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Massachusetts no longer produces buyers of technology. Instead, we may appear to be in the business of producing technology companies that are for sale to others. But while an acquisition is an exit for investors, it doesn’t mean a company bows out. As much as boosters would like to see another EMC or Akamai take root by the banks of the River Charles, the anecdotes of two acquisitions show that growth can occur on the sell-side of mergers and acquisitions.
TripAdvisor LLC’s $200 million acquisition by InterActiveCorp (Nasdaq: IACI) was a home run by any VC’s measure: Flagship Ventures and a handful of angels had put in $4.5 million. Five years later, that is not the number co-founder Stephen Kaufer is thinking about.
There are better numbers for the TripAdvisor CEO to focus on, like the $212 million the company, now a subdivision of Expedia Inc., generated in 2009 — over five times its sales in 2005. TripAdvisor now employs 750 worldwide — 350 to 400 of them in and around its Boston headquarters — and plans to hire 100 globally through the end of 2011. In 2005, the company headcount was 35.
A few years later (also in April), BMC Software Inc. (Nasdaq: BMC) bought BladeLogic, a Lexington company making data center management software. The 2008 acquisition, worth $834 million in cash, brought about 190 Lexington-based BladeLogic employees into BMC. According to the company, most of them are still there, and the headcount in Lexington has grown to 225. CEO Bob Beauchamp said on the strength of multiple quarters of double-digit growth in BladeLogic, BMC is planning to hire more. According to BMC’s annual report, BladeLogic produced at least $75 million in revenue for the company in 2009.
But BladeLogic and TripAdvisor took divergent paths to growth after acquisition. In TripAdvisor’s case, the company’s buyers have interfered little with the machine that has at times in its history thrown off half its revenue in cash, and giving Kaufer broad discretion to make acquisitions and run the company as he sees fit.
“We were lucky enough to land at IAC, which could be considered a holding company back then,” Kaufer said. “We were just one of a bunch of businesses, and we were left to run very independently. We continued to prove our worth by growing on our own.”
BMC, however, has made BladeLogic part of a broad strategy for cloud computing that the company conceived before the acquisition, using its new subsidiary as an engineering center for new initiatives in that area. Scott Fulton, who heads engineering for the BladeLogic division, came to BMC five months before the acquisition to manage the deal and the R&D efforts the company planned to build on top of it.
“BladeLogic was kind of a cornerstone, anchor acquisition to go into a broader category that we call service automation,” Fulton said.
BMC is aiming its BladeLogic R&D assets at new demands from enterprise customers, who are looking to support development of private clouds that can match the speed, scalability and self-service capabilities of public services like Amazon’s EC2.
Businesses are looking to let non-IT employees provision new servers, and do so quickly. Traditionally, the fastest an IT administrator could set up a server with firmware, operating systems, middleware and a database would be two hours.
“Customers are going to want that in 20 minutes,” Fulton said. “(IT administrators) can go out to Amazon and get that in 20 minutes. If an enterprise wants to have a private cloud, they need to match that.”
For companies planning aggressive growth, a merger with a larger, more established business can be a better means to finance growth than strategies to preserve a measure of independence — like venture investment or an initial public offering, said JC Raby, co-founder and managing director at Mansfield M&A advisory Boston Meridian.
That’s particularly true, he said, if there’s a market opportunity coming so fast and large that even a great deal of investment capital wouldn’t be enough to take advantage of it in time.
“You realize that even if you took in investment capital you wouldn’t be able to scale up the infrastructure to take advantage of it,” Raby said. “If this market is really there in spades for me, I’m going to take in that capital and still not be able to turn that into a valuation enhancer.”
Since 2005, TripAdvisor has also grown by aquisition, composing an online travel portfolio that includes companies like virtualTourist and OneTime.com.
Small, but fast-growing and immensely profitable before its acquisition, TripAdvisor probably could have made those acquisitions on the strength of its own cash flow alone, Kaufer says. But Expedia’s size and clout helped the company establish itself in China, making an acquisition there and opening its own site.
“That would have been next to impossible without the much bigger, more established parent company,” Kaufer said.
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