Interview with
Andrew “FLIP” Filipowski
BRADLEY: Let’s talk about the acquisition process.
What lessons have you learned from your successes and failures?
FLIP: When I include the activities of DBMS, Platinum technology
and Divine, Inc., the number of acquisitions our organizations collectively
consummated throughout my career is nearly 200 and most were well
executed. In the past couple of years (with SilkRoad), we’ve
acquired nearly a dozen companies and these acquisitions are a good
sample of all the ways you can acquire companies. We’ve acquired
financially healthy companies, companies in bankruptcy, companies
who were stronger than us and companies that were weaker than us.
In a span of 20 years, there are very few people that can recollect,
with perspective, all the cycles that have occurred in technology.
Remember back in the mid-70s when dozens of word processing companies
went public with the promise of replacing the typewriter? How many
of those companies are still around? Frankly most people are challenged
to remember even a few of the names of these companies. I find an
occasional seasoned veteran who can recall Wang but rarely are they
able to recall the NBI and Leniers of the era…. Business combinations
are a fact of the normal business cycle… Always have been
and always will be… Companies like Cisco are still around
and thriving only because of their ability to acquire good companies
and continually reinvent themselves. If your career is spent in
technology, your career will span many technology generations and
you’ll witness the birth, maturity and natural death of many
hundreds or even thousands of companies. This evolution is essential
and necessary for innovation, progress and commerce. Companies must
be acquired and die in order for new businesses to spawn from the
process, grow and advance technology and the economy.
In life, most things are seldom black and white. Most are gray
and you learn lessons from both your successes and failures. In
fact, the things that look like great successes are often laden
with failure. Often only a timely ‘Hail Mary pass’ distinguishes
a success. And, in hindsight, the great failures often include a
number of great lessons and string of successes ended untimely by
timing, circumstance or change in ecosystem. So, I’d rather
concentrate on the process and lessons we’ve learned in the
gray area.
BRADLEY: Okay, let’s talk about lessons learned in
the gray area.
FLIP: What I've learned over the entire set of acquisitions is
that the gray area is more about humans, human nature and culture
than anything else. Everytime I’ve tried to automate acquisitions
(in a way that feels right to the MBA types), I learn that the gray
area of M&A is capable of completely overwhelming and derailing
the process. If I look at the acquisitions that were done with an
overdose of process, those are the ones that failed on the human
scale.
After nearly 200 of these acquisitions, the real value I think
we now bring to the process is a superior understanding of how to
rapidly connect the people from two separate businesses into one
newly combined business. The issue is understanding the art of M&A
rather than the science. The science can be processed into a systematic
checklist set of activities and needs to be expertly done but the
art can not be ignored or no amount of process will salvage the
situation.
BRADLEY: Where has the process gone wrong and how do you
fix these situations?
FLIP: One company we acquired looked perfect on paper but we didn’t
blend the two companies properly. What we never uncovered in due
diligence was the obstinate development culture present in the organization
that refused to take advantage of newly created synergies in order
to protect their turf. When you make a mistake in an acquisition,
when you find out the acquiree was the wrong company to bring into
the fold, or you find the right company but screw up the integration,
you must cut your losses instantly and dump it with urgency. You
can't keep those entities inside the business because they become
cancers. They become the reasons why you can't concentrate passionately
on the healthy business because you are taxed keeping the cancer
alive.
In this very same case, the contract allowed the management team
of the acquired company to stay in place with no changes. In fact,
the new company was maintained as a separate entity. So we did not
replace anyone, we did not move anyone or integrate their management
into our company or our management into their company. After a while
it became an outpost of terror because it (at all costs) zealously
guarded its culture and any perceived intrusion (even though its
culture was not healthy). All its energy was dispensed entirely
on isolating its business and guarding any intrusion. That meant
that no energy was spent keeping customers happy. Since it was so
separate, we had less ability to understanding it, they had no understanding
of us and the anticipated synergies never developed. The challenge
for any business owner is knowing when to fix it or when to kill
it.
BRADLEY: Is it possible to keep an acquired company separate?
FLIP: Certainly. Holding companies are a great example of companies
that do this well. But when you are consolidating a technology sector
you are challenged with keeping the brands independent but integrating
the business operations. You therefore are at that point a holding
company of brands that are operated as a consolidated business.
I have discovered and learned through trial and error, that when
creating solutions out of individual products, consolidating technology,
you cannot keep an acquired organization completely separate. After
all the pain and agony of making the acquisition, in order for the
magic to happen, the two companies need to blend and evolve toward
a common purpose. The magic happens when you encourage change and
you transfuse talent from one entity to another in order to create
connective tissues between the two organizations. The good news
is customers appreciate it, and the financial results fall out of
that process
Art and experience and practice and understanding of human nature
are the things that make it work. Sure, we have a due diligence
checklist that we apply to the details (is all software legally
licensed, are all patents properly documented, are payroll taxes
paid, etc.). But the checklist is really a list of potential potholes.
What you can’t do is use a checklist to define who the thought
leader behind the software is really and if that person is capable
of stretching and growing or whether that person has the ability
to change and will forever keep that organization back and is incapable
of participating in the newly combined organization. Those are the
things that I worry about most because I know the process we have
insures that all the checkmarks are covered but the Art is in the
hands of people who will act uniquely depending on factors that
can only be uncovered with the understanding of human nature.
BRADLEY: What else?
FLIP: We’ve seen cases where people forget that the customer
is really the business. The business is not whether we use GreatPlains
or Oracle financials, whether we use WebObjects or whatever -- that
is not your business -- the customer never sees these things. The
real value of the business is what the customer sees and more importantly
experiences.
It’s important that the customer experiences the quality
and innovation of your product and receives outstanding support
and customer service during its use. Those are the things that are
key to success, not the internal activities. And it makes little
sense to protect turf that the customer never sees.
The customer isn’t all that sensitive to whether or not you
are cutting costs. They do absolutely want you to be viable and
profitable so in fact, they hope that you do not make the kind of
decisions to cut costs while integrating the companies that would
affect their service. A customer’s biggest concern is receiving
an affirmation that they made the right decision to invest in your
technology or service to begin with.
BRADLEY: What about conflicting cultures of two businesses?
FLIP: The culture of the business is the stories of the business,
the trials and tribulations, the shared experiences, the stories
of relationships, of customers won and lost and of heroic efforts
to push the business forward. If you allow the key storytellers
to remain in the mix, you can much easier blend the businesses into
a new culture. You must celebrate, even on occasion mourn, the old
chapters of the story, but you also must move on, close the old
chapter and proceed to the new even more heroic chapters confronting
the combined entity. The organization must believe that the book
is not finished that the new chapters will be even more challenging,
more rewarding, more exciting. It’s complicated but critical
to communicate why the two organizations are being combined. You
can't attach people effectively to a 3% profit increase. It is easier
to attach them to heroic innovation or a “David versus Goliath”
struggle against the 800 lb gorilla competitor -- you've got the
take the individual from both companies and attach them to new heroic
efforts.
We did just this with one of our recent acquisitions (http://www.interactsys.com).
In our quarterly town hall meeting, the Q&A and all discussions
were blog-based (www.silkblogs.com) and available to everyone. The
intent was to better document andcommunicate the goals stories of
the company in a new vision. This happened in multiple locations
across the country and served to better connect strangers in very
important ways. Blogging and new collaborative tools, if used with
authenticity, can be a great tool for amplifying critical water
cooler conversations.
BRADLEY: Any final thoughts?
FLIP: The best transactions occur when both parties have a certain
set of complimentary deficiencies. A perfect company should not
buy another perfect company. Not too much of a risk of that happening
anyway, as there are not many of those. The deficiencies are the
things that make the acquisition successful. Finding the balance
is key. You don’t want something that is so cancer ridden
that you cannot fix it. Yet, you need to buy something that has
flaws so that you can fix it and optimize it and improve shareholder
return. Finding the right balance of “fixable flaws”
is also important so you can optimize it quickly so that criticisms
from the outside don’t have time to pollute your efforts and
demoralize the organization as they must believe in themselves.
If the outside forces denigrate the effort and the infection catches
hold in the business you will be in for one whale of an effort to
rid yourself of the debilitating virus. Focus on speed and results
– you can counter any criticism with rapid financial success.
Ben Bradley is the managing director of GrowingCo, Inc. and The
Bradley Group. Do you have a question or topic you would like Ben
to address in an upcoming column? Please send your comments to ben@benbradley.net.
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