CARLSBAD -- Like an avid card-collecting sports fan, Carlsbad's K2 Inc. collects sports brands.
K2's sporting kingdom includes such well-known names as Brass Eagle, the paintball giant; Rawlings, the legendary maker of baseballs and gloves, and Shakespeare Fishing Tackle.
In July, publicly traded K2 expanded to Europe by purchasing German ski maker Volkl Sports Holding AG and its sister company, the Marker Group, as well as Marmot Mountain, based in Santa Rosa.
Growth by acquisition is how big sporting goods companies get bigger. They have the distribution and marketing clout that gets visibility for brands. For example, in March, Vista-based DC Shoes was purchased for $87 million by Quiksilver, a surf apparel maker based in Huntington Beach.
While still looking for more purchases, K2 won't stray out of the sporting goods field, said Richard J. Heckmann, chairman and chief executive of the company since October 2002.
Heckmann personifies K2's philosophy of acquisition: Buy only what you know, look for businesses with real products, and let those who know do the buying. His corporate life intersected with the most outlandish failures of the tech bubble, where those lessons were disregarded.
It's a lesson he says he's determined not to forget.
North County newcomer
K2 began life as a family-owned firm. It was founded four decades ago on Vashon Island in Washington State by brothers Bill and Don Kirschner, hence the name. While retaining the K2 Skis line, the company has long since outgrown its origins.
In 1985, K2 was acquired by Anthony Industries, a Los Angeles-based conglomerate that took its name. Over the years, the company's Vashon Island presence has steadily declined. In 2001, ski production was relocated from Vashon Island to China.
The company moved to Carlsbad in the spring of 2003 from the City of Commerce. The company's stock traded for about $8 per share then, soaring later that year to about $19 per share. Shares closed Friday at $13.12, valuing the company at just under $470 million.
Rich Duprey, a contributor to the investment Web site Motley Fool, gave K2 a mixed assessment in a July 22 article. Duprey praised the company for its knowledge of sports brands and ability to make smart purchases that reinforced the strengths of its existing properties.
However, Duprey cited K2's debt and practice of issuing additional shares to cover the cost of acquisitions, diluting the ownership of existing shareholders, as burdens.
In the quarter ended June 30, the company reported earning $6.2 million, or 16 cents per diluted share. In the same quarter a year ago, K2 earned $5.8 million, or 19 cents per diluted share. Its debt as of June 30 was $200 million, compared to $123 million in the year-ago quarter.
So for investors, the question is whether the earning potential of K2's acquisitions outweighs its debt and stock dilution.
Heckmann said he's confident that the acquisitions add value to the company. This isn't just words: in late July, he and three other top K2 officials paid more than $416,000 to buy a total of 31,000 shares of K2 stock.
Decentralization, not synergy
K2 is a holding company, which means its main assets are its subsidiary companies. Only about 30 people work in Carlsbad, which is the location of the administrative headquarters. The rest are at the subsidiaries, making, marketing and selling their products.
In its decentralized model, K2 appoints vice presidents to run each sector of its sporting goods companies. These chiefs report back to headquarters. That's it. There's no K2 organizational charts for these subsidiaries, Heckmann said, outlining a philosophy that sounds like a cross between Tom Peters and Scott Adams, the ironically cynical creator of Dilbert.
"I'll give you a million dollars if in my office you can find an organizational chart," Heckmann said. "The reason is, first of all, every organization knows who the morons are. So if you put a moron in a box and call him a manager, you lose the respect of everybody else in the business."
Nor is there any attempt at synergy, leveraging the resources of different units to cut costs. While all K2 subsidiaries are classified as belonging in the sporting goods industry, in practice, he said, each requires special knowledge that other subsidiaries don't have.
"What does paintball have to do with skiing?" Heckmann said. "It has nothing. So why would you try to integrate businesses that can't be integrated?
"The reason we can buy the number of companies we buy is the paintball guys buy paintball companies and integrate 'em. The baseball guys buy baseball companies and integrate 'em, Fishing guys buy fishing companies and integrate 'em. So we're integrating them into companies that totally and completely understand them from day one . . . Making it simple will make it a lot more complicated."
Lessons from failure
Heckmann's blunt talk comes from experience. He's the former chairman of Vivendi Water, a unit of the French utility and communications company Vivendi S.A. Heckmann watched helplessly as the parent company lunged into the entertainment field with its purchase of Universal Studios in 2000.
Drunk on dotcom convergence mania -- the idea that the Internet would knit together different businessess sectors into a "new economy" -- Vivendi wrecked its finances and reputation in the process.
Heckmann came to Vivendi in 1999, when the company purchased U.S. Filter Corp., a Palm Desert water equipment manufacturer. Heckmann started U.S. Filter in 1990. By 1998, the water services company joined the Fortune 500, mainly through acquisition. Among its more famous purchases was the venerable Culligan water softener brand for $1.5 billion in 1999.
In nine years, US Filter made 260 acquisitions, becoming a giant in the process. Vivendi paid $7.5 billion for the company.
Heckmann said that purchase was smart for Vivendi, because the companies were not only in the same industry, but had carved out their own geographic niches -- US Filter in the United States and Vivendi in the rest of the world, especially in Europe.
"We kicked their butt every time they tried to come into the U.S., and they kicked ours every time we went to Europe " Heckmann said. "The deal (Vivendi chairman and chief executive) Jean-Marie Messier and I made was that we would run everything that Vivendi had in the United States in the environmental business, and they would run what we had in the rest of the world."
While that acquisition went smoothly, Heckmann said Messier blundered by looking outside his industry to entertainment.
"I was at my beach house here in Del Mar. (Messier) called me on a Friday night in June and said 'I need you in Paris on Monday morning,' " Heckmann said.
He went to Paris, where Messier disclosed his plan to buy Universal and dive into Internet convergence. Heckmann tried to warn him off, but Messier went forward with the disastrous Universal acquisition.
"One day I sat in a lunch meeting in Washington D.C. not far from the airport in Dulles with Jean-Marie, Steve Case and Jeff Bezos, and listened to the convergence story. And it was powerful. It just never happened. And Jean-Marie's concept of being able to take the Universal library of film and music and pump it into your cell phone while you're sitting in the airport is great. The technology just never developed."
New venture
With the dotcom bubble bursting, and Vivendi's shareholders furious, Heckmann soon left Vivendi for K2. Heckmann was already familiar with the company. He had been a director on K2's board since 1997, and its chairman since 2000. But his arrival of chief executive in October, 2002 gave Heckmann full authority, and he swiftly applied his acquisition strategy.
Last year alone, the company bought Rawlings, Worth and Brass Eagle. In his moves, Heckmann used the same like-buys-like acquisition path that served him well at US Filter. While signing off on the deals, Heckmann trusted his subsidiary businesses to make the right calls.
"As an example, when we bought Volkl and Marker last month, the only part of the company that was involved in that transaction was the winter sports business. The Rawlings business wasn't involved, the Shakespeare business wasn't involved, the Brass Eagle business wasn't involved. None of the others were involved because they don't need to be," Heckmann said.
"If there's anybody that knows how to do due diligence in the ski business, it would be the K2 (Skis) guys, because they're the number one company in the business. They know who the reps are, they know who the dealers are. They know who the customers are Ö They know who to call to check out every supplier, every retailer, because we're selling to the same people."
Contact staff writer Bradley J. Fikes at bfikes@nctimes.com or (760) 739-6641.
