2004: Callaway retrenches after CEO shakeup

Even before spring arrived this year, Callaway Golf officials began receiving unwelcome news. Retailers say they were telling the company that its much-hyped plan to regain metalwood market share was failing. Callaway’s $500 ERC Fusion driver had not captured the imagination of consumers, and its lower-priced metalwoods also were not selling well.

That news became public June 15 in a company conference call. By that time, according to some sources familiar with the situation, Callaway’s board of directors already had begun discussing potential replacements for Ron Drapeau, the company’s chairman and chief executive officer. The end for Drapeau came the morning of Aug. 2, when two board members entered his office and asked for his resignation. Drapeau, who had been CEO since May 2001, was gone by that afternoon, replaced, at least on an interim basis, by 71-year-old William C. Baker, one of the board members who had delivered the news.

It’s not clear whether Baker, who declined through a spokesman to be interviewed, wants to try to fix Callaway’s problems or turn over the company to a new CEO. While Callaway describes him as an interim chief, he’s acting like more than a caretaker, scheduling a visit to its Top-Flite Golf subsidiary in Chicopee, Mass., this week.

If Ely Callaway, the company’s late founder, can be faulted for anything, other than his costly strategy for entering the golf ball business in 2000, it was his inability to pick an effective successor. In the years before his death in 2001, Callaway tried more than once to find his replacement. There was Donald Dye, his right-hand man, then Chuck Yash, his commander for the ball operation. Now Drapeau joins them as the ousted.

If the company intends to right itself, industry observers and Wall Street analysts say, its next CEO needs to be “someone like Ely” – as if there’s a lengthy list of charismatic visionaries who made fortunes in three different industries. If Baker does step aside soon, it seems almost certain an outsider will be brought in to run the company. Speculation on potential successors has centered on a small handful of industry executives, with the company more likely to look for seasoned talent outside of the clubby golf world.

Some have suggested it might be time either to sell the company or merge it with another business. When merger partners are mentioned, one name sometimes raised is K2 Inc., the fast-growing recreational conglomerate best known for its winter-sports business.

There’s some logic to this, starting with the fact that K2 is run by Richard Heckmann, a serial acquirer who charmed Wall Street in the 1990s by taking U.S. Filter, a water treatment company, from zero to $1 billion in revenues faster than any company in history. He made 260 acquisitions from 1990 to 1999 before selling U.S. Filter to Vivendi SA for $6.2 billion. He was appointed chairman of K2 in 2000, and took over as chief executive in October 2002. K2 is on a pace to double its revenues to $1.15 billion during Heckmann’s tenure, as he has relied again on his skill for acquiring and integrating companies.

“There are a lot of great transactions out there that we are looking at daily,” Heckmann said in a recent speech. (Heckmann did not respond to an interview request.)

When weighing acquisitions, Heckmann has said he checks the “CEO obituaries” for companies with management turmoil. And Wall Street analysts say Heckmann has expressed an interest in entering the golf market – but only if he can buy one of the top brands. He can find one that meets those criteria less than three miles from his Carlsbad, Calif., office: Callaway Golf, a company that Heckmann knows well, having been a founding shareholder. And he’s known as a cost cutter, something Callaway probably could use given that its operating expenses have risen to 38 percent of revenues from 25 percent in 1996.

It’s a compelling scenario, but an analyst familiar with Heckmann said that he’s only interested in deals that increase earnings, and the structure of a Callaway deal probably wouldn’t allow that.

“I think Dick Heckmann wants to own it . . . but financially, it doesn’t make sense for him,” this analyst said.

That leaves Callaway facing more challenges than ever before. Beyond the weak metalwood sales, it is struggling to integrate Top-Flite, which the company purchased last September. And the competition is much improved. A few years ago, Cobra, Cleveland and Nike weren’t on Callaway’s radar screen; now they’re serious competitors.

Still, Callaway is a profitable company with a golden brand name, nearly $1 billion in annual revenues and almost no debt. All of the gloom that surrounds the company might be a bit premature.

On Aug. 9, in fact, Gilford Securities analyst Casey Alexander upgraded Callaway’s stock to a “buy” rating. Callaway shares began trading that day at $10.81, only about a 10 percent premium to the company’s book value, and Alexander foresees no events the rest of this year that could cause the price to decline. He speculates that the share price has an immediate upside if Callaway hires a new CEO who has Wall Street’s respect, particularly if the choice is a corporate icon.

“I don’t love the company,” said Alexander, “but I love the situation.”

Meanwhile, there were signs in the past two weeks that price cuts belatedly imposed by Drapeau were helping to stabilize market share, though they hurt profitability.

“In the week since they did it, we’ve seen a shift in share of 5 points back in their favor,” said John Clouse, divisional merchandise manager at Golf Galaxy, a specialty chain. He added that the uptick in Callaway sales was most evident with lower-priced metalwoods and the 2-Ball putters, which had been losing share but, since the price cuts, was “by far the No. 1 putter.”

As for Drapeau, he told Golfweek that he would like to stay involved with Callaway in some capacity, though that seems unlikely.

“I love Callaway Golf,” he said. “I would like to stay around. I think they’re on the right track.”

The 57-year-old industry veteran plans to “semi-retire,” but added, “I’m not about to shrivel up and die, and you can quote me on that.”

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