We’re more than just a branch office
Serfdom to out-of-state companies isn’t the only option for Mass. tech sector
June 19, 1988, was the day that the complexion of New England’s technology cluster started to change.
That was when the board of Westwood’s Cullinet Software Inc. - the first software company ever to trade on the New York Stock Exchange - agreed to sell the company to Computer Associates International Inc. of New York for $320 million in stock.
“It had been a star company, with international recognition,’’ says John Landry, who was Cullinet’s chief technology officer. The next day, every sign in the company’s headquarters had been changed to the name of its new owner, and members of the executive team had been handed their severance checks.
In the 22 years since, dozens of pioneering technology companies have been purchased by out-of-state acquirers: Lotus Development Corp., Digital Equipment Corp., Monster.com, Lycos Inc., and Starent Networks Inc. among them. The latest in this skein of acquisitions, announced earlier this month, was Apple Inc.’s purchase of Waltham-based Quattro Wireless, a key player in delivering ads and other media to mobile phones, for $275 million.
All this selling has generated a great deal of wealth for local investors, entrepreneurs, and their employees. It has resulted in Greater Boston being speckled with branch offices of many world-class technol ogy companies, from Hewlett-Packard Co. to Google Inc. to Microsoft Corp. to Cisco Systems Inc., which provide thousands of high-paying jobs.
But some feel it isn’t our destiny to be serfs, subject to the strategic whims of far-off overlords.
“It’s a disaster,’’ says Bill Warner, founder of Avid Technology Inc., the Tewksbury digital media software company that today employs 2,350 people. “Are we content to be a place that’s home to all these branch offices where smart people create value for companies that aren’t based here?’’
In the last two decades, the dominant model for technology success in New England has been “build it first and fast, then sell to someone bigger and slower.’’ That model has its merits: Notably, it lets entrepreneurs go off and do something new. “At the end of the day, there’s more wealth created being acquired than being an acquirer,’’ argues Giles McNamee, founder of the Boston investment bank McNamee Lawrence & Co.
Fewer than 1 percent of start-up companies will ever go public, McNamee says, and so acquisitions are a natural endpoint for many companies. “It’s not better or worse - it’s just different,’’ he says.
You can make the argument that “build and sell’’ enables the region’s technology ecosystem to be more nimble, as opposed to laying the foundation for a lasting monolith.
Quattro, the company just picked up by Apple, was started in 2006 by executives who had just flipped an earlier mobile company, m-Qube Inc. (VeriSign Inc. bought m-Qube for $250 million, and last year resold it for a pittance.)
And acquisitions of New England companies have brought big technology players to the region that might not have come here otherwise.
Dell Inc. has a campus in Nashua as a result of its 2007 purchase of the data storage start-up EqualLogic Inc. Not long after Microsoft and Google acquired local companies, they now have major offices located just a few blocks away from each other in Kendall Square in Cambridge.
But founders of publicly traded companies that have managed to remain independent make a powerful case.
“When the economy stumbles, it’s the branch offices that tend to suffer first,’’ says Colin Angle, chief executive of Bedford-based iRobot Corp. Branch offices tend to employ people already working in the area, whereas headquarters bring new talent to that city, says Angle.
And spinoffs, when employees leave to form new companies, also tend to happen more often around headquarters, Angle argues, naming four New England companies all founded by iRobot alumni.
Gail Goodman, CEO of the Waltham e-mail marketing firm Constant Contact Inc., says her company tends to rely on local firms, consultants, and contractors “for things like marketing, creative development, Sarbanes-Oxley consulting, and legal services - all of which are traditionally sourced out of the corporate headquarters.’’
Goodman writes via e-mail that buying those services “creates a secondary economic impact in the community,’’ beyond just the jobs directly provided by the company.
Even John Cullinane, who founded Cullinet Software back in 1968 to develop software for mainframes, acknowledges that out-of-state companies have a very different level of philanthropic commitment than home-grown firms. “I used to be able to raise money on behalf of the Boston Public Library by going to a cocktail party and talking to three or four CEOs,’’ he says. “Today, you couldn’t do that, because you don’t have the CEOs based here who are controlling the corporations.’’
So can the “build and sell’’ dynamic be changed?
Fostering more start-up activity is a first step, says Andy Ory, chief executive of the Burlington networking company Acme Packet Inc.
“If you want more big shade trees, you have to increase the number of seedlings that you plant every year,’’ he says.
Ory also says that executives with decades of experience ought to help cultivate a new generation of leaders. “It’d have a big impact to have someone identify an entrepreneur and have coffee with them once a month for the next two years,’’ Ory says.
Angle says that by starting a company in an emerging marketplace - mobile robots for the military, industry, and consumers - iRobot was able to remain independent. “If you’re in a well-understood marketplace, then there’s a well-understood acquisition formula,’’ he says.
Entrepreneurs with the ambition to create an influential, independent company also need to align themselves with investors who share that vision - as opposed to investors who will prod them to sell at the first halfway decent offer.
Last year may have marked a turning point for the tech cluster in New England: Amid the economic tumult, Watertown-based battery maker A123 Systems Inc. was able to go public. It was the largest of just eight initial public offerings in 2009, raising $371 million.
A new role model, perhaps, for “build and sustain’’?
Scott Kirsner can be reached at firstname.lastname@example.org.