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.
Financial:
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.
Strategic:
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.
Implications:
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.
