The Perils of Going Public

An IPO lends a certain cachet. But it also can lead to fatal grow-or-else pressures from Wall Street

by Dean Foust

Kevin Van Aelst

When Ely Callaway took his eponymous equipment company public in 1992, it was a signal event for the golf industry. For Callaway himself, a feisty 72-year-old who years earlier had been pushed out of his job as president of a prominent textile company, the successful offering served as a redemption of sorts. And with Callaway Golf's (ELY) stock up more than eightfold in the first years after the deal, the offering convinced plenty of other entrepreneurs that Wall Street was the road to riches.

But for many of those entrepreneurs—and their investors—becoming a public company has been the equivalent of taking a header into a lake in a golf cart. In the years since Ely's big strike, the number of golf businesses that have flourished on stock exchanges can be counted on one hand, and the number that have fizzled out either on the way to or after an initial public offering are legion: Orlimar, TearDrop, Natural Golf, and Coastcast, just to name a few. Even among survivors, the returns haven't been stellar. In the past seven years the companies in the BusinessWeek/Golf Digest Golf-Stock Index have declined an average 15.5%, vs. the 10.9% gain recorded by the broader Standard & Poor's 500-stock index during the same period.

"CEMENT SHOES"

Moreover, while investors once clamored to buy into such hot IPOs as Adams Golf (ADGF), the stock market's appetite for the industry has waned. One leading analyst who helped take Natural Golf public in 2003 says he and his firm's investment bankers now discourage most golf entrepreneurs who approach them. "We tell the vast majority of them no, no, and no,'" says Casey Alexander, an analyst at New York-based Gilford Securities who holds Callaway in a fund he manages. "Most of the time, investing in the golf industry is akin to sinking your feet in cement shoes, and why would I do that to my clients?" No less than Jack Nicklaus has called his decision in 1996 to take public his course-construction company, Golden Bear Golf, "the biggest mistake I ever made." Nicklaus reacquired Golden Bear four years later amid accounting irregularities committed by the managers he'd hired.

What's making life so hard for public companies is the same challenge affecting the broader industry: The number of golfers and of dollars spent on the sport has been virtually flat since the start of the decade. So for companies to boost their profits and stock price, which is an imperative for any CEO who wants to keep shareholders happy, they must expand overseas or steal market share from rivals at home. That, or resort to creative means to book sales: As recently as the 1990s, struggling companies at risk of not hitting projected profits often would offer retailers incredible bargains on equipment, but only if they made orders and took delivery before the end of the quarter.

"At the end, my joke was that if you bought anything before the end of the quarter from [one company], you paid too much," says Leigh Bader, owner of the 3balls.com retail site and the PGA National Merchandiser of the Year in 1995 and 2001. Bader also recalls that during the 1990s, another struggling equipment maker called and asked to store 1,000 sets of irons in his warehouses, with no money changing hands.

Bader says at first he agreed, taking the move at face value, but as the year dragged on he began to wonder whether the company—which he won't identify—requested he take receipt of the irons so it could record the maneuver as a sale (a borderline practice at the time known as "channel stuffing"). After a year, "I called them and said they had a week to pick them up or we were putting them outside the building and they could sit in the rain," Bader says.