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Cervélo's White: We can grow by delivering

Published February 19, 2012

On Friday, after months of negotiations, Cervélo founders and owners Phil White and Gerard Vroomen sold their 16-year old company to Pon Holdings, the Dutch company that also owns Germany's Derby Cycle and the Holland's Gazelle.

Soon after the deal was made final, White spoke with BRAIN web editor Steve Frothingham over the phone from Toronto.

White discussed the origins of the purchase, what he's expecting with the company's new owners and some of the history of Cervélo, including its involvement with pro cycling with its own Cervélo TestTeam and the Garmin-Cervelo squad. He also discussed Cervélo's struggles with financing and product delivery.

The Q&A that follows was edited lightly for clarity and length.

Q:

Congratulations.

A:

Thanks, it's been a whirlwind the last little while.

Q:

How long have the negotiations been going on?

A:

Pretty much since early September, then it really accelerated mid-September and then it was absolutely crazy through mid-December, then a little bit better in January. Then the last two weeks before closing are ludicrous as you try and pull together every contract and every piece of paper you've done for the last 16 years. It worked out all right in the end, so we got it right.

Q:

How did you connect with Pon to begin with, was it because of Gerard's Dutch connections?

A:

No, it was just a matter of being aware of what's happening in the industry and the marketplace and how things were developing. We saw that (Pon) had taken an interest in Gazelle and then they got involved in Derby as well. That was a major point as well, it was like, 'Wow, this isn't something small, they are looking big.' And we starting talking to them more at that point about their long-term vision and thought, 'Wow, these guys could be good partners.'

Gerard and I have been talking about this for, well about 16 years. We thought for a long time there was going to be a narrow consolidation that would sweep through the industry and someone would develop a suite of brands, a portfolio of brands and someone had to understand that vision. These guys absolutely get that.

The biggest part of their business historically has been the Volkswagen group and they cover everything from Skoda up through Audi to Porsche and Lamborghini and they understand how you should manage a portfolio of brands so the brands remain distinct and unique. You can't just blend them and you can't just have one brand that runs all the way from $15,000 cars to half-a-million-dollar cars. Same thing in bikes: It's hard to stretch a brand from $29 kids' bikes to $20,000 high-end road bikes.

Q:

On the auto side, they don't own the brands, they distribute, right? This is a little different in that they own the bike brands.

Q:

They own other companies and brands directly but they still manage them all the same way. When we first started having discussions with them, right from the start they got the whole idea of how to manage brands, which is really what you want to have. Some guys just come at it like, 'it's a company.' No, it's a portfolio of brands and you've got to manage that carefully and they get it, I think.

They sat down a couple years ago and said 'OK, what what are the macro-economic trends that the world is seeing? It's getting older, there's less fuel oil, there's a move to green.' And they said, 'how to we develop a long-term investment strategy that is going to be in sync with those global mega-trends?'

And they identified cycling as one of those areas, so that's how they got into it. It was part of a long-term strategy that they had; they didn't just fall in to it.

Q:

How are they looking for Cervélo to grow? I'm guessing from what you said, we are not going to see $29 Cervélo kids bikes.

A:

Growth can come from improved delivery and improved service to our dealer base. We can grow just by delivering on the demand that's already there. As you become bigger it gets tough and you need more dollars and it stretches you thinner and thinner. ...

It always came back to, we just didn't have the financing and it's never been anything other than that every year.

We have a very, very lean company that doesn't have a lot of latitude. And as you get bigger and dealers make a bigger commitment to you, you've got to help them with reasonable terms as well and that stretches out your cash cycle again. It gets difficult.

So just replacing a very limited financing with a really good, solid, well-backed financing partner solves a lot of the challenges and you just start to think about problems in a new way. Instead of saying, 'we can't do that,' it's 'well, how do we do that?'

They were making that point to us today. We were kind of strategizing the next steps and they were just like, 'we don't have to think that way anymore.'

There's easy growth just there: just delivering on orders we have in-house and that we just haven't been able to deliver on. So I'm sure dealers will be happy with that.

Q:

What kind of financing have you had? Did you get financing from the Canadian government early on?

A:

The Canadian government has a program to support small business. I think we got $25,000 in year one. And it was gone in a matter of weeks. (Laughs) I think we spent it at the wind tunnel doing some testing.

So the Canadian government doesn't really have a program, But what they do have is a program to insure your receivables and then you can take that as a secured asset to the bank so the banks will loan against that. The Canadian government was one of the first to do that but there's two big European companies that do that and we've been dealing with them for the last 6 or 8 years or longer. They are better capable of dealing with a global brand like us. ... that's how we've financed the company's growth.

Q:

Are there any other partners beyond you and Gerard?

A:

Nope. It was just the two of us.

Q:

To go back to the growth - what about regional growth? Where is the most growth potential at this point, in Europe or North America?

A:

It's kind of both. There's just huge places in Europe where we don't have a distributor at all. So there's opportunity. Same thing with areas in the rest of the world where we don't have a distributor, period. So those are easy additions. And in North America, there's 'white areas,' as we call them, on the map that don't have a dealer. And being able to service our existing dealer base better and be a better partner to them; that's going to result in growth there.

There's going to be some growth to the product line, but it's not going to be a wholesale change. They made the case that they aren't there to tell us how to do the business. They bought the brand for what it is now and they don't want it to change. So it's up for us to say if we want to add to the product line or add a new price point. If that makes sense for the brand then we should do it and they are there to support it and help make it happen.

Q:

So can you give me a hint what direction you might go there? Mountain bike, cyclocross?

A:

$29 kids bikes. They are the future.

Q:

From the outside it's been hard to figure out what's going on at Cervélo the last few years. A lot of dealers have assumed you had trouble with financing because of the lack of availability of bikes some years. On the other hand there seems to have been periods where you had excess bikes and you've run discount programs that dealers haven't liked. So what's been really happening?

A:

We had some excess inventory in the post-Lehman era, in that year when Lehman Brothers collapsed. But last year we had almost nothing, very little, during the transition, so we tried to go back to that model we had pre-Lehman, where we generally did not discount.

Adjusting to that Lehman era was difficult for everybody. So we're trying to go back; I don't think it's good for anybody to have to discount the products. It makes consumers wait till there is something on sale. It makes it harder for dealers to sell it and it takes away from the brand. You don't make as much money, so you can't plow it back into research and development, so it's bad all around. We need to make a reasonable margin, and our dealers need to make a reasonable margin as well. And you take that away and it changes the whole dynamic.

We just have a lot of missed sales now, the dealers are empty. So that's what we've got to do now.

Q:

If you were lean this winter, what was the strategy with the twofer sale you ran this winter?

A:

We wanted to move more things into the dealer in the weaker season and this would help them move it. We don't have great terms with dealers, we've just never had the financing to be able to offer it. We thought this would enhance early-season sales in our dealers.

Live and learn. Some promotions work better than others. One thing we could have done better with that one was explain the objectives to the dealer and how to make it work for them and why it would work for them. The ones that understood it have done spectacularly well with it.

But certainly, live and learn, you look at each promotion and say, yeah, we could have done a better job of explaining that to dealers with that one. That wasn't one of our better moves.

Q:

Going back a few years, you had to have had a lot of dealers ask you why, if you are struggling with financing inventory, are you investing millions into a pro team. How did you answer them?

A:

Well, if I was going to do it again, first of all I'd be clairvoyant and I'd see the coming doom of Lehman Brother and the world economy and I wouldn't start a pro team in a year where people weren't writing checks or writing smaller checks. They put the checkbook in the safe and turned the dial and they weren't bringing it out for a year or so. That was rough.

We took a position about where we saw that cycling and pro teams needed to go, and it was important to show that leadership to the industry and the other cycling teams. To us, we were not getting — and the rest of our sponsors we had weren't getting — what we wanted out of it. We thought there was more to get out of it. And we thought we could develop the team as a R&D tool .

We also though that we had a responsibility to put our values on our sleeves and put our money where our mouth was about where we thought pro cycling should be going. And I think I'm glad we did that. It was good. We've seen a lot of manufacturers step up and take a more active role in the sport.

We expected to have more sponsors in that year, it was tough the way the world economy went.

Q:

So because of the lack of other sponsors, you had to put more money into the team than you expected. Is that money that might have gone to buying inventory or supporting dealers otherwise?

A:

Well yeah, but we'd been lean from the start and we might have had difficulty delivering bikes to dealers over the last two years, anyway. One of the bigger problems we have on delivery has been delivery to us (from the factory); it hasn't been so much a financing-related issue. We've talked to several other companies and they were gnashing their teeth and pulling their hair just as much as we were, trying to get products out of Asia.

Q:

Going out on a limb with the TestTeam was a bold move. Are you concerned that being part of a bigger company you will be restricted from doing bold things like that?

A:

They've been very clear. We talked about what their expectations were and what our role with pro cycling would be. And they were very clear, it was 'nope, we want you to absolutely continue, make sure you've locked up a long-term relationship with (Garmin-team owner) Slipstream.'

So it was very clear that they see that as part of the future of the company, so they were very supportive of that. Their overall plan is to keep companies that they buy. They are not like a private equity or hedge fund where they buy a company and do a turn-around on it and sell it in three years. They buy and they keep, so it's not the same focus on quarterly profits and a quick turn-around. So I think that focus on the long term allows us to make long-term commitments like that

Q:

How long is your deal with Slipstream, by the way?

A:

Another three years or four years. A while yet.

Q:

What part of the company is going to remain in Toronto, versus the new Pon cycling headquarters in Europe?

A:

Pon has a very small headquarters near Amsterdam, but for the most part they let their brands run themselves; there's a Pon bicycle group but there's not headquarters. There's basically two guys, but it's not an operating headquarters. The operating headquarters are the individual companies, so there's Gazelle and then Derby and then us.

Q:

Do you see any changes in Toronto? Will some positions be consolidated?

A:

No, there are opportunities (for consolidation) with warehousing in Europe, but it's hard to split things between Europe and North America. North America serves most of the world and certainly all North America with distribution, sales and marketing. We can't really move that. We have a European sales and marketing office in Germany, but we need all those people because we've got to continue to service the customers. I don't think you'll see too many changes anywhere.

The fact that we are at a distinctly different price point than everything else in the group means that we add value to the whole group. We can add some engineering prowess, but the focus on building the best bikes is going to remain a Cervélo trait. That's one thing they made very clear. It was, 'OK, you guys are staying' — meaning Gerard and me are staying. And 'your engineering team is staying.' They want to make sure we did that. They want to make sure that stays here.

Q:

Do you see any synergies with the other Pon bike brands? Cervélo and Focus aren't that different, at least in the U.S.

A:

The average sales price in Europe is lower in Europe than in North America for Focus. So there might be some opportunities there, some synergies there, but still we are significantly higher (priced) than they are in either place. So there's not much overlap between the brands at all. There's great complimentary opportunities. The question is, 'is the dealer that sells a Focus bike the same one that sells Cervelo?' And that really depends on the region. There may be areas where we can bring Focus into some of our dealers or where Focus can bring in Cervélo, but I don't think it will be a case of anyone's going to force anyone to do anything, because you don't want to put the wrong brand in the wrong spot.

Q:

Are Cervélo and Focus going to share a sales force?

A:

We don't know. We are looking at opportunities. If we can find ways to make Cervélo work better, we will be happy to do that, but they haven't told us we have to do that, they left it up to us to determine what's best for us.

Q:

Are you expecting to have more leverage with manufacturers because of Pon's size?

A:

I think so. We haven't tried to flex any of those muscles yet, but someone figured we are the fourth biggest bike group in the world now. Most of (Pon's bikes are) not in the high-end road and triathlon market that we compete in, but the group is super strong in e-bikes and city bikes. So there's a lot of units and that should help our ability to work out beneficial arrangements with our suppliers.

Q:

Does this sale feel like something that you and Gerard planned on from the beginning, or something you were forced into by circumstances?

A:

No, as I said at the start, Gerard and I from the start were wondering, 'when is someone going to come up and recognize the value of a portfolio brand and how you can leverage that?' So, we've been talking about that for years. So this is something we thought would be a good opportunity and these guys are a good opportunity.

Q:

OK, thank you for your time, I know it's been a busy day. Congratulations again and I'll let you get to the champagne or whatever you have planned.

A:

Thank you. I have a bottle of champagne chilling in the refrigerator, actually.

Topics associated with this article: Mergers/Acquisitions

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