TaylorMade-adidas Golf Company to acquire Adams Golf

[Clambake]

Everyone seems to being looking at this very negatively - I think people's view of TM as such an aggressive marketing machine is coloring their perspective.   But I'd offer a counter opinion that looks more objectively at the financial and business implications, and I feel this could be good for both companies and for golf.     For reasons I'll outline below, I fully expect TM to keep the Adams brand and I think we'll see that brand grow further in the market.

First, Adams is a very small player in this market.   With $96M in annual revenues, they were very limited in developing new products.  Their R&D; budget for last year was just under $3M, which works about to be about a dozen engineers at fully burdened labor rates.   But that assumes unrealistically they have no other R&D-related; costs, so in reality they probably only have 7-8 development engineers.        Contrast that with Callaway, who's R&D; budget for the year was about $130M.       Taylormades' is no doubt higher than Callaway as well, so Adams was going to be severely limited in their ability to compete at a technology level.

Related to the R&D; is the ability to protect one's developments through patent protection, and again Adam's is severely disadvantaged going forward.    A quick search of the USPTO's data bases shows literally hundreds of patents by Callaway and Taylormade, against perhaps a few dozen for Adams.    The cost of prosecuting patents is significant, probably upwards of $15-20k each, and if Adams was to grow its IP portfolio at a competitive pace they would probably be spending upwards of $1M per year just in patent costs.

Also related to patents has been the argument that TM bought Adams because of patent threats.    I doubt that is correct, as Taylormade already controls many of the key patents related to manufacturing metal woods.    All of the golf companies are constantly involved in cross licensing of their respective patents - the different companies have all staked out claims in certain categories of products, and essentially none of them would be in business without all the cross license agreements (an example - did you know the adjustable sole plate on the R11 is actually a Callaway patented concept?).     If Adams was trying to assert patent rights on the velocity slot idea (which by the way I could not find in the patent database except for on the crown of the clubhead), then TM could easily bury Adams with cross claims on all the metal wood manufacturing patents.

This acquisition is good for Adams because they simply didn't have the resources going forward to effectively compete for all the above.   At this point in time they are profitable, but as a small niche player they were likely going to find themselves squeezed out of the market in the next 3-5 years.   Selling now is good timing as the brand is currently strong and they are profitable, allowing them to extract a higher sales price for the company.

Financially, this also makes good sense for TM.    When a company reaches a large size, it becomes very, very difficult to keep up a growth rate through organic growth, i.e. creating and selling more internally.    It is pretty easy for a $10M company to find a $1M opportunity to grow an additional 10%, but it is very difficult to find 10% growth opportunities when you're a $1B company - those $100M opportunities just don't come along very often.     But shareholders are not satisfied with a quiescent company with stagnant sales - they demand continual growth.   Hence, companies like TM will seek to maintain growth with acquisitions.     In TM's case here, they've found a profitable company with a good brand, and one that helps fill out the different market niches where TM is not very strong.    Financially, this acquisition will be accretive - it adds directly to TM's revenues and earnings.     TM can also consolidate a lot of the SG&A; costs both companies face as well as R&D;, further helping earnings.

Another thing that makes this good for both companies is that much of retail is a battle for shelf space.    An example is the shampoo business - those hundreds or different shampoos cluttering a grocery store's shelves are made by a small number of companies, but they create different versions to gain more shelf space - the more space they control the more leverage they have in the retail channel.    A retailer won't give up its precious shelf space for just more of the same - the need differentiation to draw in the customers and create greater choice.    TM could come up with even more lines of clubs on their own, but the retailers would balk giving TM more space directly, but with Adams they have what appears to be a completely separate product line.    Why this is good for TM and Adams is they can now use their combined leverage to secure better promotion and pricing from the retailers.    This is good for consumer as well, as it can result in better pricing and special offers for both brands.

TM has a lot of market power in the industry which Adams has never had and would never achieve.    Adams is a good brand name and plays well with various market segments, and with TM behind it they now have the power to get that brand into retail and distribution channels that would otherwise not happen.

Because of all this, I see this as a good move for both companies and one that offers potential benefits to the golf consumer as well - the Adams brand will continue to survive but will have better resources behind it to grow beyond what it could do by itself.    That's a very good thing.

[GaijinGolfer]

Originally Posted by Clambake

Everyone seems to being looking at this very negatively - I think people's view of TM as such an aggressive marketing machine is coloring their perspective.   But I'd offer a counter opinion that looks more objectively at the financial and business implications, and I feel this could be good for both companies and for golf.

Whats good for business and whats good for golf dont go hand in hand though.  Less competition is never a good thing for the consumer.

[mvmac]

Great post Clambake, good point about the cross licensing

[boogielicious]

Shelf space is an excellent point as well.  Luckily Golf manufacturers don't have to deal with Walmart.

[uttexas]

I read that TM sees itself as being for 0-4 HI players and markets for the top of the pyramid and that the purchase of Adams was for the game improvement/senior players. This is a joke...right? What arrogance. Adams (IMO) make far superior "player" irons than TM (MB2 and CB3s better quality and way better looking than TM tour preferred). I see TM as a company targeting the masses with big plastic/neon graphics. Adams is an innovative company that thinks of the golfer first--why they seem to have 7-9 different iron sets at the same time--it would make more money if your advertising led consumers to believe that RBZ clubs are for everyone, but Adams has a more custom/tailored approach to business.

[GaijinGolfer]

Originally Posted by uttexas

I read that TM sees itself as being for 0-4 HI players and markets for the top of the pyramid and that the purchase of Adams was for the game improvement/senior players. This is a joke...right? What arrogance. Adams (IMO) make far superior "player" irons than TM (MB2 and CB3s better quality and way better looking than TM tour preferred). I see TM as a company targeting the masses with big plastic/neon graphics. Adams is an innovative company that thinks of the golfer first--why they seem to have 7-9 different iron sets at the same time--it would make more money if your advertising led consumers to believe that RBZ clubs are for everyone, but Adams has a more custom/tailored approach to business.

Yeah because we all know the RBZ irons were designed for pros, right?

[bpollino89]

Originally Posted by mck

They just wanted Kenny Perry back

They can have him back! That guys is annoying.

[mvmac]

The guy that is the most happy right now is Chip Brewer who was the Adam's president and CEO since 2002 and helped get Adams Golf to where it is today.  He was recently named Callaway Golf CEO but I'm assuming he kept his Adams stock, says 175,000 shares Here

[sean_miller]

Originally Posted by uttexas

I read that TM sees itself as being for 0-4 HI players and markets for the top of the pyramid and that the purchase of Adams was for the game improvement/senior players. This is a joke...right? What arrogance. Adams (IMO) make far superior "player" irons than TM (MB2 and CB3s better quality and way better looking than TM tour preferred). I see TM as a company targeting the masses with big plastic/neon graphics. Adams is an innovative company that thinks of the golfer first--why they seem to have 7-9 different iron sets at the same time--it would make more money if your advertising led consumers to believe that RBZ clubs are for everyone, but Adams has a more custom/tailored approach to business.

While I'm sure that's true in reality, the market perception is probably otherwise. Other than tour quality hybrids and LD drivers, does the average consumer associate Adams with anything other than beginners and/or seniors?

[GaijinGolfer]

Originally Posted by sean_miller

While I'm sure that's true in reality, the market perception is probably otherwise. Other than tour quality hybrids and LD drivers, does the average consumer associate Adams with anything other than beginners and/or seniors?

Id say the average person considers Adams to be old man golf clubs.  Which is a shame because Adams makes some quality stuff.

[newtogolf]

I never considered them old man golf clubs but until I got more serious about golf I never considered them in the top tier, and would often confuse them with Cobra.  They do seem to lack a real identity as they market their SGI iron/hybrid sets heavily but then they have some of the best low handicap level hybrids on the market.  I've never tried their forged irons, but most people that own them seem to think highly of them.

Originally Posted by TitleistWI

Id say the average person considers Adams to be old man golf clubs.  Which is a shame because Adams makes some quality stuff.