Spyder Active Sports 2004 Case Study Analysis Prepare an analysis of the Spyder Active Sports 2004 case. Present your findings in a report to David Jacobs.

Spyder Active Sports 2004 Case Study Analysis Prepare an analysis of the Spyder Active Sports 2004 case. Present your findings in a report to David Jacobs. The report should not exceed 5 pages of text (typed, double-spaced, 12- point font, one-inch margins), plus relevant exhibits. Include a brief introduction, analysis, and summary/conclusion. You will want to use an Excel spreadsheet to do the analysis for this assignment and it should address the following questions.

What is the ownership structure of Spyder? Why do the parties want to sell? What do they want to get out of the sale and what are their concerns?
Consider the options that Spyder has: (1) Sale to a strategic or financial buyer and (2) sale of a minority interest or a controlling interest. Which combination is likely to maximize the value of the company? Which owners would find this attractive?
Why might some owners prefer another alternative? Consider other factors that might impact the value of Spyder, namely, a control premium, a liquidity discount, and synergies. How should these be accounted for?
Prepare estimates of value based on DCF (discounted Cash Flow) and the trading and transaction multiples presented in the case. How well do these estimates reflect the considerations you believe to be most pertinent? Use the Spyder Student Spreadsheet provided.

Note that this spreadsheet allows you to employ three different valuation methods.

Trading Multiples: Value Spyder using market multiples of other companies in this space.
Transaction Multiples: Value Spyder using market multiples of other sales of companies to either strategic or financial acquirers.
Discounted Cash Flow: Present value of Spyder’s projected future cash flows.

Considering the alternatives discussed in the second question, which one would you choose if you were David Jacobs? Which one would you choose if you were a general partner in CHB Capital Partners? Who else is affected by this choice and how? What do you think Spyder will do? 9-206-027
REV: APRIL 9, 2007
BELÉN VILLALONGA
DWIGHT CRANE
JAMES QUINN
Spyder Active Sports—2004
In the spring of 2004, David Jacobs, CEO and Chairman of Spyder Active Sports, sat quietly in his
office in Boulder, Colorado. On the walls around him hung a collection of photographs and ski
paraphernalia, marking the many decades he had been connected with ski racing and the ski apparel
industry. At age 70, he remained as fit and athletic as men many years his junior, and he still enjoyed
skiing the local mountains near Denver and in Europe.
Jacobs took a moment to reflect on the tremendous growth the company had achieved during the
previous seven years—period marked by a longstanding partnership with CHB Capital Partners, a
private equity firm based in nearby Denver. Since 1997, Spyder had expanded its marketing and sales
efforts, as well as its product development capabilities, to a degree well beyond Jacobs’s initial vision
for the company, increasing gross sales from roughly $10 million to $61 million over seven years. But
now, perhaps it was time to seek an outside investor or interested buyer so that CHB could liquidate
its investment and Jacobs could harvest some value from his company, particularly given the
possibility of his own retirement. This decision raised questions in his mind about how much Spyder
would be worth in the open market, and what kind of deal he might expect. Given the role his sons,
Jake and Bill played in the company, as well as the commitment he felt to his employees and senior
managers, it also raised questions about who would lead the company toward its next frontier of
growth.
Spyder’s Founding1
Spyder, Inc. was founded by David Jacobs in Boulder, Colorado, in 1978. The company was first
established as a mail order producer of high-end ski sweaters. Its stylish sweaters, lined with special
padding, classified as “technical” gear for racers and other serious skiers. The sweaters were
manufactured in Hong Kong and sold at a premium relative to other skiwear on the market. The
company’s logo and name were intended to be “powerful and menacing—a lasting image.”2
1 This section draws on material presented in Harvard Business School case N9-899-084, “Spyder Active Sports, Inc. and CHB
Capital Partners (A),” 1999, by Professor L.B. Barnes and Senior Lecturer John A. Davis.
2 Spyder Active Sports, “Corporate—President’s Bio,” http://www.Spyder.com, accessed May 16, 2005.
________________________________________________________________________________________________________________
Professors Belén Villalonga and Dwight Crane and Research Associate James Quinn, Global Research Group, prepared this case. HBS cases are
developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.
Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
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Spyder Active Sports—2004
For the then 45-year old Jacobs, the creation of Spyder was an extension of his earlier experience
as a competitive skier. Having trained on the ski slopes of his native Montreal throughout his youth,
Jacobs became the Canadian Downhill Ski Racing Champion at age 24, and raced for the Canadian
National Ski Team from 1957 to 1961. In the midst of his training, Jacobs earned a Bachelor of Science
degree in mathematics from St. Lawrence University, which included a year at MIT studying
mechanical engineering. Jacobs later became Canada’s first full-time head coach of the Canadian
National Ski Team.
Spyder was not Jacobs’s first entrepreneurial stint, however. In 1966 he had formed a joint venture
with Bob Lange, Lange-Jacobs, Inc., to develop a racing version of Lange ski boots and manufacture
and distribute them in Canada and other Commonwealth countries. The company later merged with
the U.S. distributor and went public in 1969 as Lange, Inc., but in 1971 they were forced to recall
25,000 pairs of boots due to a faulty lining material and eventually had to sell to a larger firm for $3 a
share.
In 1972, Jacobs sold his shares in Lange Inc. for $80,000 and left the company to start another
company of his own, the Jacobs Corporation. Jacobs Corp. produced two different lines of active
wear: Hot Gear, a fashionable line of children’s skiwear, and Cool Gear, a collection of adult cycling
clothing and accessories. The company enjoyed some early sales success, but the difficulty of
financing its working capital led Jacobs to sell off 45% of his stock to a venture capitalist and,
ultimately, his remaining stock to a large sporting goods company, García Inc. When García filed for
bankruptcy in 1978, Hot Gear was sold to the Auyang family of Hong Kong. The Auyangs offered to
keep Jacobs on as a vice-president with one of the Auyang family members as president, but Jacobs
declined. Instead, he chose to start up not one, but two companies that he could fully own and
manage: Pearl-Izumi, a producer of high-performance bicycle gear that he continued to be involved
in until 1986, and Spyder.
Early Growth
During the first two years of Spyder’s life, Jacobs operated the mail order-driven business directly
out of his home—quite literally from his kitchen. His two teenage sons, Bill and Jake, themselves ski
racers and outdoor enthusiasts, pitched in to help with the company’s catalog mailings, which were
initially sent to the roughly 7,000 active ski racers in the U.S. Ski Association’s master list. Drawing
encouragement from steady sales of the company’s racing sweater, Jacobs broadened the offerings in
his catalog to include racing pants, Vuarnet sunglasses, bent downhill poles, and assorted accessories,
all of which were targeted to the high-priced, technical skiwear market. Sales remained brisk and it
was soon time to expand.
To help finance the company’s growth, Jacobs sold his stock to Boulder-based ski boot
manufacturer Hanson Industries, for cash consideration of $75,000. Under the arrangement, Spyder
gained access to warehouse facilities and sufficient working capital to expand its product line, with
Jacobs managing Spyder as a division of Hanson Industries. In 1982, Hanson Industries went into
financial distress, presenting Jacobs with a challenging situation: he could either buy out Spyder for
$50,000, or lose the business altogether. Lacking sufficient capital himself, Jacobs joined forces with
Spyder’s contract manufacturer Tsunehisa Shimokubo of Osaka, Japan. The two partners
reconstituted the business as an independent company, Spyder Active Sports, Inc., with an initial
capitalization of $75,000. Shimokubo provided the required $50,000 in capital in exchange for 50,000
shares of company stock, with Jacobs receiving the remaining 25,000 shares. As part of the agreement,
Jacobs insisted on receiving an additional 25,000 shares if and when Spyder’s sales reached the $2.5
million mark. His rocky experience as a business owner and manager had convinced him of the
2
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Spyder Active Sports—2004
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importance of owning at least 50% of any venture in which he was involved. Thus, when the sales
target was reached in 1986, the two men became 50/50 partners.
From its inception, Spyder positioned itself at the leading edge of quality and design in the
skiwear market. Jacobs believed that “there was not much of a market for what I made, but I knew
that if I could own that little spot at the top, there weren’t many people there to compete with me.”3
The company was meticulous in selecting its raw material suppliers. It bought fabrics from Japan and
Switzerland, state-of-the-art insulation from 3M in the United States, and custom-made snaps from
Italy. Spyder also worked with its suppliers to develop proprietary fibers and coatings like X-staticTM,
ThermawebTM, and SpylonTM.
In 1988, the company took a major step forward by securing sponsorship of the U.S. Ski Team.
Under the terms of the sponsorship, Spyder gained the exclusive right to outfit the entire team in the
World Cup, the Olympic Games, and in other international competitions. Ski and race fans
unfamiliar with the Spyder brand had an opportunity to see leaders in the sport such as Picabo Street,
Tommy Moe, and others clad in the bold colors and web-patterned designs characteristic of Spyder
skiwear. Along with this increased visibility came increases in sales, which rose from $3.4 million in
1987 to $7.9 million in 1990. By then, Spyder was no longer doing business by mail order. Rather, the
company pursued the specialty ski shop channel, where Spyder was developing a reputation for
being, in Jacobs’ words, “the real stuff.”4
Jake Jacobs and his Role in Spyder
Growing up in Colorado, Jacobs’s son Jake was an active skier and took an interest in the family
business. His early roles included filling orders at the Spyder warehouse throughout his high school
years and, based on a natural interest in fashion, contributing his opinion on the various products on
the skiwear market, including Spyder’s.
Jake attended the University of Colorado, where he studied international business and marketing.
While an undergraduate, he organized annual ski gear sale for local racers, selling new and used ski
equipment and skiwear. The event was popular and became an annual happening in Boulder. When
Jake graduated from college in 1986, he went to work full-time for Spyder, helping to build what was
at the time a roughly $3.5 million a year business. After one year of full-time service to Spyder, the
company sponsored Jake’s enrollment in a one-year fashion design program offered at FIDM in Los
Angeles, from which he graduated with highest honors.
When Jake returned to Spyder, his father and Shimokubo encouraged him to devote some time to
Spyder’s international operations. Excited by the challenge, he and his new wife, along with their
newborn daughter, moved to Japan for a year, where Jake worked from the offices of Shimokubo’s
family enterprise, the Ono Trading Co. Much of his time was spent in Japanese factories, where he
saw firsthand the elaborate process of transforming designs into marketable apparel. Here Jake
solidified his knowledge of a range of fabric, dyes and other materials, while also working with
vendors, mills, and other suppliers. Returning to the United States a year later, Jake became director
of Spyder’s production, but the experience he had gained abroad left him restless to relocate
overseas. So when Spyder began searching for a manufacturing manager for its Hong Kong office, 25
year-old Jake made a case to his father that he should fill the position. His father agreed.
3 Ibid.
4 Ibid.
3
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Spyder Active Sports—2004
Jake’s stay in Hong Kong, however, was short lived. After setting in motion the new systems for
the office, he met an executive from Nike who soon recruited him to Nike’s Singapore office as an
apparel development manager, a position which also involved extensive supply chain responsibilities
in Asia. Jake spent three years in Singapore before being transferred to Nike’s Hong Kong office,
where his work continued in the design of apparel for Asian markets and in the “advanced
development” of new materials and fabrics to be used in manufacturing.
Jacobs had supported Jake’s career move, recognizing there would be tremendous opportunity for
his son’s professional development at a company of Nike’s size and global influence. But he also
missed Jake’s talent and commitment. In 1995, Jacobs recruited Jake back to Spyder as vice-president
in charge of design and manufacturing, a position where he would have ample latitude to unleash his
creativity while enjoying a high degree of responsibility in the company.
Spyder’s Mid-Life Crisis
By 1995, there was a feeling among Spyder’s management that the company had reached a
plateau. While the company was well-established in the technical skiwear market and had grown
considerably in the past two decades, sales growth was relatively flat and no decisive strategy had
emerged to move the company beyond the $10-$15 million mark. On a personal level, Jacobs, who
had four daughters in addition to his elder sons Bill and Jake, was approaching 65 and beginning to
think about solidifying his financial future after spending many years pouring the proceeds from
Spyder back into the company. Additionally, he began to sense competitive pressure on Spyder’s
“turf.” He explained:
Spyder had been bumping along …[but was] successful in its category. About that time, the
attempt to go to the skiwear market caught the attention of the fashion markets. And new
companies were talking about getting into skiing, or technical skiwear—brands like Tommy
Hilfiger, Nautica, Prada, and Giorgio Armani… It was Hilfiger that miffed me the most
because they started running ads in Men’s Health, double-paged ads showing skiers in Hilfiger
jackets and I said, wow, Spyder’s a technical brand. This is my turf and these brands are
coming in here.
Concluding that “Spyder had to do something,” Jacobs conceded “I had to get out of my comfort
zone.” He formed a group of trusted advisors from the Boulder area, including a commercial banker,
the president of a venture capital firm, the president of the marketing firm that had designed
Spyder’s logo, and a partner at a leading accounting consultancy. After discussing things over the
course of multiple dinner meetings, the group suggested generating a larger capital base from which
to move the company to the next level. Jacobs explained:
The upshot of those meetings was that I needed outside investment, and the two options
were: sell the whole thing, or find a minority partner—not a majority partner, not 51%. If
you’re going to sell 51%, you might as well sell the whole thing. They suggested the process
would be to look up investment bankers that were familiar with the space and the company.
Spyder was only about $11 million in that space.
After meeting with three different investment banks and outlining Spyder’s plans, Jacobs retained
the services of Robertson Stephens & Co. and went on the market in February 1997, accepting bids
from both strategic and financial buyers. As the offering memorandum circulated among a number of
potential investors, rumors emerged that Nike was interested in buying a majority stake in the
company; but Nike’s decision to pursue interests in snowboarding and ice hockey, rather than in
skiing, eventually put the option to rest.
4
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Spyder Active Sports—2004
206-027
One potential investor that caught Jacobs’ attention early in the process was CHB Capital Partners,
located in nearby Denver. CHB’s experience included working with entrepreneurial and family
businesses (“CHB” stood for “Closely Held Businesses”), and expressed openness to the idea of
assuming a minority stake, pitching its ability to provide not only capital, but also the operational
and strategic expertise to help Spyder develop a plan for long-term growth.
The Partnership with CHB
CHB Capital Partners was founded in June 1995 by Thomas “Tad” Kelly and John Flanigan (both
Harvard MBAs), who were soon joined by associate Blake Morris (Stanford MBA). The firm followed
a “low-volume, high-touch strategy,” reviewing hundreds of deals per year but aiming to close on
only 2 to 3 transactions annually. Unlike some other private equity firms, CHB did not look to buy
companies outright. Instead, it formed a “partnership” with the CEO and senior managers of the
companies in which it invested – providing strategic, operational, and general management expertise
while working to catalyze growth. Kelly believed that “equity capital has become almost as
commoditized as debt capital,” adding, “we have to be able to offer more than just capital, because
there’s so much capital out there.”
Prior to founding CHB, Kelly had worked for 10 years with prominent investor Richard
Rainwater in Texas, placing investments in private companies. He credited his experience growing
up around a family business—the LaSalle Steel Company, which his family founded in 1912—as
formative to his business sense and development. Both Flanigan and Morris, the firm’s two other lead
professionals at the time, spent much of their early career working as management consultants. Kelly
believed one of the strengths of his young firm was its ability to provide growing companies with
high-level management expertise they might not otherwise receive working with a small- to middlemarket private equity firm. “You’ve got a $100,000 a week McKinsey team at your beck and call,” he
told prospective partners. CHB sought out only “friendly” deals in which the management team was
expected to stay on after the investment. Kelly explained the importance of the company’s orientation
to the future:
What we compete with is our expertise, not our money. And obviously, if somebody is
selling 100% of a business and they’re retiring to the South of France, they don’t care what we
bring to the table. … We’re focused on transactions in which prospective CEO partners are
asking themselves questions such as “Do I like these people? Do I trust them? Do they have
operating expertise and not just financial expertise like most private equity firms?” … Our
CEO partners care much more about what we and they can make their business be worth three
to five years from now, than about the valuation we put on their business today.
The deal with Spyder fell more or less in CHB’s “sweetspot” —companies with revenues between
$10 to $50 million. Typically, CHB took between a 20% and an 80% stake in a company, and expected
to maintain its position for roughly 3 to 5 years before exiting. At any given time, the firm had 3 or 4
active companies in its portfolio.
The CHB team working on the Spyder bid established a strong rapport with Jacobs right from the
start. Nonetheless, coming to agreement took time and careful negotiation. While CHB was prepared
to invest roughly $5 million in Spyder and was willing to accept a minority stake, the firm was also
intent on arranging a deal which would yield a minimum 30% return. Its due diligence research
revealed sales and earnings forecasts lower than those projected in the offering memorandum,
leading CHB to propose a sliding scale arrangement whereby its ownership stake would be
proportionate to Spyder’s ability to hit its own EBITDA targets. For example, if Spyder’s cumulative
5
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