The Perils of Going Public

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Such practices are rare these days because of post-Enron reforms designed to cut down on the accounting games companies can play. Management teams have been beefed up, with one leading company recruiting from the likes of Procter & Gamble (PG) and Unilever Group.

The shift toward going public has created ripple effects throughout the industry. To present shareholders with higher revenue even as the market remains flat, companies have to figure out how to persuade the 13 million golfers who account for 91% of equipment spending to buy more. And that has meant constantly refreshing their product lines with new-and-improved models. "Golf has become just like the fashion industry," says Hayley Wolff, a senior analyst for New York-based Rochdale Securities who has a "hold" rating on the two golf stocks she follows, Callaway and retailer GolfSmith International. "A hot driver used to last four years, then two years. Now it's down to one year—or less."

Experts say these grow-or-else pressures, coupled with U.S. Golf Assn. restrictions on innovation and consumer fatigue with technology, have also helped contribute to a number of high-stakes patent-infringement suits filed by companies hoping to extract royalties or hefty settlements from rivals. At the moment, Callaway has a suit against Acushnet over its ball patents, and Acushnet filed counterclaims against Callaway over clubhead patents. TaylorMade and Callaway sued each other over ball and driver disputes before settling last December. And Bridgestone Sports reached a settlement last fall with Acushnet that includes back-license fees, plus future royalties on the sale of some of its ball lines.

To be sure, some industry executives believe there are benefits to going public, not least that it allows entrepreneurs the chance to enjoy a payday for the years of toil involved in building a successful company in a cutthroat business. Going public also provides companies with a certain cachet and profile that many private outfits lack. And make no mistake, Wall Street has shown a soft spot for hot golf companies: Ely Callaway famously joked that the reason his stock performed well was that so many analysts and professional money managers were avid golfers.

BUYOUT FEVER

On the other hand, some CEOs of public golf companies lament the high costs of complying with the accounting reforms. And they say having to disclose financial results—everything from margins to receivables—is one step short of revealing trade secrets to their mostly private rivals. "There are a lot of questions from shareholders that I'd like to address on our [quarterly] earnings calls, but I usually just say I can't comment for competitive reasons,'" says Peter Mathewson, CEO of Aldila, a Poway (Calif.) maker of golf shafts. "We're the only public company in our segment, and that creates a disadvantage."

And if your company stumbles, delivering earnings for several quarters that are below the Street's expectations, you can expect an opportunistic hedge fund manager or buyout firm to pounce and demand a breakup or sale to boost shareholder returns. That happened to Callaway. After a string of poor results in 2005, the company received two separate offers from buyout groups led by Bain Capital and Thomas H. Lee Partners. In both instances, Callaway rebuffed the offers, and in the end the firms "found something else to focus on," notes Callaway CEO George Fellows. And though the Callaway board's belief that a turnaround was at hand now looks prescient—the company swung from a $10 million loss in 2004 to a $54 million profit last year—its stock remains stuck in the mid-teens, or roughly where it was at the time of the bids. If Callaway can't get more love from Wall Street, it could find itself in private hands once again.

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Foust is chief of BusinessWeek's Atlanta bureau .