This is another joint project we did with Ann Marcus because she is such an effective interviewer. Last month she sat down with Mike Bitzko, currently CEO of CadPlex, to get his founder’s point of view of getting acquired (when he was CEO of Concurrent CAE Systems) at the peak of the dotcom boom and having to make the merger work during the bust. Mike has some specific suggestions any startup contemplating an acquisition offer.
This is the second in an ongoing series of “lessons learned” stories from founders: if you founded or were an early employee of a software startup and would like to contribute your story, please use the contact form or give me a call and we can arrange an interview.
Interview with a CTO of a acquired small company. 6-19-07
Ann Marcus (AM): Acquisition is becoming a useful strategy for many organizations. What did you see as the benefits of acquisition for your organization?
Mike Bitzko (MB): Capitalization. Concurrent CAE Systems was acquired by ChipData as a dot com in 2000, in the first quarter after the peak. Everything is timing. We had to get capitalization because of the speed that the market was going. We either had to go after funding directly or be acquired by a company that already had funding.
AM: What were the benefits to the organization that acquired your company?
MB: ChipData was getting leading technology that they didn’t have, coming to them “packaged and ready to go.” But the problem turned out to be that they really didn’t know what to do with it.
AM: What aspects of the process did you not anticipate or plan for? And what advice would you give others avoid the challenges you encountered–words of wisdom, tips, gotchas?
MB: In any business situation, there are times to have lawyers involved and to not have them involved. In an acquisition situation, you MUST have good, sound legal advice protecting your interests. You are playing with experts who know how to manipulate everything. If you make the mistake of not having legal advise, you’re doomed.
I’ve never been fond of attorneys, but there are times you have to have them representing your interest. Otherwise you can get into a mess. I did get a lawyer but not with sufficient experience and the advise he gave me was weak. You should expect to pay an attorney who really knows acquisitions anywhere from $5,000 to $20,000 to get the kind of advice you’ll need. You must do this. Look, you pay now or you pay later.
Secondly, do your due diligence on the people behind the scenes of the acquiring company. If I’d done a better job at it I would have realized that there was a problem. Companies are built on different principles and foundations. Different levels of integrity—It’s like the Raiders Football Team, whose philosophy is “Live by sword, die by sword” that spends more time with attorneys than running their business. If I’d really done my due diligence, I would have realized that I shouldn’t have done business with these guys. I shouldn’t have believed in Sevin-Rosen and the fluff about that.
AM: Okay, so what went well?
MB: Very little . As soon as my name was on the dotted line, it was downhill from there. They got the acquisition. As soon as I was on the hook, it was a totally different story than the original one.
My advice to those considering an acquisition…First, do your Due Diligence! Validate the integrity of the people you’re doing business with.
Everything went well up until point I put my name on the dotted line. I was foolish that I didn’t have a stronger attorney. I’d be much more shrewd next time. There was writing on the wall, but I was in too much of a rush to unload the company once I saw the indicators that the dot com era had peaked.
AM: Can you cite a particular indicator?
MB: I knew there was a problem when my plumber, who was putting new pipes in my house began advising me on my stock portfolio, telling him how much he was making. That was a key indicator. It was clearly too late in the market, too over-bought and time to get out. But as a result I made some bad decisions.
AM: What other advise would you give those considering acquisition?
MB: Have A Term Sheet in Hand Before You Even Meet. The term sheet has to be complete and have their names on it [as well as your]. Then you have this to refer back to. Otherwise it’s just He said, She said.
Look. It was an assembly of bad timing and…well…not-too-good people…converging in what turned out to be a disaster. The dot com went down hill and those guys didn’t know how to run a software company.
ChipData, the company that acquired Concurrent CAE Systems, claimed to have expert-level management and exceptional funding. They had first round funding of $11 million and subsequent funding brought them up to $33 million. This was an easy trap.
ChipData essentially took the VC’s $33 Million and and my company and flushed them down the drain. You must look at the management of the acquiring organization and find out what kind of business they really do and what they’re capable of. I realized too late in the game that these boys had no business running this business. Because they ran it into the ground.
AM: Had you intended to stay involved after the acquisition?
MB: I had intended to stay involved, and that was what we’d all discussed, but it was obvious that as soon as I signed, things were going to be different. These guys were from Texas and knew everything, so somehow my involvement just wasn’t required once the paperwork had been signed. That why you need to have everything in writing.
AM: What are some of the significant challenges / opportunities that still remain?
MB: I learned a lot from the experience. A good attorney would have told me to figure “insurance money” into the terms along with the potentials. That means that $400, maybe $500…half a million… goes directly into your pocket even if everything fails. That way you walk away okay and you don’t find yourself back on the street having to start a new company immediately.
AM: Is that what happened to you then?
MB: Yes. The new company is CadPlex. It’s a privately held company funded by company founders that provides solutions to bottlenecks within existing EDA Design flows located in the Silicon Valley area and North Wales, PA.
AM: Would you be involved in an acquisition situation again?
MB: You bet I would! I’d be a target for acquisition, but I’d be a much smarter target the next time.
In fact, a fellow wanted to talk about the possibility of an acquisition of the new company. He was coming from the airport, driving over here, when I realized that I didn’t have a term sheet or any names on paper. So I called him and I said, don’t come over…term sheet on desk with the names on it. He said he would send it afterward. I said, no. If you don’t have the term sheet you might as well just turn the car around and go home. And he did. I never heard anything else from him. It was pretty clear that his intention was to get at proprietary information.
So, have a term sheet in your hands before talking to anyone about an acquisition. You don’t know what they’re really interested in. Get it in writing.