Caveat Emptor.

Yesterday, a surprising deal was announced in which Black Diamond Equipment, Ltd. and Gregory Mountain Products, Inc. have announced they are conjoining under an existing umbrella company called “Clarus Corp.” Not only that, but the deal stipulates that both companies will henceforth go public (CLRS).

The deal claims that Clarus will pay $90 million in cash for Black Diamond, and about $45 million for Gregory. Peering into the depth of reasons behind this dramatic move, you find a smallish group of rich folks who have been privately bankrolling these companies for years, now deciding it’s time to attract more investment while providing a way to cash out themselves.

Both companies have an entangled history of investment and ownership (both minority owned by employees, majority owned by large investors and/or other companies). Not surprising, the primary stated reason for the deal is indeed capital. Peter Metcalf, CEO and part-owner of Black Diamond was reported in the B.O.S.S. Report as saying BD needed a “competitive capital source” as much of the competition in Europe and the U.S. are well-funded portfolio companies or public companies.

While it is good to see BD & Gregory secure long term capital and work together to streamline each others operations, I can’t help but wonder what direction a publicly owned company structure will drive these brands. Research I completed years ago (as part of a college thesis) showed then that publicly owned companies couldn’t seriously tackle environmentally sustainable objectives or organic growth cycles due to the short-run speculative nature of the stock market.

Simply put, when ownership is fragmented among thousands of small investors with no concern other than a quick profit, few CEO's find incentive to invest in programs that don’t pay off quickly. On the other hand, long-term owners are more likely to build a healthy company to pass on to future generations as well as enjoy the intrinsic benefits of knowing they’re doing some good in the world (after you’re rich, most reach a monetary threshold in which more money is not as meaningful as the intrinsic benefits of giving back – public companies never reach this state)

Here’s an interesting excerpt of dialogue from Yvon Chouinard (also the father of Black Diamond) while speaking with a business consultant about what he should do with Patagonia:

At one point we decided we needed another perspective and sought the advice of a well-regarded consultant… Before he could help us, he said, he wanted to know why we were in business. I told him the history of the company and how I considered myself a craftsman who had just happened to grow a successful business… We told him the reason we hadn’t sold out and retired was that we were pessimistic about the fate of the world and felt a responsibility to use our resources to do something about it…

[the consultant] thought for a while and then said, “I think that’s bullshit. If you’re really serious about giving money away, you’d sell the company for a hundred million or so, keep a couple million for yourselves, and put the rest in a foundation. That way you could invest the principal and give away six or eight million dollars every year. And, if you sold to the right buyer, they would probably continue your tithing program because it’s good advertising.”

That was in 1991. Needless to say, Chouinard still owns the company and Patagonia still contributes relatively large amounts of money & human resources toward social and environmental activities that have no immediate ROI for the company. I can pretty much guarantee that the unique culture and philanthropic attitude is a direct result from the fact that Chouinard has prevented to allow Patagonia to go public. To this extent, it will be interesting to wait and see how this decision affects BD & Gregory 25 years from now...