February 2005

Lawyers, Guns and Money

For companies that went public in the great tech boom of the 90's, it may have seemed their rise was the business equivalent of Sex & Drugs & Rock & Roll, a song by Ian Drury and The Blockheads from that decade. The myth (and for some, the reality) was that it was a wild ride straight up, a heck of a lot of fun, and with the right technology (the sex) and a lot of money to invest (the drugs), you could become (rock & roll) stars of the business world.

The experience of this decade suggests a distinctly different tune. Examining the actions and performance of New England's healthiest small cap IT, communications, and life sciences companies suggests a practical, three-part strategy for any technology company trying to grow its revenues and value now. It also calls to mind the closing lines of verse from the late singer songwriter Warren Zevon's ode to overindulgence:

Send lawyers, guns and money
The sh*t has hit the fan

Let's look at the parallels:

Lawyers: With all the acquisitions by small cap companies to grow their top line, it certainly has been a good time to be a lawyer, or an M&A advisor for that matter. And while plenty of the acquisitions have been grabs of market share or roll-ups of competitors for some of their components, many acquisitions now are serious attempts to create long term value.

Integrating an acquisition is as critical as picking the right one

Small cap companies and some later stage private ones are using acquisitions to quickly expand internationally much faster than if they had simply set up their own operations. Equally important, they are also acquiring to expand markets and product lines. In the software industry, for example, struggling companies with strong niche offerings are being acquired by companies that expect to grow much faster and more profitably with a family of acquired and integrated offerings.

Most CEOs expect sales and operating margins to take off as a result of these acquisitions. Of course, integrating companies is very hard. It takes enormous and continuous amounts of senior management focus and attention over several quarters across a range of market, product, operational and organizational areas to fully integrate in the best circumstances. But fully and quickly integrating acquisitions is as critical to growing equity value as is picking the right companies to acquire in the first place. Many companies struggle for 1-3 years detailing and executing the integration that seemed so straightforward when it was outlined during the acquisition process.

Guns: Like it or not, shooting a lot of the unnecessary programs and operations has been a critical part of the recovery plan for most technology companies. While much cost cutting was done wholesale after the bubble burst, strategic cost management has become a key part of the growth approach for many companies in recent years. Outsourced product development and customer service operations are two examples of the approaches tech companies have used to rapidly and cost effectively grow new businesses and boost the bottom lines of existing ones.

Money: If guns and lawyers are the first two parts of the strategy for today's tech companies, spending money on organic growth is clearly the third. The smartest small cap and venture-backed companies are reinvesting some of their profits or trading equity for new investment dollars to bolster revenue and value by developing new products and services, entering new markets and businesses, complementing existing channels, and working to gain broad adoption for their still relatively new technologies.

The smartest tech companies are reinvesting for revenue and value growth

For many, this is the most challenging stage of the three. Organic growth was relatively easier in the 90s when great technology was usually greeted with huge purchases after short sales cycles. Capital budgets for new technology are far smaller now and senior line and IT executives with differing agendas are far more critical in direction setting and decision making for technology purchases. This makes for a harder, longer, more complex and value driven sale.

The best tech companies are able to grow because they understand what their customers need and how they buy. They are moving fast and taking advantage of competitors who are scared off by a slow economy and remain focused on lawyers and guns. The most successful tech companies are distancing themselves by positioning their technology as a way for customers to achieve their business objectives, and by shifting their focus from better technology to better marketing to help customer see the value in their offerings.

It no small feat to work through lawyers, guns and money, but it's what the best small tech companies today are doing. Who knew that Warren Zevon, the rebel-philosopher-poet, had such business insight?