How Converse Got Its Laces All Tangled

Corporate acquisitions don't always work out as planned. But to buy a company and then shut it down at a huge loss after just 85 days deserves some sort of booby prize.

This year's award goes to chagrined executives at shoemaker Converse Inc. On May 18, they trumpeted the acquisition of Apex One Inc., a leading maker of sports apparel. On Aug. 11, Converse quietly shuttered its new unit, citing unexpectedly slow orders and high costs. The fiasco has been costly: Converse took a $41.6 million pretax loss on its Apex investment in the second quarter, weakening its already shaky balance sheet. Apollo Advisors, the New York investment firm run by Leon D. Black, got egg on its face, too. Apollo controls 67% of Converse, and its executives were closely involved in overseeing the Apex purchase.

The finger-pointing has already begun. A spokesman for Apollo says Converse "management was making the decisions, with advice from the board." For his part, Converse CEO Gilbert "Gib" Ford says Apex' sales were 50% below the projections made by its managers last spring. He's hinting at possible legal action. Meanwhile, Apex Chief Operating Officer David Koontz says Converse and Apollo simply didn't understand Apex' situation and tried the wrong fix. Apollo's executives, he snipes, were clearly in charge of the deal yet "don't know the apparel business from a bar of soap."

Before its bizarre final chapter, Apex was a Cinderella of the sports apparel industry. Founded in 1988, it spent big to secure sponsorship deals with the National Football League and popular teams such as the Dallas Cowboys and New York Giants. The pacts gave Apex the right to design unique apparel for coaches and players to wear on the sidelines. The idea: Fans would see the gear on TV and rush out to buy "authentic" $120 warm-up jackets and other goods.

Amid a boom in licensed sports clothing, Apex surged to $50 million in sales in 1992 and $100 million in 1993. By 1994, it had partial or full deals with nine NFL teams and had expanded into other sports. Trouble was, Apex was a lot better at marketing and designing than it was at delivering goods. The privately held company was undercapitalized and constantly had to scramble for money to pay suppliers. The problem peaked in late 1994, when many retailers barely received anything, while others got shipments weeks late. Although Apex executives say they had orders worth $150 million in 1994, they delivered just $102 million worth. A 1994 net loss of $48 million sealed Apex' fate.

CRASH EFFORT. By the time Converse bought the company in May for about $35 million, Apex was nearly insolvent. Worse, retailers were so angry that it had just $35 million in orders on the books, a third of the prior spring's backlog. Instead of sensing disaster, though, Converse executives saw Apex as a cheap way to jump into the apparel business and pick up valuable sponsorships. With Converse's backing, they believed, retailers would regain confidence. According to Converse CEO Ford, Apex' managers projected that sales could rebound to nearly 1994 levels if Converse took charge.

Converse launched a crash effort to get new designs ready for delivery by Thanksgiving, with the Converse logo replacing that of Apex. "The office in Hong Kong went into a frenzy, and we actually started producing the new designs," says Koontz. Never mind that retailers had already placed the bulk of their fall and Christmas orders. Adds Koontz: "They hoped that by developing new lines, they would create excitement in the marketplace. They were looking for a Thanksgiving resurrection."

But Apex' corpse wouldn't rise to the occasion. The market was soft, and most retailers no longer trusted Apex, even with Converse's backing. "I didn't want to put too many orders with Apex and Converse this year until they got things sorted out," says Norm Charney, president of Athletic Supply of Dallas Inc. By August, the backlog hadn't budged, and creditors were raging. Facing the need to spend up to $25 million to keep Apex afloat, by one insider's estimate, Converse and Apollo pulled the plug.

Converse's own troubles undoubtedly played a part in the decision. Revenues dropped 14% in the second quarter, and it posted an operating loss of $8.4 million, not counting Apex. Given that backdrop, says CEO Ford, "We felt we had to take this action to protect Converse." But the Apex write-off leaves Converse with a scary 5-to-1 debt-to-equity ratio. Some analysts are whispering that Apollo may now try to sell the company. Hardly a fruitful 85 days.

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