A public company is supposed to be a democracy. It runs in the interests of shareholders, who can sell a controlling interest at any time and thus discipline bad management.
A private company, by contrast, is autocratic. Its owners are free to run it into the ground.
When Under Armour Inc (NYSE:UAA) CEO Kevin Plank engineered a stock split that gave him all the company’s voting rights in 2015, he made Under Armour a private company. Our James Brumley gave all the details at the time.
Since then, Plank has been running Under Armour into the ground. The shares have lost nearly 60% of their value, and the investors who owned those shares, both large and small, have been powerless to do anything about it but take the losses.
After years of reports that Under Armour might buy Lululemon Athletica Inc. (NASDAQ:LULU), the maker of yoga wear, Lululemon now has the market cap to take out Under Armour.
Autocratic Mistakes from UAA Stock
Plank made two key mistakes after his takeover.
First, he decided to build his company a palace in his native Baltimore, since delayed due to lack of money. This must have taken management attention away from the company.
Second, he lost his distribution. The bankruptcy of Sports Authority, and the pain suffered by other sporting goods retailers, did not get a proper response from UAA.
Plank put Under Armour into Kohl’s Corporation (NYSE:KSS), a discounter, angering his largest remaining retail partner, Dick’s Sporting Goods Inc (NYSE:DKS). Merchandising directly through a discounter makes it harder for others to get full price.
Why Did Plank Do It?
I believe this was done to cover up an even bigger mistake Plank made in 2008 — the decision to get into shoes. At the time, Under Armour’s form-fitting clothes that wicked away moisture made it a cult brand, but sneakers are a whole other thing.
Under Armour never had the capital, or the design talent, to go head-to-head with Nike Inc (NYSE:NKE), which has a market cap of $85 billion, more than 10 times what Under Armour is worth. Even in 2008, Nike was worth three times what Under Armour was worth.
Sneakers aren’t as simple as clothes. They’re engineered as much as they’re designed. When Adidas AG (ADR) (OTCMKTS:ADDYY), whose market cap is now $49 billion, stepped up its own sneaker game, Under Armour was between a rock and a hard place. Plank knew this when he made his move on the stockholders.
Nothing You Can Do About Under Armour
If Under Armour were still being run like a conventional public company, there would be ways to put pressure on its dumb CEO. An activist could buy a stake and demand action, threatening a proxy fight. A competitor could buy up the cheap shares and take it over.
But because Under Armour has two classes of stock now, and Plank controls the voting shares, the only recourse any shareholders have is to sell out and let him fall.
This is injustice to investors, especially those who bought before the “split” took place, in April 2016. They have been robbed of their power to impact the situation, and have lost billions of dollars in the process.
The Lesson
There is a lesson here, if anyone wants to hear it.
Corporate democracy should matter. Founders should not be allowed to take their companies private with investor money. Some deliver a return, like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). But those successes hide the rip-offs.
Under Armour shareholders have been ripped off. If management wants autocratic control, they should buy out public shareholders and take their company private. It’s not always good to be the king.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB.
