K-Swiss Acquisition of OTZ Shoes: There’s More Here than Meets the Eye

When I first read about this deal, I thought “Good for the team at OTZ. I hope K-Swiss does well by them” and kind of let it go. Then at a reader’s urging, and through a few clicks on the internet, I decided there might be something to write about here. I don’t have any information that isn’t public. 

First, I went and looked at K-Swiss. It felt like a confused brand. It’s certainly not action sports. It’s part casual footwear and part athletic footwear. It’s not youth culture as I think about it. It kind of seems like casual sneakers in search of a market position (Well, there’s another company I’ll never consult for).
 
Apparently, I’m not completely out of line to suggest that it had some issues. Its stock reached an all-time high in the middle of November 2006 at a bit above $37.00 a share. In January 2013, right before its acquisition by E.Land was announced (I’ll get to that) K-Swiss stock was trading at $3.13 a share.
 
Its last 10K filing for the year ended December 31, 2012 showed sales that had dropped over the year by 17% from $268 million to $223 million. It lost $35 million dollars and had lost money in the three prior years as well. It last turned a profit in 2008, when it earned $21 million on sales of $327 million. Guess it’s at least partly a victim of the economy.
 
OTZ Shoes, according to its web site, was conceptualized in 2005 and came into being in 2009. The idea was based on “… the oldest shoes ever found. These belonged to Oetzi, the iceman, and dated back to 3300B.C. The shoes were quite remarkable considering the time period – made of deer skin stitched to a bear skin sole with an internal woven net filled with dried grass and moss for warmth and comfort.”
 
OTZ CEO Bob Rief should expect a call from me, because I really, really want to know if they ever tried to duplicate those shoes out of the original materials just to see how functional they actually were. Don’t suppose you could sell them, but it would have some PR value.
 
If forced to characterize the OTZ brand, I’d call it outdoor with a cool factor. It’s not action sports in the traditional sense, but that’s fine. The connection to Oetzi and the oldest shoe in the world lends the brand a distinctiveness. I hope they cherish and manage that well because it might be a long term point of differentiation. I’d suggest more pictures and info on Oetzi and his shoes on the web site. I’m surprised there aren’t any. Maybe copyright or trademark issues?
 
What initially troubled me was that this deal felt a bit like Kering (formerly PPR) buying Volcom and Deckers buying Sanuk. In both those cases, a larger company that was kind of circling the youth culture/action sports space wanted credibility and an entrée to those consumers. In both cases, so far, the deals haven’t worked out the way the acquirers envisioned, especially given the prices they paid.
 
Under the acquisition agreement, “…OTZ Shoes will continue to operate as an independent subsidiary of K-Swiss Inc., with key executives remaining in place.” Let’s hope that deals holds up. I’d be very curious as to what the actual language in the contract says.
 
Then I thought to myself, “K-Swiss’ problems look like they go way beyond anything OTZ can resolve no matter how successful it is,” followed by “Why has OTZ allowed itself to be bought by a company that’s going south at a disturbing rate?”
 
Turns out, there was a simple answer. On April 30, 2013 E-Land, a Korean conglomerate, concluded the acquisition of K-Swiss that was announced in January. Here’s the press release. It says, in part, “Established in 1980 in Korea, E.Land has grown to become one of the largest South Korean conglomerates, primarily specializing in fashion and retail/distribution. E.Land is Korea’s first and largest integrated fashion and retail company, with operations spanning nine different countries across three continents, including Korea, China, India, the United States and Italy. Comprised of over 60 affiliated entities, the Company offers close to 200 brands and operates more than 10,000 stores worldwide, recording approximately US$7.1 billion of revenues in 2011. E.Land’s newer businesses also include restaurants, construction and leisure.”
 
That’s a lot of brands and a lot of stores. Clearly OTZ and K-Swiss will have the resources they need. I have to imagine that E.Land management hopes the team at OTZ can be of assistance to K-Swiss, though for all I know K-Swiss can grow by leaps and bounds just by being in E.Land’s distribution channels. Then again, I just wrote about Decker and expressed some concern that they might not understand what they’d bought in Sanuk and that they might try to distribute it in ways that wouldn’t help the brand. 
 
Obviously E.Land will offer OTZ some opportunities to expand distribution. I hope the independence that OTZ has been promised extends to having control over when, where, what kinds of stores the brand goes into. I’m also wondering if we can expect more acquisition from E.Land in our space.