OTOT John, While we're at it, here's another one -
"John Fowler, a member of the new acquisitions team at Sun Microsystems, found the company he wanted to buy near the end of an airport runway in Burlingame, Calif."
Good job. ;)
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Sun steps up acquisition efforts
By Bloomberg News
April 24, 2001, 3:45 p.m. PT
John Fowler, a member of the new acquisitions team at Sun Microsystems, found the company he wanted to buy near the end of an airport runway in Burlingame, Calif.
Inside a warehouse that looked more like an auto mechanic's shop, 20-somethings were writing Napster-like software that lets people search the Internet more easily.
Near the work stations, Mazda RX-7s and BMWs were torn apart, and a vintage Cadillac hovered on a lift.
When the InfraSearch workers weren't writing code, they worked on cars, right in the office. For CEO Gene Kan and his pals, the only things big technology companies offered were vast parking lots, where the programmers drag raced from midnight to 3 a.m.
Sun's Fowler, who holds a job that didn't exist 18 months ago, spends his time scouring Silicon Valley for new businesses. His work is part of CEO Scott McNealy's plan to maintain the company's status as the fastest-growing seller of powerful server computers.
During the past five years, Sun sales increased an average of 22 percent annually, while net income expanded at a 42 percent pace.
A neophyte compared with acquisition-mad companies such as Cisco Systems, Sun is still learning how to pull off deals like the InfraSearch acquisition.
Bungled deal
Jonathan Schwartz, who heads Sun's 63-person acquisitions team, says Sun bungled the purchase of his company, Lighthouse Design, in 1996.
"There was no integration," Schwartz said. "The only things that changed were the business cards and the T- shirts."
Until recently, Sun favored selling homegrown gear and did few acquisitions. Now, with the U.S. economy cooling and customers slowing purchases, Sun is searching out start-ups with new technologies. It agreed to buy closely held InfraSearch for $10 million in March, and it plans to do a lot more hunting.
Schwartz, 35, a pony tailed math major, is leading the charge. He became senior vice president of corporate strategy and planning in June 2000 after running Sun's venture group, which had made 30 investments with a $400 million fund during his tenure.
Schwartz and his team of engineers and lawyers are going after corporate computing software, technology for information storage machines, and so-called peer-to-peer software like InfraSearch's.
Broader vision
In the future, he'll look at optical networking, systems for making electronic switches out of mere molecules, and nanotechnologies that can create semiconductors one atom at a time.
It's a big change for Sun, which until 2000 had done just a dozen acquisitions in its 19-year history. Last year, it announced plans to buy eight companies valued at about $2 billion, and it wants to nab more than that this year.
Being late to the mergers-and-acquisitions game may be a good thing. Until last year, buyers had to contend with start-ups that commanded top-dollar prices because entrepreneurs could just as easily sell shares to the public and reap millions.
In November 1999, Cisco, the biggest maker of Internet equipment, paid $7.3 billion for Cerent, an optical networking company with no profits and $9.9 million in revenue for the first half of that year.
Now, the Nasdaq Composite Index has tumbled 59 percent from its March 2000 record, and companies are announcing job cuts instead of IPOs.
Start-ups like InfraSearch are battling to bring their products to market. "There's a big overhang of companies that were founded on the assumption that they would go public," Schwartz said.
Most are struggling just to get venture funding, which precedes an IPO by months or years. U.S. venture spending is on track to fall by half this year, according to VentureWire Group, a unit of researcher and publisher Technologic Partners.
A total of 1,051 closely held companies raised $14.5 billion in the first quarter, down from 1,855 that raised $27.7 billion a year earlier.
Investments have fallen for three straight quarters--the first time that's happened since just after the 1987 stock market crash.
Good time for prospecting
"It's a great time to be prospecting," said Dave Roux, co-founder of Silver Lake Partners, an investment firm in Menlo Park, Calif., that buys troubled technology companies.
The hard part is knowing how much to pay. Entrepreneurs say their companies are undervalued. Buyers counter that their own shares used for purchases are cheap, too. "No one knows what his stock is worth," said Roux.
Sun last week said that in the quarter ended April 1, net income fell 73 percent, to $136 million from $509 million a year ago. Sales grew just 2 percent, to $4.1 billion from $4.01 billion. President Ed Zander said the decline in corporate computer spending was the most severe he'd seen in his 28-year career.
Value in Sun stock
Schwartz says he expects many sellers will see the value in getting Sun stock at $15 instead of $50. His team has been busy already. Sun bought Cobalt Networks, a maker of low-cost computers for dishing up Web sites, for $1.33 billion in stock in December, its largest purchase ever.
Sun has since announced four other acquisitions--all but one paid for with stock. Schwartz is trying to make smarter buys, saying Sun got very little for the $40 million it spent to buy his company, which made software for Steve Jobs's NeXT computer.
Lighthouse's 35 employees stayed in San Mateo, north of Sun's headquarters in Palo Alto, and Schwartz reported to Sun's then chief technology officer Eric Schmidt. Sales teams from Lighthouse and Sun had little contact. People left. Only three remain, including Schwartz.
Plain-spoken like McNealy and unafraid to criticize Sun for mistakes, Schwartz moved up. He orchestrated the purchase of Forte Software for $700 million in October 1999--Sun's biggest acquisition at that point and still its second largest.
Now, he does for Sun what Michelangelo "Mike" Volpi, 34, does for Cisco: figure out what the firm needs to buy to stay on top.
Cisco has made 67 acquisitions since 1995. Volpi, a Milan-born engineer, had a hand in most of them. Schwartz wants to outdo even Cisco.
He's starting at ground zero with a planning process he hopes will codify the instincts that McNealy and Zander rely on to run the company. He wants a system for finding and promoting leaders and for discovering and integrating companies that complement Sun's businesses.
Statistics show that companies don't integrate purchases well. Of the 700 largest acquisitions from 1996 to 1998, 83 percent failed to deliver any reward to shareholders, according to Best Practices, a consulting firm in Chapel Hill, N.C. More than half of the transactions destroyed value.
Schwartz hired Vivek Joshi for the planning job in February. Joshi spent three years at General Electric, where he ran a $300 million unit in Erie, Penn., that made electric drive trains for house-size dump trucks. Then he went to Webvan Group, the online grocer, where he rolled out service in new cities and handled the acquisition of rival HomeGrocer.com. "This company is way too big now for the way it was being run," says Joshi.
Sun has tripled in size to 42,000 employees from 14,000 five years ago. Sales have more than doubled to $15.7 billion in fiscal 2000 from $5.9 billion in 1995. It has workers in 350 locations in 50 countries.
Learning from GE
At General Electric, the best and brightest move through the company to learn the business, and there's a succession plan for even low-level managers.
Joshi says he's going to put similar strategies in place at Sun. He's likely to find a willing taker in McNealy, who sits on the General Electric board and admires CEO Jack Welch.
Sun already has a quality program called Sun Sigma that apes GE's "six sigma" program. Another thing Welch does is make managers compile a list of companies that they'd like to buy, should the opportunity come. "There's always a hot list," said Joshi.
Sun has a list too. More important, it's developing a system for keeping the list fresh. Members of Schwartz's group work alongside managers, helping them buy companies they need to stay competitive.
Sun has never used investment bankers, and now that it has a team in-house, it isn't going to start. When people in Sun's nascent storage business discovered a hole in their product line, they told Schwartz's team that they'd like to buy HighGround Systems. The Marlborough, Mass., firm makes software that tells a company how much disk space it's using and how.
Brian Sutphin, another member of Schwartz's group, made CEO Dennis Grant an offer in September. Grant said he would consider it.
Sutphin pulled in Sun's new in-house negotiator, Daniel Mitz, an M&A lawyer Sun had just lured away from Wilson Sonsini Goodrich & Rosati, one of the richest law firms in Silicon Valley.
It took two months to settle on a price, with Mitz doing the haggling. "There was a significant gap that had to close," said Sutphin.
Sun announced the $400 million purchase in December and completed the deal April 2 for $152 million after Sun's shares fell.
Just after Sun unveiled the acquisition of HighGround, Schwartz closed the biggest purchase he's done so far: Cobalt Networks. It's doubtful that Sun would have pursued Cobalt at the height of the Internet boom. Cobalt's machines run on the Linux operating system, one of the hottest technologies of the past decade.
Cobalt sold shares at $22 in an IPO in November 1999, and they surged to $128.13 on their first trading day. Sun had always pooh-poohed Linux as too lightweight. Nonetheless, Cobalt's sales had rocketed on demand for cheap servers that companies could add in stacks.
Why was Cobalt willing to sell? Its stock had fallen 68 percent from the first-day close. Dell Computer and Compaq Computer were moving into the market for less- expensive servers. And investor enthusiasm for Linux was waning.
Sun negotiated the purchase in a week and announced it on Sept. 19.
Part of Schwartz's M&A plan is to track the success of each acquisition. Twice a month, he briefs McNealy with a diagram that shows acquired companies across the top and such criteria as sales, computer system integration and staff retention down the side.
"Red means disaster. A green light shows that things are good. Yellow means not so good," Schwartz said.
How is Cobalt doing? Only three people out of 245 declined to sign offer letters from Sun. Cobalt CEO Stephen DeWitt is running the business, though his sales team reports directly to Sun's head of sales, Masood Jabbar.
There are some eerie similarities to Lighthouse, Schwartz's company, though. Cobalt workers remain at their own building in Mountain View, south of Palo Alto, and it took until February to get Cobalt products on Sun price lists.
"It should have been faster," said DeWitt, 35, who's giving eight to 10 presentations about Cobalt each week to customers, software developers and resellers of Sun equipment. "I have a lot of gray hair all of a sudden."
The forthright critique means that Schwartz's group has more work to do, especially on big acquisitions.
The smaller ones seem to be going well.
Gene Kan and the InfraSearchers left their warehouse in March. "My team is ecstatic," Kan said.
They didn't go to a big campus in the valley, though. Sun moved them in with a special group in San Francisco's artsy South of Market district, where Sun's peer-to-peer work is based. For Kan, headquarters is still just a place to drag race.
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