Playing Hard to Get
A couple of years ago, Timberland (NYSE:TBL) CEO Jeffrey Swartz traveled to Colorado at the behest of one of his product development gurus. Swartz, 46, who has run the $1.6 billion Stratham, New Hampshire, footwear company since 1998 and is one of the most powerful men in the footwear business, went alone. He wore jeans and a baseball cap and went with the sole purpose of strolling the streets in cities like Boulder, the de facto capital of the outdoor apparel and footwear world and home of lots of artists, mountain climbers, skiers, and bikers. The product development guru, Jay Steere, had suggested that Swartz take the trip because he wanted the CEO to see firsthand what Steere, a 19-year Timberland veteran, had come to believe: that in the world of outdoor retail, being big was becoming passé.
Walking through downtown Boulder in spring 2005, looking at people's jackets, sneakers, and boots, Swartz recognized maybe five or six brands--but, he says, there must have been another 20 names that he didn't know. Says Swartz, who doesn't take himself too seriously: "There was one called Horny Toad,"--that's a real brand--"and one called Chipped Toenail"--he's being funny now--"and I whipped out my cell phone, because I'm a corporate guru, and I said, 'BYNHO. Brands You've Never Heard Of." He repeats all of this at approximately 80 miles an hour. "I get it," Swartz told Steere. "The next best thing is the small thing. People are postindustrial. They are sick of mass." He takes a breath. "It's hard to be big and cool."
That insight, coupled with the realities of Timberland's business, which lately has been proving by way of slowing sales and shrinking profits that it is indeed hard to be big and cool, would ultimately lead to a titanic shift in the company's strategy. Until recently, it had consistently turned away investment bankers who wanted to sell companies to Timberland. In the company's 33-year history, it had acquired only one business, and that was in 1985. From its entrepreneurial roots--Jeffrey's father, Sidney, tested the waterproofing of early Timberland boots by drowning them in toilets full of bright-blue Tidy Bowl water--Timberland had become mass market, a single mammoth brand from head to toe. And it had remained so even after its competitors--VF Corp (NYSE:VFC)., which owns The North Face; Wolverine World Wide (NYSE:WWW), which markets Merrell footwear; Columbia Sportswear (NASDAQ:COLM); and many others--had discovered the power of owning a portfolio of brands. In this changing world, Timberland stood pretty much alone, attempting to build its brand by itself.
That stance began to change after Swartz's Colorado epiphany. The publicly owned company decided that it might just consider acquiring some smaller companies. Maybe. If the companies were entrepreneurial enough and values-driven enough. It was a big if. It was a strategic question that Swartz and the rest of the management team--COO Ken Pucker, president of the outdoor group Gary Smith, and CFO Brian McKeon--would take more than a year to settle. They met biweekly for marathon debating sessions, carving out a list of criteria to which they would stringently adhere when selecting acquisition targets.
Swartz and his team would consider only companies committed to treating their workers, and the planet, as well as they believe Timberland does. They would look for untapped growth potential, brands that would benefit from Timberland's international supply chain, working capital, sales force, and expertise in entering new markets. They would look for founders who wanted to stay. "We're really interested in people who understand their brands and are interested in continuing to guard them," Pucker says. But on their long list of criteria, one element was so important that it far outweighed the others: They would search for "authentic" brands, Pucker says, brands that are "rooted in something real, not fashion brands." Indeed, they would look for brands that were small and focused and passionately entrepreneurial--precisely the kind of brand that Timberland once was.
One of the lesser-known logos that Jeff Swartz might have spotted as he strolled through downtown Boulder was the brainchild of Kim and Demetri Coupounas, a married couple who are polar opposites in looks and manner. Demetri, who everyone calls Coup, is 41, dark, and Greek. Kim, 40, is blond with startlingly clear blue eyes. Coup's stories come with punch lines; he waits for the laugh, like the deadpan comic Steven Wright. Kim is his straight man. They are, however, identical twins in brains and ambition: They both graduated from Princeton and then earned joint degrees from Harvard Business School and Harvard's John F. Kennedy School of Government. Each wanted to save the world, he by balancing the federal budget (he was policy director of Washington's Concord Coalition during the Clinton years), she as one of the early employees of the experimental Edison Schools Project.
Nothing seemed too hard to attempt, including hiking many of the 50 highest peaks in the U.S.--until, that is, one day in August 1994, when they found themselves on the Appalachian Trail in Maine. Outfitted with the best of everything, they planned to hike 10 miles a day for 10 days. Coup was carrying 75 pounds, Kim 65. Miserable, Kim was dreaming of bailing out, turning in her backpack for a towel at a spa. Then, in a side pocket of his pack, Coup discovered a small bag of marshmallows and chocolate--Kim's two-ounce surprise.
"How could you possibly add any more weight to these already ridiculous packs?" he bellowed.
"It's s'mores!" she said.
After sniping at each other some more, they left the trail, ditched their packs, and went day hiking, their spirits--and their backs--restored. For the two M.B.A.'s, the experience set off sparks. They wanted to know: How can we make backpacking more like day hiking? How can we make it fun?
The thought lingered until 1997, when Coup read a manifesto written by Ray Jardine, an adventurer with a passion for lightening up. The book (The Pacific Trail Hiker's Handbook) not only outlined how to pack light but also how to sew lightweight gear. It was all Coup needed. A year later, the couple had moved to Boulder, and Coup had written a 55-page business plan for a company called GoLite. It was the perfect place--the outdoor industry's capital--to found a company that they hoped would revolutionize the backpacking industry.
While Kim worked as COO of Up With People, a nonprofit that she describes as "the singing Peace Corps," Coup found sourcing agents and helped develop GoLite's first 12-item product line, which the company introduced at the 1999 Outdoor Retailer Show. Soon GoLite was growing steadily enough that Kim could leave her singers and go to work with Coup. Using their own money and some from Coup's father, a Boston-based attorney and GoLite's silent partner, the couple invested heavily, both in making products that would stand up to the scrutiny of zealous backpackers and on marketing that would make GoLite a household name among performance athletes. Among other things, they sponsored athletes, including the Team GoLite/Timberland adventure racing team, a co-marketing effort dreamed up by Kim and Timberland's Jay Steere, who served together on the board of the outdoor industry's trade association.
Still, progress came in fits and starts. For the first few years, traditional gear makers dismissed them. Then those same competitors began introducing ultralightweight products of their own. This didn't surprise Coup, who believed GoLite had to get big fast if it was going to survive once The North Face and Patagonia and Marmot and a host of other well-capitalized competitors caught on. "In a consolidating culture," Coup says, "you either get critical mass fairly early, or you're dead."
By 2005, Coup and Kim had invested more than $13 million of family money, and some 600 specialty shops were carrying GoLite products. But the company, which consisted of a handful of business-savvy athletes operating out of Spartan cubicles in an anonymous industrial park, had barely been able to crack the behemoth outdoor retailers--a tiny 6 percent of GoLite's U.S. sales were coming from REI, virtually nothing from EMS. And annual revenue was still well below $15 million. In an investment banking book that Kim and Coup wrote in early 2006 with the help of banker David Goldblum of Denver's Goldblum Lentz & Co., they underlined the following sentence: "The company needs fuel!"
Small, rapidly growing companies tend to hit this stage sooner or later. Whenever it happens, it brings what can feel like a shortlist of unappealing options: sell a stake in your company to a private equity group or to a VC, usually for a less than ideal valuation; borrow like crazy, if you can find a bank willing to lend to you; slow down your growth so that you don't outrun your available finances, a strategy that can spell death in a competitive market; or sell the company outright, often a painful choice for entrepreneurs like Kim and Coup who just aren't ready to give up their baby.
For years, the foundation of Timberland's success had been the yellow work boot that Jeffrey Swartz's grandfather, Nathan Swartz, had created. Some of that success had arrived unexpectedly. Not only did tradespeople and farmers take to Timberland's boot, but starting in the mid-'80s, city kids had begun to adopt "Timbos" as an accouterment for baggy jeans. Not surprisingly, this unanticipated but explosive growth market left Timberland execs a little uneasy; they hadn't intended to be in the fashion business, and they knew that at some point their boots would cease to be cool. That's why Swartz went to Boulder and why the company decided, along with other portfolio-building strategies, to go after the outdoor performance business--the market for footwear, apparel, and gear for athletes who like to hike, run river rapids, and run on forested trails 10,000 feet up.
But when it came to selling shoes and boots to extreme athletes, the Timberland execs were novices pitted against far more experienced competitors. REI women's sock and footwear buyer Denise Friend, a 34-year veteran with the 90-store outdoor chain, has bought almost nothing from Timberland in recent years. And that's a big deal because REI is the elephant in the market, buying well over $100 million worth of shoes and socks annually. "Other people have really raised the bar for performance footwear," Friend says, referring to brands such as Salomon, Vasque, and Montrail. "I don't believe that Timberland has kept up."
It would become part of Ken Pucker's job to solve that problem, in part by going after some of those brands Jeff Swartz had never heard of. Pucker had been fresh out of business school when he got a job at the consulting firm Bain and Co. He lasted nine days before the company laid him off. In spite of his brief tenure, he absorbed one statistic that governs much of what he does today: The majority of acquisitions destroy value. Despite an abundance of natural enthusiasm, he likes to move carefully. Timberland's first acquisition was SmartWool, a profitable Steamboat Springs, Colorado, sock maker with some $40 million in revenue. The company's soft merino wool ski and biking socks had made SmartWool a big name in the sports specialty stores that Timberland hoped to crack. At first, Timberland simply licensed the SmartWool socks for use as lining in a new set of washable shoes called Power Loungers. But Timberland isn't wild about licensing deals. That's because they expire and because, if the product succeeds, the company with the asset--in this case, the sock--has the leverage. Ultimately, in November 2005, Timberland bought SmartWool for $82 million, double the company's annual revenue.
While Pucker was looking for acquisition targets, Timberland was also attempting to build its brand portfolio by inventing new products internally. For example, the company invested well into seven figures to build a new brand of "amphibious" shoes for water sports enthusiasts that it dubbed Mion (pronounced my own). It also turned loose a burly engineer named Doug Clark, an ebullient man with a shock of curly graying hair and a booming voice who was in charge of Timberland's multimillion-dollar Invention Factory.
In the hall outside the factory, there is a plaque that reads "Area 51 Research Lab"--Clark's tongue-in-cheek reference to the U.S. Air Force's secret test site for developing new aircraft. Push open the Invention Factory's heavy door and you walk into a room full of equipment, including a force tester that can measure the impact of a 150-pound soldier jumping out of a helicopter wearing a 100-pound pack; a custom-designed treadmill with a bumpy surface, designed to simulate the effect of roots and rocks on a hiker's feet; and a machine that can make a shoe "walk" 15,000 steps.
In this lab, Clark and his assistants set about creating a new shoe that would work for trail runners and their extreme athlete counterparts, "sky runners"--athletes who run marathons on rough terrain at 13,000 feet. At the time, there were a number of trail running shoes available, but Clark believed they were dressed-up road running shoes, not shoes designed for the problems athletes encounter in the woods: "Nobody had taken a clean piece of paper and said, What does a trail runner need? What would a trail running shoe do that these other shoes don't?"
To figure it out, Clark's designers videotaped athletes running road races and sprinting down trails. The differences were dramatic. "When you are running on a smooth road, even though there is lots of jarring, your arms are close to your body and you are quiet from your waist up, conserving energy," Clark says. "You watch trail runners and their arms are out here bouncing around so they don't fall down." Trail runners look awkward, Clark realized, because road running shoes have soft midsoles and hard outsoles, which work fine on a paved road but make trail runners flail. What does work? The opposite--a harder midsole and a softer outsole. Clark took his inspiration from watching car commercials. The differences in performance between various vehicles--"You don't take a Cadillac to the mountains," he says--would suggest you don't take a road running shoe up to the mountains. By contrast, the vehicles you do take off-road--rock crawlers--have soft tires and independent suspensions for flexibility and stability.
Clark figured that if a soft tire can keep a rock crawler upright, maybe a soft outsole--Timberland calls it "soft against the ground"--could do the same for a trail runner. He created a shoe with a soft, springy outsole. It's designed to keep you stable on uneven surfaces so that your body stays vertical and your ankle doesn't snap when you step on a moss-covered rock. "The first need of a trail runner," says Clark, dryly, "is to not fall on his ass." He and his team also made the shoe as light as possible. In a visitor's hand, the silver, black, and yellow shoe, despite 12 sizable, independent, rock-hugging lugs on the outsole, feels almost weightless.
Timberland hoped the shoe would appeal to an entirely different consumer, the kind of consumer that retail buyer Denise Friend has in mind when she goes shopping for REI. But that led to an interesting question: How would Timberland market this shoe? The obvious question was whether it made sense to put a brand name known for rugged, heavy boots on a 10.9-ounce running shoe. "We invented it," says Jeff Swartz. "There was a tremendous temptation to call the shoe Timberland. But we tested it, and consumers said, We don't believe it as much coming from a big brand like Timberland."
The company had already spent millions building the Mion brand. Did it want to spend millions more developing yet another brand? Or was there a chance it made more sense to go out and find an existing brand that would better fit the shoe. Clark thought about a tiny Boulder company that had been generating a lot of buzz. By 2005, GoLite's brilliantly colored, featherweight apparel and gear--not to mention the publicity generated by its sponsored athletes, including Andy Skurka, who used GoLite gear while hiking 7,000 miles across the continent--had made a big mark in the elite outdoor performance market.
Back in the lab, Clark holds up the featherweight shoe. Its heel sports a GoLite logo. "Every hiking boot with this kind of protection is labeled as being substantial," Clark says. "GoLite was the brand that said, No, going up in the mountains is more enjoyable if it's light. I looked at this shoe and thought, that's everything you need! GoLite is the right brand. It's the only existing brand that could tell our story, that stood for what we had to say. Buy the brand and you're done."
Did Kim and Coup Coupounas know how much Timberland wanted their brand? A smile flickers across Clark's broad face and disappears.
The smile reappears.
Kim and Coup weren't really looking to sell GoLite. When approached by business development guys, Coup would shoot back, "Sure, you got $50 million?" In the summer of 2005, though, they received a serious proposal from a large company (they decline to say which one). This pitch was serious enough, and large enough, for Coup and Kim to give it credence.
But at the time, in the fall of 2005, GoLite had neither investment banker nor investment book. Kim contacted investment banker David Goldblum, and despite the couple's reservations--that the brand wasn't fully baked, that the company wouldn't get the value it deserved--they hastily put a book together. In it, they asserted that they did not want to sell--unless it was to a large strategic buyer that would supply the fuel to help them scale up dramatically. They shopped the company around a bit, bringing the book to Timberland, which had already approached them about the brand. Coup and Kim met with Ken Pucker and outlined their aspirations. It was a short conversation. When it came to valuation, says Pucker, "we were in different Zip codes."
Moreover, says Jeff Swartz, Kim and Coup were skeptical that their fleet-footed brand would be well served by associating with Big Foot. "The most powerful thing a small company can say is, No," says Swartz. "They said, 'You're not good enough for us because you're fat and middle-aged. We're young and lean.' And we said, 'No, no, we're worthy!" He laughs. At the same time, Kim and Coup rejected their other suitor, feeling their cultures were poorly matched.
And yet, unbeknownst to Kim and Coup, Timberland was fast approaching its own deadline: Pucker, Gary Smith, and Jay Steere wanted to introduce the new trail runner at the August 2006 Outdoor Retailer Show--but they couldn't manufacture it until it had a name. They didn't want to license the GoLite name, and they weren't going to pay Kim and Coup's asking price. Mulling it over, Timberland CFO Brian McKeon dreamed up an unusual solution: Why not buy the GoLite brand and license it back to GoLite? Timberland would sell GoLite shoes; Kim and Coup would continue selling apparel and gear. In January 2006, Pucker floated the idea with Kim and Coup, who were intrigued. Why not, indeed? A deal like that could give them the capital, not to mention the sales muscle, that would enable them to expand domestically and even internationally, where Timberland was strong and GoLite was weak. Moreover, it would leave the founders exactly where they wanted to be--at GoLite's helm. This time, the price negotiations were easy; the two parties came up with nearly the same number (a figure they decline to reveal).
They hadn't wanted to sell.
And the brand, Kim says, "is the company."
"No," says Coup, "it's part of the company."
"Okay," she says, "but it's the essence of the company."
When that kind of ambivalence mixes with a public company's due diligence process--a process that Kim and Coup call "as offensive and violating as invasive surgery"--it can unravel almost any deal. Could GoLite certify its financials? How clean were its global trademarks? With which competitors did it have sponsorship deals? Were all of its URLs solidly in its possession? The process infuriated Kim, who proclaimed, more than once, "I'm outta here," only to be pulled back by investment banker Goldblum and GoLite COO Dan Brillon. "At one point," says Kim, "David sent me a memo saying, 'If you guys say no to this, this will be the stupidest thing you will ever do in your entire career."
Timberland was rapidly approaching its crucial go-no go date: It had to have the brand under its control that spring in order to manufacture the shoes in time to introduce them at the August trade show. With all the details to sort out and the emotions to contend with, Kim and Coup had gone five weeks past Timberland's original deadline. Finally, one day in June, Kim and Coup became convinced that they really had no more time. If they didn't sign by midnight, they believed, Timberland would back out.
Kim signed. Coup signed. They called Coup's father, George, their silent partner, in Boston. His would be the final signature. It was a Tuesday. He wouldn't sign.
"My father is a rational, cerebral, highly intelligent Harvard Law School guy," Coup says. "But he's also superstitious." Coup is trying not to laugh. "Why can't you sign on a Tuesday?" he asks rhetorically. "Because Constantinople fell to the Turks on a Tuesday."
The laugh finally escapes. Greeks, says, Coup, won't sign important documents on Tuesdays.
Pucker and Swartz stretched the deadline one last time, to the following morning. George signed, and the GoLite brand became Timberland's.
At the Outdoor Retailer Show last summer, Timberland did indeed manage to introduce several styles of its new GoLite brand trail running shoe, which Pucker says, were well received. National Geographic Adventure gave one of the shoes, the $95 Sun Dragon, its "Best of the Year" gear award for mountain footwear, calling it "a revolutionary concept" and "the most comfortable and responsive trail runner we've seen in ages." This month, the new line of shoes, along with an "after-sport" casual line, will appear in 100 specialty stores as well as in EMS and, yes, REI. "I thought it was a brilliant strategy," says REI buyer Denise Friend. "GoLite has the entrée into and cachet in the outdoor performance marketplace." (Even so, in an ironic twist, there have been recent rumors that Timberland itself might be up for sale. Neither Swartz nor his team would address those rumors.)
If you visit GoLite's offices today, you'll see just what you would have seen before the deal--team sponsorship posters; a show room overflowing with shirts, jackets, backpacks, water bottles, and base layers; an industrial design shop not much larger than a walk-in closet; and a couple of dogs. Kim and Coup still hike when they can. Kim still serves on the Outdoor Industry Association board. They still know every one of their employees, and they still like to hire them for their athletic prowess--and then figure out something for them to do. Nonetheless, the GoLite staff is well on its way to combining its sales force with Timberland's GoLite team, and GoLite apparel and gear are already debuting in European markets. "Timberland wants to grow GoLite big," says Kim. "They're not talking about a few million dollars."
It may be that Kim and Coup got what every entrepreneur dreams of getting--the fuel, the support, the muscle of a big partner. And the freedom to continue doing what they do best.
Elaine Appleton Grant, an Inc. contributing editor, writes "Business for Sale" in the Priority section.