In the past, I have often written
about lessons I learned while working to improve the value of operating
companies—after the fact. This is a very pleasant exercise—an
occasion for bragging. In the event that we don’t do such a good
job I don’t have to tell you about it.
So this time I am going to stick my neck out. I’m
writing about a strategy we plan to execute over the next year. Our
plan is to implement a strategic buildup using StairMaster, a fitness
equipment company, as the platform for building a company to dominate
the home fitness market (just kidding, Justice Department).
We start with a strong, well-respected platform company
with a management team that is not only good at running its own business
but has the talent, energy and capacity to run a substantially larger
one. We plan to help the managers to identify, evaluate, finance, acquire
and integrate additional companies to build a dominant firm.
Done successfully, this strategy can create powerful
operating leverage by applying existing managerial talent to a larger
base of assets. That’s why this strategy is so popular today. A
particularly interesting variant is the brand-name buildup: extending
the market impact of a strong brand name across to more products—and
to more customers.
The result is what the stock market is hungry for today—growth.
By extending the product line of a company with a strong brand, you
can offer customers solutions that were not feasible for any of the
individual companies. For example, by adding capabilities in treadmills,
strength equipment and other sectors of the fitness equipment market,
StairMaster will be able to design, fit out and finance a complete health
club or hotel fitness facility with equipment designed to perform together.
In a good brand-name buildup, two plus two truly equals five.
But buildups can be fumbled, too. As one of the directors
of Coca- Cola told me once, a brand name doesn’t live in a company
or on a product; it lives in the brain cells of the customers. To him,
the value of the Coke brand is based on his memory of the time he sat
at a drive- in movie with a Coke in one hand and his girlfriend’s
hand in the other. Likewise, the value of the StairMaster brand is based
on all the positive experiences its customers have had while using the
product. A botched buildup can inflict permanent damage on a good brand
name.
The best way to botch a buildup is, if you will pardon
the expression, brand-whoring; placing a respected brand name on inferior
products, hoping to dupe customers into paying a premium price for a
discount product. This reminds me of a friend of mine in graduate school
who served daiquiris made with water in place of rum after midnight
at his Saturday night parties. Water was a lot cheaper than rum, he
said. And besides, it was actually healthier for the partygoers. No
point in telling the drinkers and spoiling their fun.
But I wouldn’t try this with product-line extension.
Valuable companies with strong franchises are not built on a foundation
of disappointed customers. So, in a buildup, it is important to put
together only those companies that in the eyes of customers belong together.
In StairMaster, like Coke, Kleenex, Frigidaire and Osterizer,
we have a brand that has become synonymous with an entire category of
products. We think that in the minds of customers it stands for quality,
durability, service excellence and aerobic health authenticity. It is
very important to consider only acquisitions whose brands mean these
same characteristics to customers. There aren’t many of those out
there.
Standard operating procedure among deal junkies is to
sneak up on companies they want to buy and keep their plans secret.
But I would rather let people know what we are up to. Which is what
I am doing now. If we flop, you get to watch it live. If we succeed,
be sure, I will tell you about it.
I’ll keep you posted on our progress as we do our
work in the coming months.
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