ACS adds WaterMark's name and the company's boat division to its Confluence Holdings biz

Confluence Holdings Corp. has agreed to acquire the watersports division's assets of WaterMark Paddlesports Inc., including WaterMark's paddlesports brands, the WaterMark name and WaterMark's assets in Easley, S.C. The transaction is expected to be completed by May 16.
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Confluence Holdings Corp. has agreed to acquire the watersports division's assets of WaterMark Paddlesports Inc., including WaterMark's paddlesports brands, the WaterMark name and WaterMark's assets in Easley, S.C. The transaction is expected to be completed by May 16.

All told, the company now owns between 45 percent and 50 percent of the paddlesports market, boasts approximately 450 employees, has a state-of-the-art production facility in Easley, S.C., and a larger, though not as fancy, production facility in Trinity, N.C.

In the paragraphs to follow, we'll do our best to present a picture -- some fact, some speculation -- to shed light on the details behind the deal.

SNEWS® Fact: A little history for you. Founded in 1998, Confluence was formed through the merger of Mad River Canoe, which included Voyageur, and Wilderness Systems, which included WindRider. In 2001, Confluence acquired Wave Sport. The Confluence family of brands now includes Mad River Canoe, Wilderness Systems touring and recreational kayaks, Wave Sport whitewater kayaks, WindRider sailing trimarans, and Voyageur watersports accessories.

WaterMark was formed in 1998 through the merger of Perception and Dagger. Since then, the WaterMark boat division has expanded its product range to include Harmony and AT Paddles. WaterMark's paddlesports division brands include Dagger touring and whitewater kayaks, Perception touring and whitewater kayaks, Mainstream recreational kayaks, Harmony paddlesports accessories, and AT Paddles.

SNEWS® Fact: There were more turns and twists to this deal than there are bends in a country road. Just when we'd hear the deal was imminent, something would come along and hold up the works, requiring more negotiation and more lawyers. Several times in the last two months, pens were poised, only to have someone point out a "whoops, we gotta deal with this first" contract clause or deal-breaker. It all began with Arcapita (formerly First Islamic Investment Bank and Crescent Capital -- the U.S. arm of the bank) approaching American Capital Strategies (ACS) about acquiring Confluence quite a while back. ACS has been on a roll lately, and it became clear from insiders that sometime into the negotiations, the tables turned with ACS saying, "why don't we buy you?"

SNEWS® Speculation: Although exact numbers are hard to come by, several things have happened over the last year that caused the turnaround and led to ACS buying WaterMark. First, Confluence's management (sans a CEO) along with its staff finally got ACS to buyoff on trusting them to run the business. And with a new strategy to tighten up distribution (thanks to retailer feedback) and improved margins (both for itself and for its dealers), the company saw the business begin to grow and, gasp, threaten to become profitable again. Consider that three years ago, the company was around $23 million in size. Now, our estimates place sales closer to $33 million, and those are the kinds of numbers that will garner attention from your owner. The Confluence team deserves a lot of credit for the turnaround.

On the other side of the coin, there is WaterMark. The size of the watersports division was easily $40 million, perhaps a tad higher when Arcapita added Yakima to the fold in 2001, at that time paying a record multiple to Kransco for an outdoor industry company. Granted, Sospenders is now gone (sold to K2) and a few other material things have happened; however, sales for the watersports package of WaterMark are now closer to $42 million -- indicating little or no growth. Combine that with margins that were shrinking faster than the characters in "Honey, I Shrunk the Kids," and you have the ingredients for let's-make-a-deal.

Consolidation had to happen, and ACS held more negotiating chips than Arcapita, who insiders have told us for several years now was becoming more and more embarrassed and disillusioned with its WaterMark portfolio's performance. Especially since Arcapita has been able to report more than a 25 percent return on equity for its investors since 2003. Underperforming portfolios were not going to be tolerated.

Arcapita has placed its faith in Yakima alone as a bright spot in the portfolio that, with the right investments and additional acquisitions, could realize a good return on its original investment -- see our related story on Yakima by clicking here.

SNEWS® Fact: Richard Feehan has been named CEO of Confluence. You remember him? Joins Confluence as the company's new CEO early in 2004 only to be slapped by Johnson Outdoors with a court-mandated enforcement of a non-compete clause in his contract because he formerly headed up Old Town. ACS tried to negotiate, but no deal. So, ACS found Feehan another position, this time at ACS, while he waited out the non-compete. Clearly, ACS liked Feehan's MBA pedigree and paddlesports experience. And now, Feehan is back, heading up a company twice as large as the one he would have been leading.

SNEWS® Speculation: Johnson Outdoors won little more for all its efforts and legal fees than a special place on or near the bull's-eye in the paddlesport marketplace target that Feehan and company will likely be gunning for. Confluence now has the power and financial wherewithal to go head-to-head with Old Town at all levels of distribution. Our bet is that while Feehan is too good of a businessman and detail guy to react in a punitive manner toward Johnson, it will certainly put a smile on his team's face to happily take market share from Johnson and Old Town.

SNEWS® Fact: Confluence and the WaterMark paddlesports division will continue to operate as autonomous business units for the remainder of the 2005 selling season. Confluence has announced that Kelley Woolsey, senior vice president of marketing and sales, and Bob McDonough, vice president of research and development, will continue to lead the Confluence side of the business, and Brian Fisch, vice president of sales; Ron Barlow, vice president of operations; and Tony Lee, director of research and development; will continue to lead the WaterMark side. Feehan confirmed also that Miriam Beckman, CFO for Confluence, will be staying on board.

Departing the company is Joe Pulliam, who until the deal was announced served as the head of WaterMark's paddlesport division. Pulliam told us while he was packing up his office that he was looking forward to some much-deserved time off to paddle and be with family.

Sixteen WaterMark employees were laid off on Thursday, but the word on the street and the news reports that have appeared regarding the layoffs have not been accurate. Prior to the deal closing, WaterMark provided Confluence with a complete list of its current Easley staff and the positions that were held. Confluence, in turn, created a list of positions it needed and staff that would be retained, and 16 were not on that list. As a result, 16 had to be taken off the WaterMark payroll prior to the deal closing. Three of those individuals were rehired by Yakima, including Doug Ragan. Six to eight more are possibly being rehired by Confluence into other positions following an interview process. That means that between five and seven individuals have been laid off as a result -- so far.

Two of those employees that were laid off and will not be offered positions with the new company are from Arcata and recently made the move to Easley. Jim Clark, former CEO of WaterMark and now CEO of Yakima, told SNEWS® that Yakima has offered to pay relocation costs for those two for a move back to Arcata if they choose.

SNEWS® Fact: As part of the agreement, Confluence has contracted WaterMark to continue to handle all customer service activities for the WaterMark paddlesports division from its current customer service center in Arcata, Calif., during the transitional period -- 90 to 120 days beginning on May 16. During this period, Confluence will rebuild a customer service and credit department for the division in the Easley facility.

SNEWS® Speculation: Feehan has to hope things will go smoothly; he stated, "As this acquisition will be taking place in the midst of the selling season, we will do everything we can to ensure that there is no disruption to our customer service, delivery performance or sales coverage. It will be business as usual for our customers." But things may not be quite that smooth.

The customer service center for WaterMark's boat and accessory brand is going to be handled by the Arcata, Calif.-based, crew for the next 90 to 120 days -- the same crew that knows their office is shutting down for good on Sept. 30. You can read between all the lines you want, and you can believe what the press releases and retailer letters have been saying publicly that the team is "customer-focused," but there is no ducking the reality that many of those same folks are very bitter and very angry with WaterMark. In fact, the entire Arcata community is very bitter and very angry with WaterMark. These are good people, who do care about the customers, but (right or wrong) there is little love shared for WaterMark management or Arcapita, and that could affect service.

We've been getting an earful for months now (though sworn to silence for fear of corporate retribution against those who were talking). However, after the announcement was official, the gloves came off.

"I hope this final chapter in WaterMark's book of shameless lies and soulless business practices might lead you to reexamine your own position, abandoning the courageous and dedicated crews in Arcata and Easley to lend your kind words to Jim Clark and Tom Fumarelli in one issue after another," said one email to us after the deal was announced.

And there has been much more ranting and raving than that. Arcata is a small community, and right now, nerves are frayed, electrical and fully charged.

SNEWS® Fact: For now, both the Confluence headquarters in North Carolina and the former WaterMark headquarters in Easley, S.C. (three buildings and 25 acres of property), remain open and operating. However, insiders familiar with both campuses and the deal have told us that it is unlikely both locations will remain fully operational for more than a year. Feehan would only tell us that, "We have made no decisions to consolidate operations. Both plants are running and we have a lot to learn about their plant and facilities before any decisions are made."



SNEWS® Speculation:
Property owner records reveal that Bill Masters still owns the WaterMark facility. For those of you who do not know the name, think founder of Perception and the one who sold Perception to an investment group who ended up selling it to Arcapita. He retained ownership of the property and WaterMark has been paying him as a landlord all these years. Knowing the facilities, and knowing Masters and his adept negotiating skills, we would believe it likely that he has a long-term lease agreement in place that would make it very difficult or very expensive for Confluence to back out and move. Meaning -- Easley has the inside track if only one facility remains open.

SNEWS® Fact: There is little denying that with the culmination of this deal, Confluence now owns the cream of the crop when it comes to recognized paddlesport boat brands -- Perception, Wave Sport, Wilderness Systems, Dagger and Mad River. Feehan told us that with the deal, his company has secured "iconic brands worthy of investment and worthy of our best efforts to make them even stronger."

"We have an opportunity with the brand portfolio we now have to sell across all tiers (of distribution), but we need to make very sure we get that right," added Feehan. "I don't think we will be looking at more places to sell boats, but we do need to do a better job of where we place our boats and have the best product that will serve each location."

"For this industry to be successful, we need profitable retailers, and profitable manufacturers."

SNEWS® Speculation: While this doesn't mean that Confluence will soon be opening the likes of Costco, we would expect ACS to mandate that Confluence utilize the brand diversity it now has and begin strategically placing certain brands in the low price, lower margin tier, other brands in the middle price-point, increased margin tier, and select brands in the upper, high margin, high end tier. We would also expect Confluence to compete on price where it has to, and that means Old Town is going to be in for a fight, as well as increase prices and margins where it can -- meaning specialty stores should expect to pay more, but receive more for each boat sold. And that is a very good thing for the industry if it holds true.

SNEWS® View: No matter how you slice it, debate it, analyze it or discuss it, this was a business deal done on a corporate level between investors seeking the best financial deal possible, nothing more and nothing less. Executives on both sides of the table were bound by non-disclosure agreements (NDAs), and as a result, employees were left to hear details of the negotiations and bits and pieces of the deals going on frequently from third parties -- sometimes reading about something in SNEWS® that they should have heard first from their executive team. Other times, seeing a "for lease" sign in front of the building before being told the company was moving, which happened in Arcata, has created more pain. And none of that encourages a feeling of trust, loyalty or respect, unfortunately.

You can debate the virtues of NDAs and trust all you want, but the bottom line remains -- if you want employees to trust and respect the company, you have to show them trust and respect, and that starts with open and honest communication. Unfortunately, executives and investors too often get caught up in a world of NDAs and keeping everyone on a "need to know" basis as a means of ensuring productivity and therefore value.

The theory holds that if an employee does not know that the company is about to be sold, he or she will be more likely to do things for the company they might not otherwise do if they believe or know their job is in jeopardy -- and as a result, keep the company operating smoothly and profitably right up until the shoe drops and the sale is announced. Trouble is, as we saw here, that rarely works out the way lawyers, investors and company executives plan. People do talk, whispers are heard, snippets of deals are discovered, and misinformation in turn seeds storm clouds of mistrust.

Employees deserve much better and we feel sorry for all the jobs lost and all the families now left wondering what is next. Jim Clark and his executive team deserve better than to be pilloried for executing a sale that was decided on and directed from above -- by Arcapita. At some point, everyone needs to realize businesses are going to be bought and sold and jobs will come and go. And in the process, real people can and will be affected by the decisions that are made. In this case, we would argue that things could have and should have gone much more smoothly than they did -- if only WaterMark management -- and by that we mean all the way from the former Arcata headquarters to the head office at Arcapita -- had worked harder to foster a working environment of trust and communication that even employees who might be losing their jobs would respect.


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