Nike's announcement last week that it entered into an agreement to acquire Converse Inc. for $305 million and assumption of the company's debt was largely seen as a smart acquisition giving the global sports brand entry into Converse's rich heritage and retro appeal.
Despite the company's recurring financial troubles, Converse's Chuck Taylor and other shoe lines have always struck a chord with consumers, whether the "grunge" market 10 years ago or the current retro consumers and skateboard enthusiasts. In addition, with the lower cost of Converse's shoe offerings, the deal should give Nike much-needed access to mass-merchandise channels.
"Assuming the debt isn't great, they stole the company," said Jack Smith, founder and former CEO of The Sports Authority. "If Nike can put out $90 million for a high school athlete [endorser LeBron James], this is pocket change for them." Converse didn't disclose its debt but said it has a revolving credit line of up to $125 million.
Converse made $18.5 million on revenue of $205 million in 2002, both up significantly from 2001. Nike's revenue is almost 50 times higher, but observers said 95-year-old Converse offered something 31-year-old Nike couldn't manufacture: history and credibility with an authentic, low-priced shoe.
"There's huge potential for Converse under Nike. Converse has shown it's like the cockroach. It just keeps on dividing," said Joe McCarthy, a former Nike global advertising director and now CEO of the ad agency McCarthy Mambro Bertino.
Observers likened the Converse purchase to Nike's acquisition last year of surfwear maker Hurley International, which allowed it to reach a key consumer demographic. Hurley's first action-sports shoes came out a few months ago, and sandals will be introduced shortly.
"Nike was cool, then kids walked away," said Jeff Bliss, president of sports marketing consultancy The Javelin Group who follows the footwear industry. "Brown shoes were cool, then kids walked away. Now it's skate shoes. Fashion keeps circulating, and if Nike can capture the key directions with a variety of brands, they can cater to a consumer who is fickle when a company operates under one brand."
Added McCarthy, "To continue its success into the next decade, Nike has to have a multibrand portfolio attack."
Experts suggested there are balance-sheet benefits to the deal, as well, as Nike should enjoy efficiencies in accounting, information services, overseas manufacturing and other areas that the smaller Converse couldn't. Nike intends to keep Converse's top management in place and has no plans to reduce the company's 200-person work force.
But others are less enthused about the deal. "For $300-plus million, you'd think with their strength Nike could develop a second brand of their own for a lot less. It's been done hundreds of times in the lives of companies," said Dan Head, vice president of e-commerce at SportsLine.com and a longtime sports retail executive.
It hasn't been reported whether Nike had competitors for Converse, but observers doubted any other shoe company could have done the deal. Reebok may be large enough to have afforded it, but its focus is squarely on the company's official league relationships, several said.
In that context, Converse's ownership group could be commended for commanding $305 million for a company it bought out of bankruptcy proceedings for $117 million two years ago. "Bet Nike wonders why it didn't act two years ago," said one observer.
For a comparison of Nike and Converse, click here.
