Callaway CEO Upheaval A Complex Situation

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The same three letters spelled both success and failure for Ron Drapeau, who resigned Monday as chief executive of Callaway Golf.
 
The letters ' Ely ' stood in lower case for his predecessor, the late Ely Callaway, founder and leader of one of golfs most successful companies until his death in 2001. Ely in lower case was Drapeaus colleague, friend and supporter.
 
But the same three letters in all caps ' ELY ' make up Callaway Golfs symbol on the New York Stock Exchange, where you have colleagues and supporters only if youre profitable, and where there are no friends.
 
Ron DrapeauDrapeau, Elys hand-picked successor, left the company immediately and reportedly without acrimony. But reading between the lines of Callaways own press release, it becomes apparent that Drapeau left because of pressure from the companys board of directors over Callaways recent substandard financial performance. That slide, which included a 60 percent drop in second-quarter net income compared to the similar quarter in 2003 ($13.7 million versus $34.1 million), got Wall Street tongues wagging, and some backchannel talk among analysts predicted Drapeaus departure.
 
But what his leaving really demonstrates is that companies such as Callaway play not one game, but two: The golf industry game and the public-company gambit. The second game is a blood sport, and the CEO is always out front to either reap the huge rewards or take the proportional fall.
 
Drapeau presided over Callaways frank self-criticism in June, when the company in a press release reduced its predicted 2004 earnings, citing weaker general sales in Japan and softer metalwood sales than expected after a strong first quarter. The company has also struggled with the costs of integrating the Top-Flite brand, which Callaway bought out of bankruptcy last September. Predicted Callaway sales for 2004 dropped from more than $1 billion to, at most, $975 million, and per-share earnings estimates decreased from as much as 97 cents to 25 cents.
 
Recent success on tour by chief competitor TaylorMade-adidas Golf, whose innovative r7 quad driver was used by U.S. Open winner Retief Goosen and PGA Tour multiple winner Sergio Garcia, also intensified the competitive environment. So did a feature article in Fortune magazine (July 26), which said Callaways share of the metalwood market had dropped from 30 percent to 16 percent since 2000, while TaylorMades had grown from 17 percent to 20 percent. (Some Callaway watchers, though, have questioned the r7s ability to sell through pro shops as well as it has sold in the shop. Others downplay the effect of the Fortune story, which broke no new ground, they say.)
 
Fortune called metalwoods a high-margin category, but lately that hasnt been universally true. In Callaways June earnings revision and throughout the industry, experts echoed concern over at least two years of downward price pressure on metalwoods as a reason for sluggish revenue streams. The concomitant pressure to innovate faster and faster, repeatedly recapturing the consumer imagination while not angering buyers with computer industry-style speedy obsolescence, makes golf one of the most difficult subsegments in the leisure products market. And faster (read: more expensive) innovation leads to more late-model closeouts and ' you guessed it ' more downward price pressure.
 
Pressed on the issue, most experts in golf clubs privately admit that among the top companies, competitors usually manage to stay even with each other in the realm of pure technical merit. Truly objective measures of differences between the r7 quad and, say, the ERC Fusion, Callaways flagship driver, are hard to find and even harder to sell universally. (Callaway got credit among club watchers for the Fusion, which solved the age-old problem of optimal placement of clubhead weight by combining a titanium front with a graphite composite body.) So allegations that Callaway, and therefore Drapeau, simply got out-developed are usually taken advisedly. Callaway has had some product miscues since Drapeau joined the company in 1996 ' the C4 composite head didnt do well ' but in general, there were more technical ' and economic ' successes than failures. (The 2-Ball putter and its progeny did wonders for Odyssey, Callaways wholly-owned putter brand, which Drapeau managed before Callaway acquired it in 1996.)
 
More telling, and harder to manage, is tour acceptance and success. The r7 quads launch, which gathered thrust from the timely wins by Garcia (Buick Classic, EDS Byron Nelson Championship) and Goosen (U.S. Open), surpassed even TaylorMades lofty expectations. But Annika Sorenstam, the worlds best woman player and far more recognizable than many men on the PGA Tour, has won four times this year, all with the Fusion (she switched to the Fusion from the Great Big Bertha II last September, and used the Fusion for the last of her six wins in 2003). So even tour success by a great player doesnt assure a retail win.
 
As a unit of a public company (adidas) instead of a listed company in its own right, TaylorMade is immune from direct Wall Street pressures (although the competitive atmosphere at TaylorMade is intense, thanks largely to the energetic leadership of CEO Mark King). Thats not to say that TaylorMade has an easier job than Callaway does, or that TaylorMades achievements over the last few years have been anything other than phenomenal.
 
But as an NYSE company, Callaway was playing a slightly different game, living under the immense scrutiny that is the price of public capitalization. When things go bad, the head man usually goes. So it went this time.
 
Industry sources admit that Drapeau, despite his expertise at improving manufacturing and other efficiencies, had a very hard act to follow in Ely Callaway. Drapeau endured as elegantly as he could allegations that he was a manufacturing guy but not a golf product guy ' which was not true (but just to be safe, Drapeau surrounded himself with a top development team). What he lacked, if anything, was the ability to be Ely ' and only one man could do that. Industry watchers say that the late Mr. Callaways knack for managing Wall Street and leading a company emotionally is rarely found in one person.
 
That may be why Callaway has said privately that the company will take its time finding a successor, who could come from inside or outside the organization. For the present, senior board member William Baker will take over. Baker, 71, has no direct golf industry experience outside of his decade on the Callaway board, but he has been an officer or board member at 11 companies in a 46-year business career.
 
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