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Interview with Andrew “Flip” Filipowski

Posted on February 15, 2007
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Interview with Andrew “FLIP” Filipowski

Ben Bradley, recently spoke with Andrew “Flip” Filipowski, about the gray areas of M&A, the importance of culture, and the human side of acquisitions. During his career, Flip has been instrumental in the creation of several tremendously successful technology companies, including Cullinet, which was the first software company listed on the NYSE and the first to achieve $100M in sales, and PLATINUM technology, inc., which amassed one of the most valuable technology and service offerings in the software industry. PLATINUM became a recognized entrepreneurial success story, growing from a startup to the eighth-largest software enterprise in the world within just 12 years, reaching $1 billion in revenue before its sale to Computer Associates International Inc., in 1999 for nearly $4 billion in cash, the largest acquisition of a software company at the time. After Platinum, Flip founded Divine, Inc., raising and spending more than a billion dollars while acquiring dozens of companies in comparatively one of the Internet’s biggest riches to rags stories. Flip now devotes all of his expertise, thought leadership and entrepreneurial talent to the strategic direction of all the corporate holdings of SilkRoad Equity, including SilkRoad technology.

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.

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