King of the hill Featured

7:00pm EDT December 31, 2006

Timing in business is everything, and Dick Heckmann’s success at K2 Inc. serves as proof that good things can happen when a CEO with the right background and experience comes into the role just when that expertise is most needed.

Such was the case in 2002, when Heckmann was serving as nonexecutive chairman of sporting goods manufacturer K2.

At the time, K2’s stock was hovering around $8 a share and was stagnant, but the retail side of the industry was anything but stale. The industry was quickly changing to a big-box retail model as expansion moves by Sports Authority and Modell’s were forcing single product manufacturers to expand or be acquired.

When Heckmann received a call from K2’s incumbent CEO warning that he might choose to file bankruptcy rather than supply the security needed to comply with the covenant terms required by the banks providing K2’s lines of credit, Heckmann sprang into action, calling upon his contacts and experience to quickly resolve the problem.

“Why play chicken with your vendor?” says Heckmann. “It’s a huge stain on the record of your company. I called the banks and said that I would not only give them security, but I would commit to raising more money.”

Within weeks, Heckmann had become chairman and CEO of the company, shoring up the financial foundation and raising the necessary capital to make the acquisitions that would position the firm to compete in the evolving retail environment.

Establishing the foundation
Heckmann began his career as a stock broker, and he used his knowledge of what captivates Wall Street in formulating his strategy and planning his first moves.

“My lead card was to shore up our financial situation, so I called a friend and raised $25 million,” says Heckmann. “Following the change in leadership and business strategy, the company’s stock price began to rise upward toward $10 per share, enabling me to raise even more money.”

In 2005, K2 had sales of $1.3 billion, but just three years earlier, in 2002, that number was around $580 million. The company needed to diversify its product offerings through acquisitions to be competitive in the new retail landscape.

Heckmann set his sights on acquiring legendary baseball glove manufacturer Rawlings because the ensuing merger would significantly increase the size of the organization.

“I wanted to find the biggest, highest-profile deal that I could find because I wanted to get the attention of Wall Street,” says Heckmann. “We were a one-trick pony, we were snow farmers. With Rawlings, we achieved visibility, and they were counter-seasonal.”

Heckmann says that the Rawlings acquisition began to build a portfolio of brands providing K2 with marketing synergy opportunities, and the additional product lines established an expansion platform that could be enhanced through future acquisitions, such as the addition of baseball bat manufacturer Worth.

Besides repositioning K2 as a player in the minds of investors, Heckmann says that the Rawlings acquisition began to cause a shift in the attitude of the company’s employees.

“The most important thing about the Rawlings acquisition is that it gave our people a reason to feel proud again and a reason to believe,” says Heckmann. “Now it was fun to be with the company again.”

He says that his predecessor at K2 was paralyzed by the thought of risks, and the company stagnated. Heckmann, rather than avoiding risk, uses a methodology for evaluating the pros and cons of each deal, looking for conditions that he says often correlate to success.

In addition to evaluating the opportunity for increased marketing synergies, he looks for companies that are manufacturing domestically so that he can shift that function overseas and further leverage K2’s excess capacity in China — a move that instantly increases margins. Since beginning this practice, K2’s employee base in China has increased from 2,000 workers to almost 10,000.

“I also look for companies who are underdistributed on their brands because what we bring to the marriage is additional reach,” says Heckmann.

The additional sales through the expanded distribution network help to pay the cost of the acquisition, and he often uses the increased margin from the outsourced manufacturing to offer incentives to retailers, which further increases sales.

His pre-acquisition analysis includes running numerous financial models that reflect the worst-case scenarios that might occur after the purchase so he can avoid a fatal error.

"Every decision you make in business is fatal to something,” says Heckmann. “You just never want to make the decision that’s fatal to the company.”

That type of review has caused Heckmann to pass on acquiring ski makers Rossignol and Salomon. With K2 now owning a dominant share of the ski market, he says that the potential downside outweighed the upside, and should the ski market become soft, it could be the tipping point from which the company could not recover.

This customer is king
Heckmann says that he spends up to 50 percent of his time in front of customers and relies heavily on their advice on everything from potential acquisitions to price points, product consolidation and new product development.

For example, he says he was calling on Target, which leans heavily toward the women’s sporting goods market, when the customer suggested that pink baseball gloves might potentially be a hot-selling item to young girls. While the Rawlings representative at the meeting was not initially keen on the idea, Heckmann says that the customer has a finger on the pulse of what the buyers want, and so the pink baseball glove was born.

“Discussions with customers provide the checks and balances for me,” says Heckmann. “I won’t do anything unless the customer tells me that they want it.”

His customer-driven attitude also plays a key role in fashioning his philosophy and attitude toward assimilating new acquisitions. Counter to some thinking on cost reduction as part of post-acquisition strategies, Heckmann refuses to consolidate functions and reduce headcount in administrative areas that might have an impact on service or the customer experience.

“I build the business around what the customers want,” says Heckmann. “We only have 22 people in our headquarters because no one at headquarters should be making decisions that affect customers. We don’t consolidate accounting after an acquisition because that’s not customer-friendly. We run at a higher expense, but we also have the highest margins in the industry, and we are the industry leader in seven categories. The easier you make it for customers to sell stuff, the better it will go.”

Hunting elephants
While acquisitions can have financial benefits, getting people to work cohesively when merging different corporate cultures, pay plans and personalities can be a challenge for any leader. The assimilation of people into a shared mission and vision is so vital to the outcome that many companies fail because the balance sheet starts to reflect the internal struggles.

As an owner of the Phoenix Suns, it seems natural for Heckmann to use sports analogies and philosophies as part of his people management plan. This was the case when he discovered that the previous K2 CEO had all of the division managers competing for capital bonuses, a practice that was contrary to his vision of teamwork.

“There was no recognition of the other companies when we were out in front of customers,” says Heckmann. “Now we go in as a group to the customers and ask how we can get more business.”

Heckmann says he gives strong support to his managers by allowing two to three years to get their numbers on track following an acquisition. However, he has little tolerance for those who resist the new company direction and appear to be working against the changes.

“I believe in the lead-elephant theory,” says Heckmann. “You shoot the lead elephant, and all the other elephants run off into the woods until a new lead elephant emerges from the group. A good example occurred after the Rawlings acquisition. They thought that everyone would love them forever because they were Rawlings, and it was very hard to get them to buy in to the fact that they were going to need R&D.”

After terminating the CEO and making other major managerial changes, Heckmann says that today, Rawlings has a successful R&D function, complete with a technical center staffed by 26 engineers.

Although acquisitions can mean the occasional need to perform an elephant execution, Heckmann says that one of the positive sides of the process is that, along with a new company, he often gets great new managers.

“One of my greatest accomplishments was when we acquired Worth, we got Robert Parish,” the CEO of Worth who was promoted to president of Rawlings, says Heckmann. “He struggled mightily, and he did some things that I wouldn’t have done, but I continued to back him until it worked. “I think you need to back off as a manager and let the numbers be the litmus test.”

Given the continued retail consolidation and the lack of overall growth in the sporting goods market, Heckmann plans to continue to make strategic acquisitions according to the model he has honed while pushing for continued new product development to facilitate growth from the stable of brands that K2 has collected. But he says that no matter how much planning and experience a CEO brings to the table, each acquisition brings its own unique challenges.

“Every acquisition ends up being a giant headache,” says Heckmann. “Rawlings was a struggle for a year-and-a-half. But once you get the process finished, you can reap the rewards. I’ve learned from every acquisition that I’ve done, and I’m still learning.”