9-206-027 REV: APRIL 9, 2007 BELÉN VILLALONGA DWIGHT CRANE JAMES QUINN Spyder Active Sports—2004 In the spring of 2004, David Jacobs, CEO and Chairman of Spyder Active Sports, sat quietly in his office in Boulder, Colorado. On the walls around him hung a collection of photographs and ski paraphernalia, marking the many decades he had been connected with ski racing and the ski apparel industry. At age 70, he remained as fit and athletic as men many years his junior, and he still enjoyed skiing the local mountains near Denver and in Europe. Jacobs took a moment to reflect on the tremendous growth the company had achieved during the previous seven years—period marked by a longstanding partnership with CHB Capital Partners, a private equity firm based in nearby Denver. Since 1997, Spyder had expanded its marketing and sales efforts, as well as its product development capabilities, to a degree well beyond Jacobs’s initial vision for the company, increasing gross sales from roughly $10 million to $61 million over seven years. But now, perhaps it was time to seek an outside investor or interested buyer so that CHB could liquidate its investment and Jacobs could harvest some value from his company, particularly given the possibility of his own retirement. This decision raised questions in his mind about how much Spyder would be worth in the open market, and what kind of deal he might expect. Given the role his sons, Jake and Bill played in the company, as well as the commitment he felt to his employees and senior managers, it also raised questions about who would lead the company toward its next frontier of growth. Spyder’s Founding1 Spyder, Inc. was founded by David Jacobs in Boulder, Colorado, in 1978. The company was first established as a mail order producer of high-end ski sweaters. Its stylish sweaters, lined with special padding, classified as “technical” gear for racers and other serious skiers. The sweaters were manufactured in Hong Kong and sold at a premium relative to other skiwear on the market. The company’s logo and name were intended to be “powerful and menacing—a lasting image.”2 1 This section draws on material presented in Harvard Business School case N9-899-084, “Spyder Active Sports, Inc. and CHB Capital Partners (A),” 1999, by Professor L.B. Barnes and Senior Lecturer John A. Davis. 2 Spyder Active Sports, “Corporate—President’s Bio,” http://www.Spyder.com, accessed May 16, 2005. ________________________________________________________________________________________________________________ Professors Belén Villalonga and Dwight Crane and Research Associate James Quinn, Global Research Group, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 206-027 Spyder Active Sports—2004 For the then 45-year old Jacobs, the creation of Spyder was an extension of his earlier experience as a competitive skier. Having trained on the ski slopes of his native Montreal throughout his youth, Jacobs became the Canadian Downhill Ski Racing Champion at age 24, and raced for the Canadian National Ski Team from 1957 to 1961. In the midst of his training, Jacobs earned a Bachelor of Science degree in mathematics from St. Lawrence University, which included a year at MIT studying mechanical engineering. Jacobs later became Canada’s first full-time head coach of the Canadian National Ski Team. Spyder was not Jacobs’s first entrepreneurial stint, however. In 1966 he had formed a joint venture with Bob Lange, Lange-Jacobs, Inc., to develop a racing version of Lange ski boots and manufacture and distribute them in Canada and other Commonwealth countries. The company later merged with the U.S. distributor and went public in 1969 as Lange, Inc., but in 1971 they were forced to recall 25,000 pairs of boots due to a faulty lining material and eventually had to sell to a larger firm for $3 a share. In 1972, Jacobs sold his shares in Lange Inc. for $80,000 and left the company to start another company of his own, the Jacobs Corporation. Jacobs Corp. produced two different lines of active wear: Hot Gear, a fashionable line of children’s skiwear, and Cool Gear, a collection of adult cycling clothing and accessories. The company enjoyed some early sales success, but the difficulty of financing its working capital led Jacobs to sell off 45% of his stock to a venture capitalist and, ultimately, his remaining stock to a large sporting goods company, García Inc. When García filed for bankruptcy in 1978, Hot Gear was sold to the Auyang family of Hong Kong. The Auyangs offered to keep Jacobs on as a vice-president with one of the Auyang family members as president, but Jacobs declined. Instead, he chose to start up not one, but two companies that he could fully own and manage: Pearl-Izumi, a producer of high-performance bicycle gear that he continued to be involved in until 1986, and Spyder. Early Growth During the first two years of Spyder’s life, Jacobs operated the mail order-driven business directly out of his home—quite literally from his kitchen. His two teenage sons, Bill and Jake, themselves ski racers and outdoor enthusiasts, pitched in to help with the company’s catalog mailings, which were initially sent to the roughly 7,000 active ski racers in the U.S. Ski Association’s master list. Drawing encouragement from steady sales of the company’s racing sweater, Jacobs broadened the offerings in his catalog to include racing pants, Vuarnet sunglasses, bent downhill poles, and assorted accessories, all of which were targeted to the high-priced, technical skiwear market. Sales remained brisk and it was soon time to expand. To help finance the company’s growth, Jacobs sold his stock to Boulder-based ski boot manufacturer Hanson Industries, for cash consideration of $75,000. Under the arrangement, Spyder gained access to warehouse facilities and sufficient working capital to expand its product line, with Jacobs managing Spyder as a division of Hanson Industries. In 1982, Hanson Industries went into financial distress, presenting Jacobs with a challenging situation: he could either buy out Spyder for $50,000, or lose the business altogether. Lacking sufficient capital himself, Jacobs joined forces with Spyder’s contract manufacturer Tsunehisa Shimokubo of Osaka, Japan. The two partners reconstituted the business as an independent company, Spyder Active Sports, Inc., with an initial capitalization of $75,000. Shimokubo provided the required $50,000 in capital in exchange for 50,000 shares of company stock, with Jacobs receiving the remaining 25,000 shares. As part of the agreement, Jacobs insisted on receiving an additional 25,000 shares if and when Spyder’s sales reached the $2.5 million mark. His rocky experience as a business owner and manager had convinced him of the 2 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Spyder Active Sports—2004 206-027 importance of owning at least 50% of any venture in which he was involved. Thus, when the sales target was reached in 1986, the two men became 50/50 partners. From its inception, Spyder positioned itself at the leading edge of quality and design in the skiwear market. Jacobs believed that “there was not much of a market for what I made, but I knew that if I could own that little spot at the top, there weren’t many people there to compete with me.”3 The company was meticulous in selecting its raw material suppliers. It bought fabrics from Japan and Switzerland, state-of-the-art insulation from 3M in the United States, and custom-made snaps from Italy. Spyder also worked with its suppliers to develop proprietary fibers and coatings like X-staticTM, ThermawebTM, and SpylonTM. In 1988, the company took a major step forward by securing sponsorship of the U.S. Ski Team. Under the terms of the sponsorship, Spyder gained the exclusive right to outfit the entire team in the World Cup, the Olympic Games, and in other international competitions. Ski and race fans unfamiliar with the Spyder brand had an opportunity to see leaders in the sport such as Picabo Street, Tommy Moe, and others clad in the bold colors and web-patterned designs characteristic of Spyder skiwear. Along with this increased visibility came increases in sales, which rose from $3.4 million in 1987 to $7.9 million in 1990. By then, Spyder was no longer doing business by mail order. Rather, the company pursued the specialty ski shop channel, where Spyder was developing a reputation for being, in Jacobs’ words, “the real stuff.”4 Jake Jacobs and his Role in Spyder Growing up in Colorado, Jacobs’s son Jake was an active skier and took an interest in the family business. His early roles included filling orders at the Spyder warehouse throughout his high school years and, based on a natural interest in fashion, contributing his opinion on the various products on the skiwear market, including Spyder’s. Jake attended the University of Colorado, where he studied international business and marketing. While an undergraduate, he organized annual ski gear sale for local racers, selling new and used ski equipment and skiwear. The event was popular and became an annual happening in Boulder. When Jake graduated from college in 1986, he went to work full-time for Spyder, helping to build what was at the time a roughly $3.5 million a year business. After one year of full-time service to Spyder, the company sponsored Jake’s enrollment in a one-year fashion design program offered at FIDM in Los Angeles, from which he graduated with highest honors. When Jake returned to Spyder, his father and Shimokubo encouraged him to devote some time to Spyder’s international operations. Excited by the challenge, he and his new wife, along with their newborn daughter, moved to Japan for a year, where Jake worked from the offices of Shimokubo’s family enterprise, the Ono Trading Co. Much of his time was spent in Japanese factories, where he saw firsthand the elaborate process of transforming designs into marketable apparel. Here Jake solidified his knowledge of a range of fabric, dyes and other materials, while also working with vendors, mills, and other suppliers. Returning to the United States a year later, Jake became director of Spyder’s production, but the experience he had gained abroad left him restless to relocate overseas. So when Spyder began searching for a manufacturing manager for its Hong Kong office, 25 year-old Jake made a case to his father that he should fill the position. His father agreed. 3 Ibid. 4 Ibid. 3 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 206-027 Spyder Active Sports—2004 Jake’s stay in Hong Kong, however, was short lived. After setting in motion the new systems for the office, he met an executive from Nike who soon recruited him to Nike’s Singapore office as an apparel development manager, a position which also involved extensive supply chain responsibilities in Asia. Jake spent three years in Singapore before being transferred to Nike’s Hong Kong office, where his work continued in the design of apparel for Asian markets and in the “advanced development” of new materials and fabrics to be used in manufacturing. Jacobs had supported Jake’s career move, recognizing there would be tremendous opportunity for his son’s professional development at a company of Nike’s size and global influence. But he also missed Jake’s talent and commitment. In 1995, Jacobs recruited Jake back to Spyder as vice-president in charge of design and manufacturing, a position where he would have ample latitude to unleash his creativity while enjoying a high degree of responsibility in the company. Spyder’s Mid-Life Crisis By 1995, there was a feeling among Spyder’s management that the company had reached a plateau. While the company was well-established in the technical skiwear market and had grown considerably in the past two decades, sales growth was relatively flat and no decisive strategy had emerged to move the company beyond the $10-$15 million mark. On a personal level, Jacobs, who had four daughters in addition to his elder sons Bill and Jake, was approaching 65 and beginning to think about solidifying his financial future after spending many years pouring the proceeds from Spyder back into the company. Additionally, he began to sense competitive pressure on Spyder’s “turf.” He explained: Spyder had been bumping along …[but was] successful in its category. About that time, the attempt to go to the skiwear market caught the attention of the fashion markets. And new companies were talking about getting into skiing, or technical skiwear—brands like Tommy Hilfiger, Nautica, Prada, and Giorgio Armani… It was Hilfiger that miffed me the most because they started running ads in Men’s Health, double-paged ads showing skiers in Hilfiger jackets and I said, wow, Spyder’s a technical brand. This is my turf and these brands are coming in here. Concluding that “Spyder had to do something,” Jacobs conceded “I had to get out of my comfort zone.” He formed a group of trusted advisors from the Boulder area, including a commercial banker, the president of a venture capital firm, the president of the marketing firm that had designed Spyder’s logo, and a partner at a leading accounting consultancy. After discussing things over the course of multiple dinner meetings, the group suggested generating a larger capital base from which to move the company to the next level. Jacobs explained: The upshot of those meetings was that I needed outside investment, and the two options were: sell the whole thing, or find a minority partner—not a majority partner, not 51%. If you’re going to sell 51%, you might as well sell the whole thing. They suggested the process would be to look up investment bankers that were familiar with the space and the company. Spyder was only about $11 million in that space. After meeting with three different investment banks and outlining Spyder’s plans, Jacobs retained the services of Robertson Stephens & Co. and went on the market in February 1997, accepting bids from both strategic and financial buyers. As the offering memorandum circulated among a number of potential investors, rumors emerged that Nike was interested in buying a majority stake in the company; but Nike’s decision to pursue interests in snowboarding and ice hockey, rather than in skiing, eventually put the option to rest. 4 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Spyder Active Sports—2004 206-027 One potential investor that caught Jacobs’ attention early in the process was CHB Capital Partners, located in nearby Denver. CHB’s experience included working with entrepreneurial and family businesses (“CHB” stood for “Closely Held Businesses”), and expressed openness to the idea of assuming a minority stake, pitching its ability to provide not only capital, but also the operational and strategic expertise to help Spyder develop a plan for long-term growth. The Partnership with CHB CHB Capital Partners was founded in June 1995 by Thomas “Tad” Kelly and John Flanigan (both Harvard MBAs), who were soon joined by associate Blake Morris (Stanford MBA). The firm followed a “low-volume, high-touch strategy,” reviewing hundreds of deals per year but aiming to close on only 2 to 3 transactions annually. Unlike some other private equity firms, CHB did not look to buy companies outright. Instead, it formed a “partnership” with the CEO and senior managers of the companies in which it invested - providing strategic, operational, and general management expertise while working to catalyze growth. Kelly believed that “equity capital has become almost as commoditized as debt capital,” adding, “we have to be able to offer more than just capital, because there’s so much capital out there.” Prior to founding CHB, Kelly had worked for 10 years with prominent investor Richard Rainwater in Texas, placing investments in private companies. He credited his experience growing up around a family business—the LaSalle Steel Company, which his family founded in 1912—as formative to his business sense and development. Both Flanigan and Morris, the firm’s two other lead professionals at the time, spent much of their early career working as management consultants. Kelly believed one of the strengths of his young firm was its ability to provide growing companies with high-level management expertise they might not otherwise receive working with a small- to middlemarket private equity firm. “You’ve got a $100,000 a week McKinsey team at your beck and call,” he told prospective partners. CHB sought out only “friendly” deals in which the management team was expected to stay on after the investment. Kelly explained the importance of the company’s orientation to the future: What we compete with is our expertise, not our money. And obviously, if somebody is selling 100% of a business and they’re retiring to the South of France, they don’t care what we bring to the table. … We’re focused on transactions in which prospective CEO partners are asking themselves questions such as “Do I like these people? Do I trust them? Do they have operating expertise and not just financial expertise like most private equity firms?” … Our CEO partners care much more about what we and they can make their business be worth three to five years from now, than about the valuation we put on their business today. The deal with Spyder fell more or less in CHB’s “sweetspot” —companies with revenues between $10 to $50 million. Typically, CHB took between a 20% and an 80% stake in a company, and expected to maintain its position for roughly 3 to 5 years before exiting. At any given time, the firm had 3 or 4 active companies in its portfolio. The CHB team working on the Spyder bid established a strong rapport with Jacobs right from the start. Nonetheless, coming to agreement took time and careful negotiation. While CHB was prepared to invest roughly $5 million in Spyder and was willing to accept a minority stake, the firm was also intent on arranging a deal which would yield a minimum 30% return. Its due diligence research revealed sales and earnings forecasts lower than those projected in the offering memorandum, leading CHB to propose a sliding scale arrangement whereby its ownership stake would be proportionate to Spyder’s ability to hit its own EBITDA targets. For example, if Spyder’s cumulative 5 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 206-027 Spyder Active Sports—2004 EBITDA for fiscal years 1998-2002 was $20.5 million (as projected in the offering memorandum), CHB’s ownership position would be 35%. If cumulative EBITDA exceeded $26.5 million, then CHB’s ownership position would fall to 25%. At the other extreme, if the earnings fell below $10.5 million, CHB stood to own a 60% share. Jacobs rejected the sliding scale plan and insisted on a fixed percentage deal. After much discussion, the two sides agreed to a deal that saw CHB investing a total of $4.5 million in two stages. Upon consummation of the deal, the firm would put in $2.5 million in exchange for preferred stock convertible into 22% of Spyder common stock. By a date no later than December 31, 1998, CHB would then have the option to invest an additional $2 million—half of which would be a cash payment to be split by Jacobs and his partner, Shimokubo, with the remaining $1 million available to the company as working capital. If CHB elected to invest at both stages, its stake would increase to 37.9% of common stock. CHB’s Kelly commented: “We were just trying to protect ourselves a little bit because, for us, this was early stage [investment]. Earlier stage than we usually do.” On September 25, 1997 Spyder’s relationship with CHB officially began, with the private equity firm infusing $2.5 million in capital into the company. Organizational Changes Building on the rapport established in the months leading up to the private investment, Jacobs and Kelly, with the help of their respective teams, began the task of making operational a strategy for growth. Kelly and Flanigan joined Spyder’s board (in keeping with CHB’s practice of installing one or more of its founders on each of its partners’ boards), and Morris added the company to his personal portfolio of businesses—companies to which he would serve as a direct line of support. Jacobs noted that following the addition of Kelly and Flanigan, the nature of the board changed dramatically. He explained: When Spyder was a joint venture between Shimokubo and myself, we held the board meetings when I happened to be in Japan. We would sit down and just put something in the minute book, so that we did enough to satisfy the corporation. It was once a year to throw something in the minute book. But CHB was different. Then we had quarterly board meetings. They weren’t random. They were business meetings. Shimokubo, and my son and myself—all my senior team, whether directors or not, I wanted everybody to be in those board meetings. My business philosophy has always been to have more people, have more information, rather than fewer or less. … And CHB played key roles from then going forward. One of the first steps was to invest in a state-of-the-art information technology (IT) system. Selling only through specialty shops, Jacobs pointed out, as they had done in the past, did not require a huge investment in IT systems, as “specialty shops write you an order and send it to you handwritten - it’s all manual.” However, a transition to bigger accounts, including major department stores, would require all data processing to be electronic—an Enterprise Resource Planning (ERP) system. But making an investment in an ERP system would cost the company roughly $1 million, after accounting for hardware, software, installation, and consulting support—and for a company considered reluctant to spend, this represented a major outlay. Morris explained CHB’s position: “Our point [to Spyder’s management team] was, you have this vision of being a $100 million brand, so don’t put a system in for a $10 million brand. Put a system in for a $400 million brand, because that way you’ll never have to do it again, and it will be a lot easier to implement now.” After meeting with leading suppliers, Spyder drew on a portion of its new capital to take the plunge and invest in a high-level ERP system from J.D. Edwards. 6 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Spyder Active Sports—2004 206-027 A second step management took was to invest in new key hires. Bringing in a senior marketing executive stood atop the list. For many years, the company had been largely “product-driven,” but it was felt that, in order to move sales to the next level, it would need to become more of a “marketingdriven” firm. Thus, management opened a search for a new global brand manager. Jacobs explained his approach to the hire: The ski industry is very incestuous. Maybe a couple of years you work for Salomon. And then you move to Rossignol and maybe K2. And everybody moves around the industry because it’s almost like a small club in a way. It’s a very narrow industry and target market. It’s a far cry from a bad market, so everybody hangs around. I wanted to be outside of that, so I hired a search firm. As the search unfolded, a number of strong candidates came forward, including a seasoned marketing executive in his 50s whom Kelly felt “would have been the safe choice—a ‘done-it-all, been-around’ type of guy.” But there was one younger executive––still in his early thirties–– John Walbrecht, who captured the attention and imagination of the group. Morris explained: He had risen to the head of global sales and marketing at Doc Marten’s from being in sales. And he had experience at Gloria Vanderbilt and Timberland, so he’d been in the branded apparel and products business. He had been with a brand, an edgy brand that appealed to a broad range of people. … So it was analogous to what we wanted to happen at Spyder. We didn’t want to lose Spyder’s high-end image, but we needed to broaden the number of people who could actually buy the product. So that was what attracted us, the fact that he had gone through the whole life cycle with Doc Marten’s. But also, if you meet him, he’s the most energetic and most driven person you’ll ever meet. So it was hard to turn him down, even though he was 31–32. Given the strong support expressed for Walbrecht, he was hired into the position of vice-president of global sales and marketing in May of 1998. Exhibit 1 shows a complete list of Spyder’s senior management. A third major step was to develop a concept shop or so-called fixture program. At the time, some of Spyder’s competitors were employing programs whereby a select company’s products were given dedicated floor space within a retail or department store, rather than being grouped with other brands. Jacobs explained: “If you walk into a ski shop, a lot of them have all their jackets on rounders—everybody’s brand together. But we wanted to separate Spyder visually. And Nautica was doing that and Polo started doing that. And I saw how they did that in department stores with their own fixtures and their own floor pad. So I figured we needed to do that.” Among other places, Spyder developed its own concept shop within Marshall Fields, in Chicago, where the company was able to secure 1,500 square feet of space to display its jackets and ski gear. Jacobs commented: “As soon as you walk in, you see a Spyder concept shop. This is big for us, a valuable piece of real estate.” Jacobs also saw his strategic planning process change qualitatively as a result of CHB’s involvement. He explained: We would have outside meetings once a year where we would strategize prior to crafting our annual plans. And I asked John [Flanigan] to run those. He would put big sheets of paper on the wall, capturing information and writing down all the different ideas. He would then distill the important ones down on a single sheet. And this was a process he was used to doing. It was great. It allowed me to step back where I didn’t have to think on my feet while I was figuring out what to write down. With him driving that, I was able to be part of the discussion, which was very valuable. 7 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 206-027 Spyder Active Sports—2004 CHB exercised its option to infuse an additional $2 million into the company before year-end 1998, with $1 million in cash to be split between Jacobs and his partner Shimokubo, and $1 million to be used as working capital. Jacobs and Shimokubo opted not to take out the $1 million. In keeping with the terms of the deal, CHB’s share of the company rose to 37.9%, on a fully diluted basis. (Company employees, including Jake Jacobs, had options for 11.3% of the company. The remaining shares were split equally between Jacobs and Shimokubo, at 25.4% each.) Earlier in the year, Spyder had secured renewal of its sponsorship with the U.S. Ski Team, which had been scheduled to expire in April, 1998. The move was viewed by Spyder as critical to maintaining its visibility globally as a highperformance ski apparel brand. Spyder’s key investments led to rapid growth in revenues, with gross sales reaching $17.2 million and $21.2 million in 1999 and 2000, respectively. The investments were expensive, however, with earnings hitting a low of negative $972,000 in 2000. While the negative earnings gave Spyder’s management as well as its commercial lenders cause for concern, management contended that financial statements during that period “did not really represent the funds of the company.” Kelly and Jacobs assembled a set of revised financial figures which, in accounting for one-time expenses associated with recent investments, they believed more accurately represented the position of the company. Jacobs explained: “We were able to carve out the one-time line items and then illustrate what the funds for the operations were based on their own merit during the normal course of business. So [the banks] accepted that, which was a key element in maintaining our bank relationships.” In effect, the banks accepted a “pre-investment” set of numbers that reflected the performance of the company and a “post-investment” set that reflected the “one-time” investments. New Vision for Marketing and Product Development When Walbrecht assumed his position, he brought to the role what Jacobs called “big-picture marketing initiatives,” which grew out of his experience with Dr. Martens. Jacobs explained that Dr. Martens held “sales events where they would bring in musicians or top stars into one location, bring in their top accounts, put them up for three days, put on a big production and then show them the new collections,” adding, “nobody in this industry had ever done that.” Within months of joining Spyder, Walbrecht had formulated a vision for a major marketing event, to be located in Vail, Colorado. Getting Spyder’s management to agree to the $150,000 cost was not easy: Jacobs had never spent more than $25,000 on a sales meeting. But Walbrecht’s presentation of the idea—not only of the event itself, but also of the long-term marketing benefits he expected would accrue to the company— was persuasive, and he ultimately earned approval. Jacobs recalled: We went to Vail and set up at the Cascade Hotel, a big hotel. This was just before the Olympics in Atlanta in ‘96, and John [Walbrecht] knew the people who designed the opening ceremonies in Atlanta through Doc Martens. And they happened to be a vendor. So he hired them and set up a multi-media video / slide show / fashion show and so on in the Cascade Hotel, where they brought in all the big trusses with lights. And it was like a Hollywood production. It was unbelievable. Jacobs continued: So we invited 75 dealers up there for this whole extravaganza. It just blew the market away. They just could not believe what Spyder was doing. All of a sudden, it changed their perception of the brand - changed the industry’s perception of the brand. Now we were players. It’s not like all the other brands that had been doing the typical things. So that was the start of it. 8 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Spyder Active Sports—2004 206-027 Kelly concurred that the event was “mind-blowing,” with a “sleepy little company” suddenly flying people in from Germany, Australia, and other places. He noted: “It was a clear signal—Spyder was going to spend the money ahead of the revenue and make a statement in the marketplace.” Walbrecht’s efforts pitching Spyder’s products began in earnest, with his personally traveling 250 days per year to visit customer sites. Widely perceived as knowledgeable and highly energetic, Walbrecht quickly earned the respect of many who were close to Spyder’s operations. Kelly commented: “If you met him, you would buy anything he was selling. And I mean that in a good way. The guy is brilliant. He’s got it all thought out, and when he walks you through his thought process, you say, of course. And you sign right there.” Morris added: He knows your job better than you do, and he is going to help you become a better retailer. He’ll say, “this is how you sell the product, this is the customer you look for, this is the type of music they like to listen to… the movies they attend, the amount they’ll pay, this is how you arrange it on the floor, the colors you buy.” So he basically merchandised it for them. As Walbrecht established himself with customers, suppliers, and his new colleagues, CHB worked to support management’s evolving marketing strategy. Many within the Spyder management team felt there was an opportunity to make industry data more integral to the company’s strategy. This topic was taken up not only when the board assembled or at annual strategic planning time, but also in day-to-day discussions involving CHB and Spyder management. Jacobs commented: There were industry statistical reports that we weren’t even subscribing to that showed which brands were selling in which categories—say jackets compared to shells and pants; it included price points and all of those things. And we never read them in the past because we knew we made a good product and we’d make it and people would buy it and so on. I didn’t really care that much what other people were doing, because in our spot we were ahead of the pack. He continued: But Blake [Morris] took that information and crunched it in amazing ways, with graphs that showed sell-through rates, the size of your business relative to others, your highest sellthrough profit margin, and so forth. So in a snapshot you could see which brands are doing the best, how big they are relative to others—all in one page. And he would crunch these things and point out how we were doing in different areas. You’re maybe two or three in the category of insulated jackets, but you’re getting killed in shells. And North Face is outselling in shells and so on. So then we were able to react. Product Expansion and Distribution Walbrecht’s efforts in sales and marketing were complemented by those in product development by another key executive - this time a familiar face to everyone associated with the company. Jake Jacobs, soon after been re-recruited to Spyder, took several steps to revamp the product development department. At the time, his father “was still designing a good part of the line and the development staff was only a couple of people”: The entire product development team included one graphic artist, two developers, with no one assigned to merchandising. Jake took some initial steps to develop the department. He transitioned his father away from the product design role and hired full-time designers. He also created a new merchandising position. Within 18 months of rejoining Spyder, Jake was promoted to vice president of merchandising. Relying in large part on operations he had observed at Nike, he began to ramp up the department 9 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 206-027 Spyder Active Sports—2004 through a series of hires and restructuring moves. Morris commented: “Jake is a very effective organization builder. Maybe that’s because of his background at Nike. If you look at Jake’s organization, he’s not afraid to delegate. And yet, at the same time, he is as intense about every little detail being right. He is extremely detail-oriented and extremely focused.” In distinguishing its products, Jake observed that Spyder “does a good job of melding fashion and function” —adding that relative to its competitors, “we’ll spend more time on the fabric itself and melding material, so that in the end it’s a richer, more fashionable technical product.” Spyder viewed its product design and development as a highly collaborative process, one dependent upon many inputs in the early design stage. Jake explained: “We listen a lot to all of our customers, distributors, and partners—and always have.” Leading up to the late 1990s, the Spyder brand was primarily identified with the tight-fitting, webcovered race suits worn by professional ski racers. Exhibit 2 shows Spyder’s characteristic racing suits. Spyder’s additional product offerings at the time were largely comprised of its “core brand” products—high-end alpine skiing apparel and accessories which retailed for $300–$1,000 and were distributed through specialty ski stores. Exhibit 3 describes Spyder’s core brands and lists its principal competitors for each brand. Beginning in 1999, Spyder began to broaden its product offerings to include skiwear and outerwear for new customer targets, some of which were offered at lower price points. As products were developed for a broader range of customers, the move into new distribution channels, including sporting goods stores and department stores, became inevitable. Spyder’s core lines were continued to be sold in specialty ski stores including Cole Sport, Christy’s, Intersport Eyble, and others. Select high-end new products such as snowboard apparel were also sold through this channel. The majority of products developed after the late 1990s, however, whose price points fell below many of the Core line offerings, were distributed through sporting goods chains and two department stores, Macy’s and Marshall Field. Exhibit 4 shows Spyder’s brands, competitors, and distribution channels by product line. The expansion of Spyder’s product line required ongoing discussion among the company’s management and board about how to manage the brand and divide the market in terms of price points. Morris commented: “Christy’s is a fairly high-end ski shop—they sell a $600 jacket. Well, you can’t go to Macy’s and find that. So there’s not going to be any overlap. And quite frankly, the person who shops at Macy’s doesn’t look like the person who shops at Christy’s up in Vail.” He continued: I’m sure at the margin you can always find one or two overlaps, but the bottom line is, if you keep your channels clean and you know the customers you are going after—and what price points and what demographics they’re going to pay—then you can avoid the kind of overlap where Gart buys a $600 jacket, can’t sell it, puts it on sale for $300 and kills Christy’s business. …and half of our discussion was always, “let’s make sure that we’re not damaging this or that part of the brand.” At the same time that Spyder rolled out its new product offerings, it also worked to refine its sales and distribution strategy abroad. Throughout the 1990s, the company’s approach varied by geography. In the United States, Spyder contracted with a number of independent sales representatives to sell merchandise around the country, with distribution to the roughly 450 U.S. sales accounts handled directly at Boulder headquarters. Similarly in Japan, distribution was handled by a single outfit—the Ono Trading Company owned by Shimokubo. Outside of these two regions, however, Spyder contracted with a host of distributors, which handled all the marketing and sales. 10 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Spyder Active Sports—2004 206-027 One distributor covered Canada, another covered Australia and New Zealand, and seven more distributors handled accounts across Europe. As management looked more and more closely at its distribution abroad, they determined that the system lacked the efficiency of its approach in the United States and Japan—where activities such as order placement, warehousing, shipping, administration, and so on were consolidated under one roof. Additionally, it was clear from the financials that handling sales and distribution in-house was substantially more profitable than the European system of selling through multiple distributors. Thus, Spyder elected to gradually transition key European accounts to a “direct selling” model, beginning “in fiscal 2001 when it first converted Germany, Australia, and the Benelux countries and, subsequently, France and Switzerland.”5 Results By 2001, Spyder’s ambitious growth plan started bearing fruit, with net sales reaching $27.3 million in 2001, $34.0 million in 2002, and $40.3 million in 2003, and net income moving from $83,000 to $854,000 over the same period. Exhibits 5 and 6 shows Spyder’s consolidated financial statements for those years. During that period, Spyder added the Canadian and the Austrian National Ski Teams to its list of sponsors and often attracted the attention of the business press for building momentum within the industry. Retailers highly valued the high margins and “sell-through” rates—how much retailers sell of what they buy––provided for them by Spyder’s products. Exhibit 7 shows Spyder’s sell-through rates and market shares compared with its competitors. Spyder made a point to always sell “one less jacket than the market demanded.” At the time, Jacobs found himself presiding over a company whose employees included both his sons, since Bill was recruited back to the firm to manage Spyder sales in Northern California, one of the company’s major sales regions. Amidst the environment of growth and momentum, it was nevertheless becoming clear to Jacobs that CHB was likely to exit the partnership in the near future. The private equity firm had tested the market in 2002, but in the wake of the major stock market correction and the collapse of the high-tech sector, economic conditions were not ripe for an exit. By late 2003, however, the market had improved, and CHB’s seven-year investment in Spyder had well exceeded its expected term, being the only investment that remained to be realized from CHB’s first fund. Jacobs commented: “There were huge amounts of cash that people wanted to put to work and there was no place to put it. The economy was starting to look better, so people became more aggressive, looking for companies. … And the smart money, I guess, was looking for brands to invest in.” Exhibit 8 charts the recent evolution of the market. Considering the Sale of Spyder The combination of CHB’s desire for a liquidity event and the recent evolution of the private equity market led Jacobs to think about the future of Spyder—most notably, who would own and control it for the foreseeable future––and to consider his own exit from the company in early 2004. Jacobs and CHB agreed to engage an investment bank to conduct a total or partial sale of the company. Ultimately, they chose two banks that were willing to split the fees and duties in finding an outside buyer or investor: Financo, and Wachovia Securites. Financo was selected because of its expertise in the retail industry; and Wachovia was chosen because of its expertise in consumer 5 2004 Spyder Offering Memorandum. 11 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 206-027 Spyder Active Sports—2004 products and the confidence Jacobs had in Joe Pellegrini, former banker with Robertson Stephens & Co. who ran the “process” that resulted in CHB’s 1997 investment in Spyder. As the two investment banks proceeded with their due diligence, Jacobs wondered what the company would be valued at in the open market, and what kind of deal he might expect. Exhibit 9 summarizes recent acquisitions of companies comparable to Spyder, and Exhibits 10 and 11 show information about publicly traded comparable companies. The possibility of an IPO was not seen as an option for a relatively small and highly seasonal business like Spyder’s, whose monthly sales during fiscal year 2004 (ending in March 2004) had ranged between a maximum of $22 million in June and almost zero in January of 2003. Likewise, the company’s working capital debt, which averaged $8 million a month over fiscal year 2004, had ranged between zero and $23.4 million in the peak month. To be able to take his company public, Jacobs would most likely need to make it substantially larger and multi-seasonal. Thus, the main ways in which a sale of his own equity stake along with CHB’s could be feasibly structured were either a trade sale to a strategic buyer, or a secondary private placement with a financial buyer. (In either case, Jacobs and Shimokubo would sell all or a large share of their equity position). Alternatively, Jacobs might decide not to exit the business at this point and maintain a controlling ownership stake, which would effectively reduce CHB’s exit options to a sale of their minority stake to another private equity company. Which of these options was likely to yield the highest price for Spyder’s equity? More generally, which would be more suitable to Jacobs’s needs? At the age of 70, issues of control took on a different meaning than they had seven years earlier when he struck a deal with CHB that guaranteed a majority stake for himself and Shimokubo. Being fairly paid for his decades of entrepreneurial effort weighed more heavily than did controlling the direction of the company. Jacobs conceded that in the last couple of years he had stepped back slightly from day-to-day operations, but others pointed out how successful he continued to be in the role of “conductor” or “coach.” At the same time, a deal at this point also raised questions about how succession and future leadership would evolve. Morris pointed out that Jake and Walbrecht were “the creative engine of that company” during its recent growth phase, but it was not clear how a buyout would affect their future roles and that of other senior managers. In making a decision about Spyder’s sale, Jacobs somehow had to balance his own interests with those of his partner CHB, those of his sons Bill and Jake, and those of the company that he had so proudly created. 12 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Spyder Active Sports—2004 Exhibit 1 206-027 Spyder’s Senior Management David Jacobs: The founder of the Company, David Jacobs is a former Canadian national ski champion and has over thirty years of experience in the snowsport industry. Jake Jacobs: Jake Jacobs, who has been with Spyder for 16 years, has extensive merchandising and product development experience and was previously Development Director of Nike’s Asia Pacific Apparel Organization in Hong Kong. John Walbrecht: John Walbrecht has been with the Company for six years and has extensive marketing and sales experience at Airwair (Dr. Martens), Gloria Vanderbilt, and Timberland. Doug Saunders: Doug Saunders has worked for Spyder for 15 years and has served in executive roles with the Company such as Manager of Customer Service Department, North American Sales Manager, and his current role, Vice President of Operations. Todd Stockbauer: Todd Stockbauer is a CPA and has executive financial experience at Airwalk, Southwest Products Company, and Sunbase Asia. Bert Stjernholm: Since 2001, Bert Stjernholm has acted as Spyder’s financial advisor, before which he was CFO since 1997. He had nearly two decades of executive commercial banking experience at Bank One before joining Spyder. Cees de Witte: Cees de Witte joined Sypder in 2001 to lead its European operations (Spyder Europe AG), serving as both General Manager and Vice President of Sales & Marketing. Prior to joining Spyder, Mr. de Witte served as General Manager of GT Bicycles Europe and Vice President of Sales & Marketing at Bell Sports Europe. Source: 2004 Spyder Offering Memorandum. 13 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 206-027 Spyder Active Sports—2004 Exhibit 2 Source: Spyder’s Racing Suits Worn by the U.S., Canadian, and Austrian Ski Teams Spyder company materials. 14 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Spyder Active Sports—2004 Exhibit 3 206-027 Spyder’s Core Brands and Competitors by Brand Description Competitors Legend High-end collection Prada, Bogner, Postcard, Killy, Arc’Teryx (Adidas-Salomon) Platinum High-end collection for women Postcard, Killy, Nils, Bogner, Arc’Teryx (Adidas-Salomon) Authentics / Race Official race suits & accessories for professional skiers or amateur team racers Descente, Phenix Bode Miller Skiwear for young men & boys with Bode’s “uncompromising attitude” Quest Skiwear for recreational skiers - lower price points Killy, Schoffel, Couloir, Marker (K2), Descente, Obermeyer Allure Fashion-oriented line for women who enjoy casual skiing Polo, Tommy Hilfiger, Nautica (VF Corp), Prada, Armani Fundamentals Ski pants, overalls, other basic skiwear North Face (VF Corp), Patagonia, Phenix Accessories Sweaters, fleeces, t-necks, hats, socks, gloves Source: Compiled by casewriters from company documents. 15 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. See Ex. 3 Competitors X X X Orage, North Face (VF Corp), DNA (Descente) Source: Compiled by casewriters from company documents. d Better Department Stores: Macy’s, Marshall Fields, El Corte Ingles, etc. c Sporting Goods Stores: The Sports Authority, Dick’s, Sport-Scheck, etc. X Karbon, Beyond X, Avalanche, Descente $200-$300 Custom-made skiwear for ski teams & resorts “Spyder with an attitude” $250-$350 ProGear Venom b Specialty Stores: Cole Sport, Christy’s, Intersport Eyble, etc. a Licensed to Genfoot (Canada) Better Department Storesd Ski Club/Team Sporting Goods Storesc Specialty Ski/Snowboard Storesb X $300-$1000 Retail Price Distribution Channel High-end alpine skiiing apparel and accessories. See breakdown in Ex. 3 Core X Obermeyer, Columbia, Jupa, Karbon, Couloir $100-$250 Kids versions of adult brands & kids brands like Mini Moe, Stynger, & Itsy Bitsy Kyds X X Columbia $200-$250 Outerwear for multi-seasonal, multi-sport outdoor activities XSCāp Spyder’s Brands, Competitors, and Distribution Channels by Product Line Description Exhibit 4 X X Columbia $100-$225 Less technical features for pricesensitive customers Stryke X Burton, 686, Volcom, 4Square $225-$500 Snowboard apparel Section X X Burton, Blackdot, Convert (Columbia) $100-$200 Snowboard apparel for teenagers - lower price points Legion X X X $50-$160 Footweara 206-027 -16- This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Company documents. FY2004 figures are unaudited. Source: a n/a 83 Net Income Net Working Capital Investment 35 Taxes 251 (63) FAS 133 Expense Capital Expenditures 467 805 Interest Expense & Bank Fees 1,327 Depreciation & Amortization EBITDA 113 Non-Operating Income (Expense) 20 1,214 Op. Income Before Depreciation Mgmt. Fee, Licenses, & Royalty Income 9,573 10,767 Gross Profit Total Operating Expenses 27,303 16,536 Net Sales Cost of Sales FY2001 (1,592) 410 844 159 (185) 664 464 1,946 142 1,804 27 12,175 13,952 33,960 20,008 FY2002 (86) 621 854 688 1,076 613 668 3,899 295 3,604 10 14,159 17,753 40,290 22,537 FY2003 69 1,797 5,069 1,858 1,065 846 744 9,582 208 9,374 26 21,007 30,355 61,366 31,011 FY2004a 1,590 2,619 8,071 2297 0 1,260 1,078 13,771 (217) 13,988 0 28,014 42,002 85,281 43,279 FY2005E 929 3,000 10,593 2,898 0 1,396 2,097 16,983 0 16,983 0 33,571 50,554 105,630 55,075 FY2006E Spyder Consolidated Income Statement and Cash Flow Adjustments—Historical and Forecasted (in $ thousands) Fiscal year ended March 31. Exhibit 5 1,292 3,500 13,019 3,729 0 1,769 3,260 21,777 0 21,777 0 41,028 62,804 133,223 70,419 FY2007E 1,459 4,250 17,139 5,396 0 2,263 3,098 27,895 0 27,895 0 49,584 77,479 165,732 88,253 FY2008E 206-027 -17- This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 2,001 123 2,124 2,109 4,233 4,717 (146) 4,571 8,804 Accts Payable & Accrued Exp Other Current Liabilities Total Current Liabilities Other Liabilities Total Liabilities Preferred Stock & Commmon Retained Earnings Total Stockholders’ Equity Total Liabilities & Equity Source: Company documents. FY2004 figures are unaudited. 8,804 Total Assets a 844 815 485 4,797 1,458 250 155 7,145 Net PP&E Other Assets Cash Accounts Receivable Inventories Prepaid Expenses Other Current Assets Total Current Assets FY2001 8,246 4,719 514 5,233 502 3,013 2,216 295 2,511 8,246 827 1,049 793 3,568 1,284 483 242 6,370 FY2002 9,085 4,723 1,366 6,089 0 2,996 2,834 162 2,996 9,085 849 826 2,693 2,560 922 406 829 7,410 FY2003 15,851 4,731 1,807 6,538 3,814 9,313 5,499 0 5,499 15,851 1,970 906 7,975 3,192 845 346 617 12,975 FY2004a Spyder Consolidated Balance Sheet—Historical and Forecasted (in $ thousands) Fiscal year ended March 31. Exhibit 6 19,055 4,731 10,952 15,683 0 3,372 3,372 0 3,372 19,055 3,581 836 6,812 5,625 1,130 454 617 14,638 FY2005E 30,328 4,731 21,545 26,276 0 4,052 4,052 0 4,052 30,328 4,554 766 15,572 6,873 1,402 543 617 25,008 FY2006E 44,222 4,731 34,564 39,295 0 4,927 4,927 0 4,927 44,222 4,865 696 27,060 8,521 1,798 666 617 38,661 FY2007E 62,378 4,731 51,702 56,433 0 5,945 5,945 0 5,945 62,378 6,087 626 41,587 10,409 2,246 806 617 55,665 FY2008E 206-027 -18- Spyder Active Sports—2004 Exhibit 7 206-027 2003 Spyder’s Sell-Through Rates Relative to its Competitors 90% 85% Industry Average: 80.0% 80% 75% Ro ss i gn o Sp l yd Co e lu r m bi a O M ra g et e ro C p ol G i S s O por be ts r Ju me pa ye r Pr Sp iva or ts Th t e eL No a b rth el Fa Sp ce or Bl t ac ina k Be a O r ak le y Ki lly Co ul oi r He Ei lly de Ha r ns en Fe ra Ni l M s ar ke r 70% Source: 2004 Spyder Offering Memorandum. 19 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 206-027 Spyder Active Sports—2004 Evolution of Trading and Transaction Multiples for Comparable Companiesa Exhibit 8 Com posite Sales Multiple Camelbak ● 2.75x 2.50x 2.25x 2.00x 1.75x 1.50x Jack Wolfskin 1.25x ● Arc’Teryx 1.00x ● ● Teva ● Arc’Teryx 0.75x 0.50x Converse ● ● Mountain Hardwear ● Arc’Teryx ● Nautica ● Fila ● North Face 0.25x 12 /1 /9 9 3/ 1/ 00 6/ 1/ 00 9/ 1/ 0 12 0 /1 /0 0 3/ 1/ 01 6/ 1/ 01 9/ 1/ 0 12 1 /1 /0 1 3/ 1/ 02 6/ 1/ 02 9/ 1/ 0 12 2 /1 /0 2 3/ 1/ 03 6/ 1/ 03 9/ 1/ 0 12 3 /1 /0 3 3/ 1/ 04 0.00x Com posite EBITDA Multiple 16x 14x ● Arc’Teryx 12x ● Fila 10x 8x 6x ● Teva Jack Wolfskin ● ● Mountain Hardwear Nautica ●● Converse ● Camelbak 4x 2x 12 /1 /9 9 3/ 1/ 00 6/ 1/ 00 9/ 1/ 0 12 0 /1 /0 0 3/ 1/ 01 6/ 1/ 01 9/ 1/ 0 12 1 /1 /0 1 3/ 1/ 02 6/ 1/ 02 9/ 1/ 0 12 2 /1 /0 2 3/ 1/ 03 6/ 1/ 03 9/ 1/ 0 12 3 /1 /0 3 3/ 1/ 04 0x a The continuous lines show daily trading multiples for a composite of Columbia, K2, Nike, Quiksilver, and VF Corp. The isolated dots show transaction multiples paid for the target companies listed beside each dot. Source: SDC Platinum, a Thomson Financial Product, accessed [May/2005], Bloomberg LP, accessed [May/2005], and casewriters’ analysis. 20 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Arc’Teryx Inc. Teva Sandals Mountain Hardwear Inc. Nautica Enterprises Inc. Converse Inc. Adidas-Salomon AG Deckers Outdoor Corp. Columbia Sportswear Co. VF Corp. Nike Inc. Jack Wolfskin GmbH Fila Holding SpA CameIBak Inc. Bain Capital Inc. Cerberus Partners LP Bear Stearns & Co. 4/7/00 11/6/03 3/7/03 8/28/02 4/11/97 7/9/03 7/7/03 3/13/03 10/11/02 12/5/01 12/2/03 6/10/03 9/9/02 5/1/97 9/4/03 8/27/03 4/1/03 11/26/02 3/1/02 8/16/00 Date Effective 209 586 63 160 335 600 36 62 21 129 Total Ent. Value ($ millions) Source: SDC Platinum, a Thomson Financial Product, accessed [May, 2005] and casewriters’ analysis. a All acquisitions were for 100% of the target’s equity except for The North Face (81.2% acquired) and Helly Hansen (70% acquired). Helly Hansen ASA Investcorp Int’l Inc. Financial Acquirors The North Face Inc. VF Corp. Target Date Announced Recent Acquisitions of Companies Comparable to Spydera Strategic Acquirors Acquiror Exhibit 9 74 954 52 146 205 694 31 56 19 244 LTM Sales ($ millions) 25 44 7 18 36 66 3.2 6.1 1.4 -44 LTM EBITDA ($ millions) 2.8 0.6 1.2 1.1 1.6 0.9 1.2 1.1 1.1 0.5 Sales Multiple -21- 8.2 13.3 9.3 8.9 9.4 9.1 11.1 10.3 15.5 -2.9 EBITDA Multiple 206-027 206-027 Spyder Active Sports—2004 Exhibit 10 Comparable Companies Description Company Name Description Adidas-Salomon AG Designs, manufactures, and markets sports footwear, apparel and accessories, under the brands adidas (footwear and apparel), Salomon (ski and snowboard equipment), Arc’Teryx (ski and outdoor apparel), Bonfire (snowboard apparel), and Maxfli (golf equipment). Headquartered in Germany and traded in the Frankfurt Stock Exchange. Columbia Sportswear Co. Manufactures ski and outdoor apparel. K2 Inc. Manufactures outdoor sports equipment and apparel for ski, snowboard, skating, fishing, mountain bike, and paintball, as well as industrial products like fiberglass for marine applications. Brands include K2 and Volkl (skis and apparel), Marker (ski bindings and apparel), Marmot (outdoor apparel), Ride (snowboards and apparel). Nike Inc. Designs, develops, and markets sports footwear and apparel for running, basketball, tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling, cheerleading, aquatic activities, and hiking. Quiksilver Inc. Designs, manufactures, and distributes surf, swimming, and snowboard apparel and equipment under the Quiksilver, Roxy, and Gotcha brands. Skis Rossignol SA Manufactures ski and snowboard equipment and apparel under the brands Rossignol (skis and ski apparel), Dynastar (skis and boots), Look (bindings), Kerma (poles), and Lange (boots). Headquartered in France and traded in the Paris Stock Exchange. VF Corp. Manufactures and markets branded apparel and accessories. Subsidiaries include The North Face, focused on technically advanced products for climbers and extreme skiers, Lee jeans, and Jansport backpacks. Source: Bloomberg LP, accessed [May/2005]. 22 This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. This document is authorized for use only by Kanwal Sakhi (sakhi.k@husky.neu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. g Apparel, incl. Sports Apparel Sports Equipment & Apparel Sports Apparel 0.59 0.55 1.01 0.70 1.36 1.48 0.81 Betab 5,113 994 118 138 866 209 20 1,459 LTM InterestBearing Debt 0.20 0.44 0.17 0.08 0.41 0.06 0.39 Five-Year Average Debt-to-Value 5,390 479 1,039 11,751 839 990 6,221 LTM Sales 725 25 130 1,736 63 220 586 LTM EBITDA -23- Sources: Compiled from Bloomberg LP, accessed [May/2005], http://www.adidas-salomon.com, http://www.rossignolcorporate.com, Standard & Poor’s Compustat data, accessed [May/2005], and casewriters’ analysis. g Traded in the Paris stock exchange. f Fiscal quarter ending Feb 29, 2004. e Fiscal quarter ending Jan 31, 2004. d Traded in the Frankfurt stock exchange. c For companies that have dual share classes including one non-traded class, market value of equity is computed as the product of the publicly traded share price by the total number of shares outstanding of all classes. b Estimated by 60-month regression of stock returns on S&P500 returns. 174 1,217 20,558 559 2,239 4,302 a Figures are in U.S. dollars for all companies except for Adidas-Salomon AG and Skis Rossignol SA, which are in Euros. VF Corp. Skis Rossignol SA. Quiksilver Inc. Sports Apparel & Footwear K2 Inc. f Sports Apparel Sports Equipment Columbia Sportswear Co. e Sports Apparel, Footwear, & Equipment Adidas-Salomon AGd Nike Inc. Industry Market Value of Equityc Selected Financial Data about Comparable Companies (in $ or Euro millions, as of 03/31/2004)a Company Name Exhibit 11 206-027 Spyder Valuation Based on Trading Multiples Sales 2004 EBITDA 2004 Sales 2005 EBITDA 2005 $61,366 $9,582 $85,281 $13,771 Exhibit 5 Exhibit 5 Exhibit 5 Exhibit 5 Sources: Exhibit 11 Exhibit 11 Exhibit 11 Exhibit 11 Exhibit 11 Exhibit 11 [1] Company Name Adidas Columbia K2 Nike Quicksilver Rosssignol VF Mean Median [2] Industry Sp. App. Sp. App. Sp. App. Sp. App. Sp. App. Sp. App. Sp. App. [3] [4] [5] [6] Market Value of Equity $4,302 $2,239 $559 $20,558 $1,217 $174 $5,113 Last 12 Months InterestBearing Debt $1,459 $20 $209 $866 $138 $118 $994 Last 12 Months Sales $6,221 $990 $839 $11,751 $1,039 $479 $5,390 Last 12 Months EBITDA $586 $220 $63 $1,736 $130 $25 $725 [7=(3+4)/5] [8=(3+4)/6] [9=7*Sales] [10=8*EBITDA] [11=7*Sales] [12=8*EBITDA] Spyder Spyder Spyder Spyder 2004 Total 2004 Total 2005 Total 2005 Total Enterprise Enterprise Enterprise Enterprise Value Value Value Value Implied by Implied by Implied by Implied by Sales EBITDA Sales EBITDA Sales EBITDA Multiple Multiple Multiple Multiple Multiple Multiple 0.93 9.83 $56,828 $94,201 $78,975 $135,384 2.28 10.27 $140,026 $98,390 $194,596 $141,403 0.92 12.19 $56,173 $116,809 $78,064 $167,875 1.82 12.34 $111,880 $118,252 $155,481 $169,948 1.30 10.42 $80,030 $99,874 $111,218 $143,536 0.61 11.68 $37,409 $111,918 $51,988 $160,845 1.13 8.42 $69,529 $80,713 $96,625 $115,999 1.28 1.13 10.74 10.42 $78,839 $69,529 $102,880 $99,874 $109,564 $96,625 $147,856 $143,536 Spyder Valuation Based on Transaction Multiples Sources: Exhibit 9 Exhibit 9 [1] [2] Sales 2004 EBITDA 2004 Sales 2005 EBITDA 2005 $61,366 $9,582 $85,281 $13,771 Exhibit 5 Exhibit 5 Exhibit 5 Exhibit 5 Exhibit 9 Exhibit 9 Exhibit 9 Exhibit 9 [3] Acquiror Target Date Strategic Acquirors VF North Face 8/16/00 Adidas Arc'Teryx 3/1/02 Seckers Teva 11/26/02 Columbia Mountain Hardward 4/1/03 VF Nautica 8/27/03 Nike Converse 9/4/03 [4] [5] [6] [9=7*Sales] [10=8*EBITDA] [11=7*Sales] [12=8*EBITDA] Spyder Spyder Spyder Spyder 2004 Total 2004 Total 2005 Total 2005 Total Enterprise Enterprise Enterprise Enterprise Value Value Value Value Total Last 12 Last 12 Implied by Implied by Implied by Implied by Enterprise Months Months Sales EBITDA Sales EBITDA Sales EBITDA Value Sales EBITDA Multiple Multiple Multiple Multiple Multiple Multiple $129 $21 $62 $36 $600 $335 $244 $19 $56 $31 $694 $205 ($44.0) $1.4 $6.1 $3.2 $66.0 $36.0 $160 $63 $586 $209 $146 $52 $954 $74 $18.0 $6.8 $44.0 $25.0 [7=4/5] [8=4/6] 0.53 na 1.11 15.00 1.11 10.16 1.16 11.25 0.86 9.09 1.63 9.31 32,444 67,826 67,941 71,264 53,054 100,281 143,730 97,391 107,798 87,109 89,166 45,087 94,258 94,418 99,036 73,730 139,362 206,565 139,968 154,924 125,191 128,147 1.10 1.21 0.61 2.82 8.89 9.26 13.32 8.36 67,250 74,347 37,694 173,317 85,173 88,774 127,615 80,106 93,459 103,321 52,384 240,861 122,409 127,584 183,405 115,126 1.21 1.11 10.52 9.31 74,542 67,883 100,762 89,166 103,592 94,338 144,813 128,147 Mean Strategic Acquirors Median Strategic Acquirors Financial Acquirors Investcorp Helly Hansen Bain Jack Wolfskin Cerberus Fila Bear Stearns CamelBak 5/1/97 9/9/02 6/10/03 12/2/03 Mean Financial Acquirors Median Financial Acquirors All Acquirors Mean All Acquirors Median All Acquirors Spyder Valuation Based on Discounted Cash Flow Assumptions: Discount Rate Terminal Growth Rate Synergies in COGS Synergies in SG&A Net PP&E Accouts Recievable Inventories Accounts Payable & Accruals Net Working Capital 13.50% Includes small-stock premium 3.00% 0.00% 0.00% FY2004 $1,970 $3,192 $845 $5,499 ($1,462) Net Sales COGS % Cost of Goods Sold Gross Profit Operating Expense % Total Operating Expenses Depreciation EBIT Tax Rate NOPAT Capital Expenditures (net) Change in Net Working Capital Free Cash Flow Terminal Value Total Cash Flow Total Enterprise Value FY2005E $3,581 $5,625 $1,130 $3,372 $3,383 $85,281 50.70% $43,237 $42,044 32.80% $27,972 $1,078 $12,993 21.10% $10,252 $1,611 $4,845 $3,796 $3,796 $38,180 FY2006E $4,554 $6,873 $1,402 $4,052 $4,223 $105,630 52.10% $55,033 $50,597 31.80% $33,590 $2,097 $14,909 21.50% $11,704 $973 $840 $9,891 $9,891 FY2007E FY2008E $133,223 52.90% $70,475 $62,748 30.80% $41,033 $3,260 $18,455 22.30% $14,340 ($4,554) ($4,223) $23,117 $165,732 53.30% $88,335 $77,397 29.90% $49,554 $3,098 $24,745 23.90% $18,831 $0 $0 $18,831 $23,117 $18,831 Sources: Exhibit 6 Exhibit 6 Exhibit 6 Exhibit 6 Exhibit 5 Exhibit 5 Exhibit 5 Exhibit 5 Exhibit 5
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