Deal fever will cost you millions

Hey everyone,

Imagine you see a chance to save your struggling business. 

The lifeline is right there: a famous partner, instant credibility, and the potential to add a billion dollars to market cap in a single day.

Do you take it?

Gap did, in a now-infamous partnership with Kanye West. Two years later, they were down $53 million, out of a CEO, and in a worse position than when they started.

So below, there's a lot to learn here (that has nothing to do with Kanye’s taste).

By 2019, Gap had watched its annual sales fall from $13.7 billion to $4.7 billion in five years. They were burning through CEOs, competitors were eating their lunch, and malls — where they’d built their empire — were dying.

Then Kanye called (a former Gap employee, believe it or not). He’d just turned Adidas into a $1.7 billion revenue machine. 

Gap's leadership got deal fever.

Mickey Drexler, the legendary CEO who'd built Gap into a powerhouse in the first place, personally called Kanye and told him the deal was a mismatch. He told Gap's board the same thing. Nobody listened.

It’s a dangerous moment when you want a deal so badly that you stop asking whether it's actually a good idea.

It happens in hiring, partnerships, acquisitions, anywhere the excitement of what could be drowns out the signals of what is. 

Often, you already know, deep down, that it’s a bad idea. Or maybe someone smart is raising a red flag. 

But you don’t want to hear it. 

Here’s a suggestion: the next time you’re really excited about something: 

Before you sign, write down the three most likely ways this deal blows up. If you can't make yourself do that exercise, you have deal fever.

The deal was bad from the start. 

Kanye wanted sub-$100 price points but top-tier quality, everything manufactured in Los Angeles, and complete creative control.

Gap’s entire operating model was optimized for overseas production, and they wanted something focused, on-brand, and quick to market.

It didn’t get better from there. 

Three months in, Kanye demanded a seat on the board. He started renegotiating the terms of the deal. Then he publicly aired his grievances on Instagram.

None of this was surprising. The signs were there at the contract stage, but Gap just… ignored them.

This is the part that stings for me as a business owner. 

Because misaligned incentives don't get better over time. They compound.

Before-You-Sign Tip #2: Write out what "winning" looks like for each party in year three. 

Be specific, not "we both grow". Actual outcomes, incentives, definitions of success. 

If you can't write their version without guessing, you don't know enough yet.

If the answers point in different directions, the deal will surface eventually. And it'll cost more than a clean exit would have.

Kanye's edginess was always part of the value proposition. 

But Gap didn’t fully price in how far that might go. 

When Kanye wore a "White Lives Matter" shirt at Paris Fashion Week in October 2022, he followed it up with a string of antisemitic statements, and Adidas dropped him. Gap had no choice but to follow suit. 

$53 million written off. CEO fired. Back to square one.

This risk exists anytime a business ties its brand to a single person, whether that’s a spokesperson, an influencer, a founder-CEO who is the product. 

I've thought about this with my own businesses. The upside of a strong personal brand is real. So is the tail risk.

But the real question isn't whether to use personal brands. It's how you let ride on someone else’s behavior: some exposure is manageable, but be very careful before betting the farm. 

(Honestly, the Gap board should have read the 11 questions I ask before partnering with anyone.)

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That's my take, anyway.

The Gap-Yeezy story gets told as a Kanye story. But I think it's really a story about what happens when a desperate company stops trusting its own judgment.

They knew. They did it anyway. That's the expensive lesson.

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Thanks for reading!

Michael

P.S. Back in the fall, I mentioned I was building a QoE business. Well, it’s happening! We found an amazing CEO and we’re getting ready to launch. I’ll give occasional updates in this newsletter, but if you’re interested in working with us - or just want the latest updates - drop your email → girdley.com/bedrock