Leadership

Best Practices for a Successful Exit

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It has been said that success is not a destination to be reached; rather, it is a journey to be taken one day at a time. Every company, regardless of its size, needs to have an end strategy for its success.

Companies need to realize that unanticipated events may occur along the journey and cause the end strategy to change. A company might not be successful, or it could become very attractive for another company to buy.

To prepare for the unexpected, software companies need to be cognizant of what could happen and what they would do in such scenarios.

The Acquisition of SurfControl

That is what happened at SurfControl, which was acquired by Websense in 2007. In 2002, the company was ranked fifth in its market and had 22 percent of the market share. By 2005, revenue was still growing, based on maintenance and earlier work, but the company had experienced two years of flat to declining bookings; and the board was looking to find creative ways to grow the business.

After I joined SurfControl as CEO in 2005, we added on-demand and security offerings and soon had good financials to report. We grew bookings for eight of the next nine quarters. But the strategies we put in place to enable our growth were the same things that made another company want to acquire us. At the time, we were so focused on growth that we hadn’t fully considered the probability of acquisition until it practically landed in our lap.

Guiding my contributions in companies I have joined, I think in terms of Plan A and Plan B – first a vision for growth as an independent company and, second, understanding that there could be a possibility of acquisition. (There is no such thing as a merger. One company is always stronger and, in reality, is the acquirer.) Any company under $100 million can certainly be acquired.

Although SurfControl’s end strategy was to remain independent, it received an unsolicited offer, so we went to Plan B. But in the end, it was a $400 million win for the shareholders; so our end strategy for growth brought success.

Five Critical Best Practices Enabling Growth

What techniques or best practices do companies need to follow in their growth strategies to keep company expansion aligned with the Plan A or B end strategy? My experience has been that there are five critical business practices that enable growth and success, some starting on day one.

1. Focusing on winning or getting technologies out the door does not set the stage for success. Business growth strategies start to work to your advantage only when they are founded on a context of core company values, such as integrity as to how the company will conduct business.

If you examine some of the companies that failed or were caught for defrauding their shareholders and customers in the late 1990s and in this millennium, you will find that a lot of those companies lacked those values or suspended them at some point.

These core-value decisions made from day one will have a huge impact on business success later on. Business practices and technologies change all the time, and so do people. But there are some things that should be immutable – a company should have core values that are lasting.

2. The business cannot just be a product chasing problems. There are some people in the software industry whose career design is to launch a start-up, bring it to profitability, sell it and launch another company. But for those companies whose exit strategy is not acquisition, it is critical to understand the business need for a product or solution. If the software is just a technology chasing a solution to a problem that customers do not believe is a need, marketing that technology will be a hard row to hoe, and there will be a much lower probability of business success.

Companies need to be careful that they innovate not just for the joy of the technology, but with awareness that someone will probably buy it someday. Always be sure the business focuses on solving a problem that customers want to pay for and will actually be able to adopt.

3. Set the objective of being a high-performance company. Achieving this objective starts with hiring the best leaders and employees who share the company’s values and vision. I believe business success requires doing this without compromise.

In addition, companies cannot cut their way to growth. It is important to invest in training and developing employees and creating an effective team to achieve company goals. During the turnaround and expansion efforts at SurfControl, for instance, I found we needed to upscale and put in place some of the right skills that would enable growth. At LogLogic, we continue to add new talent to support the company’s growth.

4. Measure and inspect. Start by knowing your company’s purpose – its vision for growth and success. Then set measurable, empirical milestones. Be sure to also regularly inspect what the company produces to be sure it is aligned with the vision.

5. Do not operate from a strategy based solely on organic growth or solely on buying other companies and revenues. No company should ever limit itself to organic growth, as it cannot build everything itself. And while an acquisition strategy can work, it will not by itself achieve optimal success.

The best-practice strategy is leadership regularly inspecting market developments, determining whether the business strategy needs another element, and whether the company should build, buy or partner in adding that element to the product portfolio.

The company leadership needs to determine what is happening and changing in the market, consider the customer requirements that the sales team and support services are hearing, and listen to what customers and partners are directly telling them.

At my company, we look at this information twice a year and then determine what we have in our quiver that can meet customer needs and meet the revenues that we need to provide our shareholders to achieve the growth they are looking for. What would make a difference to that revenue balance?

We then measure that against the business fundamentals of bookings, revenues, profit and cash. If we have these fundamentals, then we determine whether to use what we have in our quiver, or look at a company to acquire or partner with.

We did this at SurfControl and found that meeting those fundamentals enables the growth to make it as an independent company – or makes the company an attractive acquisition target.

Leadership in an Unsolicited Takeover Offer

An acquisition precipitates situations, and regulations, that require a number of leadership skills. However the attributes involved are not simply interacting collaboratively with the other C-level executives; nor is it a matter of driving and enforcing the activity from the top down. In an acquisition, governmental regulations dictate the approach.

The CEO needs to execute a plan that brings the best value for the shareholders. At the same time, the CEO must provide support and empathy for company employees – without trying to make the deal not work.

I first received a letter about the offer for SurfControl in December 2006. Because of the regulatory conditions in the UK, I could not tell anybody except the CFO and the board that we had been approached because the UK Takeover Panel would consider it to be open information and was watching for insider trading. I actually did not get to talk to all of my executives until nearly April 2007 when we finally had negotiated the offer through.

A week and a half after the offer letter, I received a call at 2:00 A.M. and had 20 minutes to get out a statement announcing we had been approached, couldn’t name the company, and it might or might not result in an acquisition. Our British employees understood this simply meant the company had been approached. But our American employees did not understand and believed we had struck a deal to be acquired.

This was a very tough situation for our employees and for our customers. We announced that something was happening but could not reveal details. They could only do a lot of guessing. Leadership skills in communication, change management, etc. were required, as a successful acquisition meant I certainly had to involve my employees as much as I could.

There was a significant effort in persuading the acquiring company about what great employees we had and how they would fit with the company’s goals. We certainly did not want our employees put in a position of working for an acquiring company whose business was not set to succeed. So it was also important to share information and collaborate with the company coming after us. Factors such as direct selling versus channel sales, and short sales cycles versus long sales cycles, for example, have a lot to do with success in an acquisition.

Leadership Career Path

Where does one gain the attributes to do a turnaround, launch a start-up, or take a company public? Start with a vision for your career. Then seek to work in environments where you can learn and also contribute. One of my career path decisions, for instance, was to go to Salesforce.com; it was a great place to learn from Mark Benioff and also a great place to contribute.

Learn new skills that will grow your base capabilities. The more you grow, the more you can deliver good results, which leads to getting more opportunities either within your company or at another company. For example, I went to work with IBM and planned to leave while I was young but ended up spending 20 years there because the things that I contributed presented new opportunities. Later, it led to an offer from Sun Microsystems that I could not refuse.

The growth path to career success does not stop with learning new capabilities. To a certain extent, you need to affirm what you are doing as it aligns with your career vision. Otherwise, most companies will let you stay where you are, thinking: “She is doing a good job, so we better keep her there.”

The Bottom Line

Although we sometimes hear comments in the industry like “That company is really shopping itself around” or “That company has been on the block for a while,” the reality is, companies do not get sold – they get acquired. Where they do try to sell themselves, we usually do not hear of premiums for them, or not as great a premium.

Remember, an acquirer’s interest, and the price it is willing to pay, is tied to your company’s performance at the time of the offer. If you’re always thinking about positive energy for the company and thinking about how to build intellectual property, expand the customer base, and add shareholder value, such a business strategy will result in sustained revenue growth and opportunities for future growth. It may also bring people around who want to acquire your company – and pay a premium.

Pat Sueltz is CEO at San Jose-based Sequoia Capital-backed LogLogic, a software company with an open-source twist to the business of monitoring and analyzing server log files from any device, application or system. She joined LogLogic after leading global Internet security company SurfControl through a successful acquisition by Websense in October 2007. She has a wealth of high-tech experience and was formerly an executive at IBM, Salesforce.com and Sun Microsystems.

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