanded its Santa Ana headquarters, adding a wing that cost $300,000 to retrofit. The 700-square-foot, soundproof advanced-rendering lab, which features 22 speakers and two subwoofers controlled by a laptop computer in the center of the room, cost another $250,000 to build.
The lab is where SRS executives show potential customers and industry insiders the company’s surround sound technology rooted in psychoacoustics, the science of sound perception.
Hollywood
The technology caught the eye of Hollywood and music industry brass, prompting SRS to open an office in Santa Monica last year and retrofit it with a smaller version of the rendering lab.
SRS’s origins date back to the late 1970s when Hughes Aircraft Co. landed a government contract to develop a test communication system for airplanes on aircraft carriers.
In 1984, Hughes hired noted researcher and inventor Arnold Klayman as a senior scientist to build an audio division around him. He later led Hughes’ creation of advanced entertainment systems for commercial aircraft.
It was at Hughes that Klayman created SRS’ namesake technology: the sound retrieval system.
Set Standard
The technology, which captures certain qualities of sound lost in stereo recordings, eventually became the standard for 3D audio technology.
Klayman developed several more audio technologies and patents before joining a few engineers from Hughes in buying the SRS name, taking the company independent in 1993.
A year later prospective investor Yuen, cofounder of one-time Irvine-based computer maker AST Research, visited SRS’ offices.
He bought in, and then recruited former AST engineer Alan Kraemer to lead the technology side of the business.
