Thursday, March 22, 2012

Analyzing Taylor Made's Purchase of Adams Golf

This has been a big news week in my world – the PGA Tour announced significant structural changes, my company TGA officially announced the launch of TGA Premier Youth Tennis with the USTA as a Founding Partner, Los Angeles announced itself as a meaningful startup community at Start Engine’s Demo Day (where I’m a Mentor), and Taylor Made announced its acquisition of Adams Golf.

I’m going to talk about all of these items in future blogs, especially TGA’s strategic decision to enter the tennis industry as the lessons learned are already reminding me of case studies I used to debate in business school. 
Today, however, I want to look at Taylor Made’s Acquisition of Adams Golf, which was announced on Monday.  I’m going to look at it from three perspectives – financial, strategic, and implications for entrepreneurs.

Taylor Made Adidas Golf Group acquired Adams Golf for ~$70 million, or $10.80 per share. This represents a premium of ~71% over the share price from before Adams Golf announced it was examining major new strategic directions in early January and a 9.5% premium over their closing price last Friday of $9.86.  Upon news of the acquisition, shares rose 8.8% to $10.73 on Monday (where it currently remains), indicating that the market likes the acquisition, at least for Adams Golf.  Shareholders must like it too considering the stock at this time last year was $5.22.
Adams Golf had $11.85 million of operating income in 2011 on $96.50 million of revenue, so Taylor Made gets an equipment company that is profitable with ~12% operating margin. This seems pretty good considering Callaway, the other publicly-traded golf equipment company, had an operating margin of almost -10% last year with $81.09 million of losses on $886.53 million of revenue.  Therefore, Taylor Made paid 0.72x revenue and 6x earnings.  I don’t have any comps to compare these multiples to, but at first glance they look pretty good to me considering the lack of profitable equipment manufacturers in the industry.

Adams Golf’s focus on mid-high handicappers nicely complements TM’s portfolio of products that focus on low-mid handicappers.  Therefore, the acquisition buys top-to-bottom market share for Taylor Made.  Additionally, when analyzed through Porter’s Five Forces (which is a great model for looking at strategic decisions), the deal looks like a good one:
Threat of New Competition – the acquisition makes the largest golf equipment manufacturer even larger.  I agree with many leaders in the golf industry who feel that we’re about to see consolidation amongst equipment manufacturers and this move is a step in that direction.  As a result, threat of new entrants into the market decreases as barriers such as capital requirements, brand equity and economies of scale tilt more in favor of Taylor Made. Analysis – thumbs-up for TM.

Threat of Substitute Products or Services – since there are no alternatives to golf clubs – meaning, you need to have them and them alone to play on a golf course – this “force” doesn’t apply much to the acquisition.  In terms of customers spending their time/money on activities that substitute for golf, this deal also has no impact. Analysis – neutral for TM.
Bargaining Power of Customers – consolidation almost always leads to less bargaining power for customers due to fewer options that create less competition.  Analysis – thumbs-up for TM.
Bargaining Power of Suppliers – this move gives greater economies of scale to TM and therefore gives them greater influence over suppliers. Analysis – thumbs-up for TM.

Intensity of Competitive Rivalry – I believe the acquisition will increase rivalry in the short-term as competitors scramble to compete with a growing market leader through increased advertising spending and so forth.  However, in the long-term, I don’t believe any equipment company can create a sustainable competitive advantage through innovation due to USGA regulations.  Therefore, manufacturers will (and are) evolving from R&D houses to marketing firms.  Once this happens, golf clubs will essentially become a commodity from a technological standpoint and industry leaders will need to succeed through brand equity.  New  private-label entrants will then be able to enter the market with equal quality and significantly reduced price-points through reduced overhead, thus increasing competitive rivalry for everyone.  For both the short-term and long-term, that spells trouble for Taylor Made.  But, I believe this will happen regardless of the Adams acquisition. Analysis - neutral for TM.

For entrepreneurs, I think consolidation is bad news in the short term and good news in the long term.  As technology becomes a commodity, and big players fail to innovate (as is often the case with consolidation), opportunities will arise for new entrants to capitalize on the huge market of people who want top-of-the-line technology but don’t want to pay $500 for a driver.  If and when that happens, hopefully entrepreneurs will be there with a solution that makes golf more affordable and therefore gets more players into the game.

Thursday, March 1, 2012

A 19th Hole - at the Beginning of the Round?

I made a quick jaunt to Northern California last week with a hectic work schedule but was fortuitously able to incorporate a little golf into the itinerary.  The golf was spectacular (see pictures below), my game was not.  Complicating matters was that we were pushing it by trying to fit two rounds into very limited time.  As such, we essentially pulled into the parking lots of each golf course, checked in, hit a few putts and teed off.  You can imagine what those first hole scores looked like.

My TGA colleague Nate Wright had a couple of intriguing thoughts about this process that I’ve been chewing on since and wanted to pass along.
As I was finishing up my double bogey putt on the first green of our second course, Pasatiempo, he said – “Wouldn’t it be great if golf courses were built with 19 holes and the first was a warm-up?”  I laughed it off but he persisted – “You could have a Marshal walk with each group and determine, based on the scores and what he or she saw, what tees the players needed to use for the rest of the round.”
I initially laughed it off again but the idea grew on me as I thought more about it.
There are obvious complications – incorporating a 19th hole into existing layouts, adding to the length of a round, disrupting the concept of an 18 hole course, adding another employee to payroll, potential subjectivity of the Marshal determining tees (and the corresponding displeasure/arguments), etc.
But there are also benefits – minimizing the need for practice time before the round, increasing enjoyment of the round by having a warm-up hole to minimize high first-hole scores, faster pace-of-play on the other 18 holes due to players playing from the appropriate tees, etc.
The first “practice” hole would need to be very easy, such as a wide open 350 yard par 4 with a flat green.  Maybe there would be rules regulating the maximum number of shots to get on the green at four and the number of putts at three.  Maybe players with handicaps below a certain number could bypass it altogether and play from any tees they wanted.  Maybe the practice hole could be added to the side of the driving range, where space is often more abundant and easier to carve out, as opposed to including it in the course layout.
With the USGA considering new rules and some golf courses starting to develop innovative ways to make the game more attractive, all options seem (thankfully) to be on the table.  I think this idea stands up with many of the others and merits a place in those conversations so I wanted to throw it out there. 
What do you think?
And, hat tip to Nate Wright for the ideas.
18th Hole at Pasatiempo - Me on the left, Nate Wright on the right
11th Hole at Monterey Peninsula Country Club's Shore Course