But didn't know who to ask...
Saturday, March 11th, was an interesting day for the “DevCo” leadership team. That morning we had a chance to sit down with one of the “board” members. This particular member has been involved with many different companies doing exactly what Borland is currently trying to do with its IDE/Dev-tool business. This person has many contacts in the Valley and has helped Borland and many other companies with acquisitions and/or divestitures. In other words, this guy “has been around the block” more than a few times. Since I'm not sure he wants his identity revealed, I'll simply refer to him has “Ed.“
I have to say that I probably share far more in common with the folks that read this blog than with this “business builder” guy. Ed's from a different world with a very unique perspective. In reading a lot of the various comments folks have made to this blog, I have to say that in many ways I share some of their concerns. However, in light of all these concerns, issues, and “unknowns” I still choose to be positive. So part of this Saturday meeting was also a chance to actually get the straight story on a couple of burning questions I know many of you have had. I have had those same questions on my mind as well. There are several main questions folks have been asking surrounding the whole spin-off idea. I'll try and articulate what this person said as best as I can.
“Why did Borland announce the plans to spin-off its IDE/Dev-tool business before it had a buyer?”
I know you've all had this question on your mind. Ed's response was that it was simply a matter of practicality and Borland needing to steer clear of running afoul of anything within the new Sarbanes-Oxley (SOX) rules that govern public corporations. Then on the practical side, trying to do something this big and involving this many people (that's hundreds of people) in secrecy is just a recipe for disaster. The mis-information, leaks, speculation, and overall exposure to the SOX rules was too great a risk. In other words, it was far less risky to announce the intentions and work on the details, more or less, out in the open, than trying to keep it out of the press. Imagine trying to explain both internally and externally why the management is having people work on drawing arbitrary lines between different parts of the business and identifying dependencies. How do you do that without raising all kinds of embarrassing questions?
The corollary to the above question is “I've never heard of things being done this way before. Isn't this unprecedented?” Ed's answer was a little more vehement . Of course not! This kind of thing is done all the time! There's been a lot of companies that have pre-announced their intention to divest or spin-out a portion of their business. This kind of thing has been done in the railroad company sector, and other kinds of shipping companies. The consumer commodities sector is another place where this is also done. In the tech sector, one such example is expedia.com. Here's an example of a company, Crown Media Holdings, Inc., owner of the Hallmark cable channel, doing exactly what Borland is doing right now.
“What if there are no buyers? I've heard that there is no interest.”
Ed's response was even more concise than for the previous question. Quite simply, if the exec team had not thought there was any value in this business and that it just needed some focused investment, they'd have never even tried to do this. As far as there being no interest in the business, that was just not true. There are a number of investors currently going through the NDA signing process as we speak.
“How can you possibly justify accepting anything other than the highest bidder?”
Here is where Ed used selling one's house as an example. Suppose you have several bona-fide bids in your house. Say two of those bids were slightly above asking price and one was slightly below. However, the first two bids had several contingencies in the proposed contract (things like securing financing, escrow periods, sale of another home, etc...) and the lowest bid was a cash offer with no contingencies. Which one would you take? If you could afford to wait and weren't needing to sell the home ASAP, you might take one of the first two. However, you are also taking a risk that the deal may not close and by then the third cash buyer may have moved on and bought another property. Suppose you wanted the deal to close with minimum hiccups? You may take the lower bid because of the much firmer chance of the deal actually closing.
A corollary to this question is “How would a lower bid be in Borland's best interest?” Ed also put this in economical terms; What if Borland were to retain a minority stake in this new venture? Wouldn't it now be in Borland's best interest as well to ensure that the absolute best match be found and the proper investments made to better guarantee its chance of success? Ed also said that he can easily make the case that given the proper buyer and investments along with the retention of a minority stake, Borland could stand to gain more in a few years than with the initial sale!
Those were very frank questions and very frank answers. Sure, Ed is a financial guy, which is exactly why we need him. We need someone to help us put together the best business plan and make the best pitch to the investors. The best way to do that is to consult with someone who knows their stuff. As an engineer, I tend to not be easily impressed, but I must say that when Ed was explaining all of this to us, I immediately became aware of how little I actually knew. I was also equally surprised by how much I actually did know! Much of it is simply common sense. I was also far more comfortable about this deal because there were folks involved that did know what they were doing. There are always going to be horror stories and folks who've been damaged by unscrupulous investors. Generalities will be made. However, from my purely analytical point of view is that, if the idea of using venture capital or equity investments were, in general, so bad, why is it done so much? I mean, there has to be an overriding upside to counter all the negatives, right? Focusing on the negative and fringe horror stories is just like saying that childbirth is a potential deadly and dangerous thing, yet there are millions of successful births every year. Likewise, jumping in your car and driving to work could be the deadliest thing you ever do, yet millions do it every day. So, for every failed investment there has to be some larger number of successful ones. If investing was that risky why do we even have an economy built around creating and obtaining wealth both through hard work and supporting investment?