Fossil Group to Buy Misfit for $260 Million

Sonny Vu, chief executive and founder of Misfit

Watchmaker Fossil Group Inc. has agreed to acquire startup Misfit Inc., a maker of wearable fitness trackers, for $260 million.

Richardson, Texas-based Fossil Group has its Fossil and Skagen brands, and it licenses a host of others, including Michael Kors, Diesel and DKNY.

“If you don’t have a brand it is hard to be legit in this space,” said Sonny Vu, chief executive and co-founder of Misfit. He will become president and chief technology officer of connected devices for Fossil Group after the transaction closes, which Fossil expects before the end of the year.

Being a stand-alone fitness tracking startup has gotten harder in the past year, as competition has intensified. Companies such as Xiaomi released cheap variants, at the same time Apple Inc. entered the fray with its Watch, which has similar sleep- and fitness-monitoring functionality. In part because the competition, Jawbone has been struggling over the past year, as VentureWire previously reported. But Fitbit Inc., has bucked the trend. It had a successful IPO in June, which priced at $20. Shares traded up as high as $51.90 but have sunk lower recently.

“We believe it isn’t about function. It is about function and design and branding,” said Greg McKelvey, chief strategy officer and digital officer at Fossil Group. “We see tremendous growth opportunity and that a lot of our jewelry and watches could be connected devices,” he said.

Publicly traded Fossil expects to incorporate Misfit’s technology into products that look like traditional watches, rather than rubber fitness trackers, as soon as next year. It plans to continue producing Misfit’s own products, as well, Mr. McKelvey said. He said the company’s battery life innovation was especially appealing to Fossil.

For Fossil, the acquisition could help reinvigorate its product offerings. The company has seen mostly flat volume shipments through the first half of the year. Its entry into the category is unusual because most of the fitness tracker manufacturers now are technology companies, except for Nike Inc., developer of FuelBand, which has reduced its hardware development plans.

Misfit’s line of round-faced fitness and sleep monitors, called Shine, had a fashion-conscious design from the start. The startup’s first product came out in 2013 after a successful Indiegogo campaign. The startup had previously secured partnerships with brands such as Speedo and Swarovski.

“Those products did great. That gave us the taste–brands really do matter,” Mr. Vu said. But each of the deals took “quite a bit of work,” he said.

By rolling into Fossil, the startup’s technology will be able to take advantage of Fossil’s lineup of brands, as well as its massive distribution and manufacturing capability, Mr. Vu said. Fossil sells 50 million watches and accessories each year in 150 countries.

The companies declined to say how much Misfit has in revenue or on shipment volumes.

Misfit launched in 2011 and raised about $63 million in venture capital in three rounds of funding. Investors included Xiaomi, GGV Capital, , Horizons Ventures, as well as Founders Fund, Khosla Venturesand Norwest Venture Partners.

The purchase price of $260 million includes transaction costs. Fossil will fund it using cash and bank debt, it said.

The startup employs about 220 in Burlingame, Calif.; Ho Chi Minh City; Shenzhen; and Beijing. Fossil will give employment offers to all of Misfit’s employees, Mr. McKelvey said. For Fossil, the acquisition of the large engineering team is crucial as it delves into the wearable devices market, Mr. McKelvey said.

Mr. Vu declined to say what kind of return venture investors will receive in the deal or name the largest shareholder. “Investors wouldn’t let us do a deal like this unless they make some sort of return,” he said.

The crowded wearable devices category is poised for consolidation, acknowledged Jenny Lee, a managing partner at GGV Capital, which is an investor in Misfit. She said that the market is positioned to evolve to more special purpose wearable devices that handle particular tasks.

Write to Yuliya Chernova at Follow her on Twitter at @ychernova