Enterprise software and services Feature
The birth of a global giant?
Andrew 'Flip' Filipowski, a highly successful software mogul, has acquired more than a dozen companies in the space of a few months. What is he up to?
Andrew Filipowski, Divine
In 1999, Andrew 'Flip' Filipowski pulled off what was arguably the software deal of the year. He sold his systems management tools business, Platinum Technology, to industry giant Computer Associates for a whopping $3.6 billion (€4.0bn), netting himself close on $300 million (€333.4m) in the process.
But while that deal left many touting Filipowski as a genius, his recent actions seem more akin to madness. Throughout 2001, the most volatile period in the technology industry's history, he has been busy acquiring distressed companies in some of the industry's most unfashionable sectors, including web hosting and e-services. Under the umbrella of Divine, a company Filipowski set up in 1999 (see box, From Internet incubator to enterprise zealot), he has acquired 13 companies in eight months, and there is no sign that the shopping is over yet.
The apparent randomness and frenetic pace of these acquisitions (see table, Divine's acquisitions) suggests an element of opportunism at work. Filipowski doesn't dispute that he has reacted to market conditions: "Two years ago, it was most cost-effective to build a company from scratch. Today, the marketplace has definitely shifted to where it is clearly far more appropriate to acquire technologies." But, he insists, his overriding goal is to build a cohesive enterprise solutions company, not to focus on asset-stripping.
The deployment of technology through the enterprise, says Filipowski, has evolved in a series of concentric circles, starting out with the back-office, expanding to the human resources function and then out to the sales force. The next stage of that development, he says, is 'the extended enterprise' – focusing on all of a company's interactions beyond the four walls of its enterprise. And the foundation of the extended enterprise is, of course, the current industry hot spot – collaborative commerce.
Divine, along with the rest of the software industry, is busy marshalling the technologies and services it believes are essential to the delivery of collaborative commerce. Beginning with the purchase of Sagemaker in April 2001, it has assembled a jumbled mix of enterprise information portal, content management, customer management and ecommerce software, together with a range of services assets. From this, Filipowski plans to build a billion-dollar company by 2003.
It is a risky strategy. Mergers and acquisitions are notoriously complicated in the technology sector and, according to Marco Fasoli, managing director at M&A advisory boutique Broadview, more than half of all deals end in failure. Those risks are magnified when a dozen companies have to be integrated under a single corporate banner, particularly when the company has little in the way of profile or corporate culture to begin with.
Filipowski dismisses such difficulties, pointing out that Platinum made 70 acquisitions under his leadership. And the team that made it work there – faithful ex-Platinum lieutenants, Paul Humenansky and Mike Cullinane – are confident of doing the same at Divine. Together, they are already crowing about their success. Divine's string of acquisitions has brought in cash, assets, technology and customers, they say – and all at bargain-basement prices. For example, the $40 million (€44.7m) purchase of content management software vendor Eprise brought $54 million (€60.0m) in cash and annual revenues of $20 million (€22.2m).
Filipowski's reputation and gravitas count for a lot in clinching these deals, says Peter Rowell, chief executive of M&A specialist Regent Associates. What is particularly noteworthy is that, in most cases, Filipowski has managed to convince the executives and shareholders of his targets to take Divine shares rather than cash – and he has got his investors to live with the inevitable dilution. Admittedly, for both parties, there may have been few alternatives. RoweCom, which provides ecommerce software for managing online magazine subscriptions, was bleeding red ink before the takeover and cash was running dangerously low. Eprise, meanwhile, was facing liquidation.
Powerhouse or power games?
Divine's finances, despite Filipowski's boasts, don't look too heavenly, either. The combined group generated sales of around $300 million (€333.6m) in the first six months of 2001, and ran up losses of almost $200 million (€222.4m). Of course, Divine supporters argue that these figures are largely meaningless, and that synergies and rationalisation will reduce costs and stem the red ink.
More importantly, Filipowski points out, by rolling up various companies in fragmented markets, Divine has gained nearly every Fortune 2000 company as a customer. "The Divine strategy is a recognition that [enterprises] need fewer throats to choke when things go bad," he says. "Customers close the door to new vendors, and limit existing ones." The breadth of Divine's software and services offerings, he says, means that when companies rationalise their suppliers, Divine is more likely to escape the cull.
Filipowski sees three distinct threads to the now 3000-strong company: professional services, software and managed services. The first, he says, is Divine's route to market; the second is heavily weighted toward portal software, content management and customer interaction management technology; and the third is only viable as part of a broad offering.
The bulk of Divine's professional services business is made up of former assets and employees of now-defunct e-services supplier MarchFirst. Although much derided, Filipowski says that the three-pronged skillset of e-services specialists (business, branding and technology) is crucial in the collaborative commerce age. As enterprises increasingly reach out to consumers, partners, suppliers and employees through technology, he adds, issues such as branding take on increased importance.
Divine's software business has also been the subject of some derision. It comprises enterprise information portal technology from Sagemaker; content management from Open Market, Fracta Networks and Eprise; wireless content delivery from Databites; and customer relationship management technology from eShare, Synchrony and OpinionWare (the latter business was developed in-house). To ease the confusion caused by this array of products, some applications have been bundled into Divine's enterprise portal suite, which includes news feeds and a search engine across internal and external content. Sagemaker and Rowecom, for example, are now the main components of Divine's Enterprise Content Center, which allows organisations to search, analyse the use of and order from a database of content providers.
But there are other obvious technology clashes within Divine's portfolio that still need to be resolved. Content management vendors Eprise and Open Market, for example, cannot coexist comfortably. The concern is that Eprise will increasingly look like a low-function version of Open Market. To compete effectively in this notoriously competitive sector, therefore, Divine needs to deliver a single comprehensive package with the usability of Eprise and the scalability of J2EE-based Open Market.
Divine's customer interaction management division is also made up of what appear to be incompatible technologies. One of its constituents, eShare, still carries the legacy of developing traditional call centre technologies; the much smaller and younger (by 14 years) Synchrony has developed an entirely web-native suite, which can chronicle multi-channel interactions.
While some of these can claim to be pioneers in their sector, none are brand leaders. Divine's success, then, will depend on how well the sales team can cross-sell its products, and how effectively it can tie software sales into services deals.
Divine is hoping, of course, to deliver much of that application capability as a managed service. While acknowledging the spectacular failures among standalone managed service providers, Filipowski is particularly enthusiastic about the bargains to be had in the managed services market. He says he hopes to buy another five companies in this area, with the ultimate aim of becoming "the biggest and only profitable managed hosting company". By 2002, says Filipowski, the managed services division will already be bringing in $100 million (€111.2m) in revenues.
The bold claims and big ambitions do not stop there, though. Not only has he said that Divine will be a billion-dollar company by 2003, he also says it will be profitable before the end of 2002. Analysts, understandably, are highly sceptical, but one thing is sure: if he pulls it off, Filipowski will once again be lauded as a genius.
Divine's acquisitions
Date (of announcement) Company Activity Price** €m Revenues €m (6 mnths to June 01)
Apr-01 Sagemaker Enterprise information portal s/w 18.3 n/a
Mar-01 MarchFirst* E-services and consulting 83.3 (cash) 62.3
May-01 DataBites Develops wireless s/w to view portals n/a n/a
July-01 RoweCom E-commerce publishing s/w 18.7 165.9
July-01 eShare Customer interaction management 41.8 41.9
July-01 Emicom Israeli tech holding company 18.9 for 66% n/a
August-01 Intira * Web hosting and managed services 8.7**** 2.0 per month
August-01 Fracta Networks * Content management s/w n/a n/a
August-01 Open Market Ecommerce & content mgmt 75.9 28.8
September-01 MarchFirst GmbH * E-services and consulting 5.4 (cash) n/a
Sep-01 Eprise Content management s/w 46.2 9.2
Oct-01 Synchrony Customer interaction mgmt technology 7.7 n/a
Nov-01 Data Return Corp Managed hosting services 36.7 31.1
* certain assets
** all-share deals except where stated
*** performance-related pay-outs over five years
****and €33.5m in liabilities
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From Internet incubator to enterprise zealot
The common perception is that Divine – originally called divine interVentures – started out as a technology and dot-com incubator. But Andrew 'Flip' Filipowski, its founder, tells a different story: "We never claimed to be an incubator, we never wanted to be an incubator... we were building companies that we owned," he says.
Given that Divine's portfolio swelled to include stakes in over 50 companies, that is a little difficult to believe. Moreover, many of the portfolio companies were 'distinctly dot-com' – Divine took stakes in 13 vertical e-marketplaces and also invested in a number of other incubators. More curious still, the company's portfolio also included a handful of wholly-owned services groups such as marketing and recruitment companies, legal and accounting firms, office leasing and furniture suppliers.
"The scope of the extended enterprise was broader when we began," retorts Filipowski.
That eclectic mix clearly made sense to some. Microsoft, Dell, Hewlett-Packard, Compaq and AON Corporation invested a combined $275 million (€395.8m) in the company; while high-profile industry leaders poured tens of millions more into the group. Its July 2000 IPO – delayed because of waning enthusiasm for the incubator model – raised a further $200 million (€222.4m) at $9 (€10.0) a share.
By 2001, Divine had ditched its incubator model, rolling up, repositioning and spinning-out most of its portfolio companies. Nevertheless, its share price has continued to fall ever since flotation, and now languishes at around 40 cents (€0.4). This values the Chicago-based group at $62 million (€68.9m); its cash pile exceeds $170 million (€192.9m).
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Author: Roxanna Mohseni
roxanna@infoconomy.com
Date: 18 December 2001
infoconomy 2001 |
