Investments Pump New Blood Into Old Firms
Investments Pump New Blood Into Old Firms
By Nick Wakeman, Senior Editor
A growing number of information technology companies are using equity investments as the glue to cement their relationships with up-and-coming firms that have promising technology.
Companies such as American Management Systems Inc., Andersen Consulting, Cisco Systems Inc., Computer Sciences Corp., Deloitte Consulting, Electronic Data Systems Corp., Science Applications International Corp. and Silicon Graphics Inc. in the past year have invested in other, usually
smaller companies that have a hot technology.
By putting up their own money and making their own capabilities available to younger companies, established players are getting quicker access to new capabilities and offerings that may have taken several years for them to develop on their own, company officials said.
"Speed to market [with new technologies] is probably the biggest issue," said David Wilkins, global managing partner for ventures and new business at Andersen Consulting of Chicago.
Companies in the IT industry have long formed partnerships and alliances, "but money tends to cement people together," said William Roper, chief financial officer for SAIC of San Diego.
In the government space, the companies that are drawing the most investment and partnership attention are the ones with promising technologies in areas such as security, network infrastructure and just about anything to do with the Internet and electronic government. For example, both Andersen Consulting and Deloitte Consulting of New York have made equity investments in Epylon Corp., a San Francisco company that provides electronic procurement software and services.
Deloitte Consulting has the first right of refusal on projects in the K-12 education market, while Andersen has that right in the state and local government market, Epylon officials said.
"It's a form of 'co-opetition,' " said Greg Pickard, managing director of Deloitte Consulting's Sacramento, Calif., office that oversees the relationship with Epylon.
Andersen, Deloitte and SAIC have each formed in-house venture capital organizations that look for new companies to invest in.
SAIC has been forming alliances with equity investments for several years, but it wasn't until late 1999 that the company formed SAIC Venture Capital Corp. to manage the nearly 30 companies SAIC has invested in, Roper said.
Ten of the companies are publicly traded, and about 20 are private, he said. SAIC has invested about $200 million, with the size of the ownership stake typically ranging from 5 percent to 10 percent, and on rarer occasions getting close to 20 percent, Roper said.
Deloitte formed its venture fund in early 2000 with a pool of $500 million in capital and resources, such as consulting, management services and intellectual property, said Oswald Mata, the partner who manages the venture fund.
The Deloitte fund made 14 investments this year, he said.
Andersen also is working with a large pool of money, putting up $500 million of its own cash when it formed AC Ventures in December 1999, and raising another $500 million from other sources, company officials said.
In the past year, the fund has made 33 investments, mostly in the electronic commerce area.
None of the companies would disclose the amounts of their equity stakes in individual companies.
Epylon is its only investment specific to the public-sector market, but Andersen wants to make more in that area, Wilkins said.
What sets apart these funds and the individual investments from traditional venture capital groups is that these investments aren't just about investing money, company officials said.
"This isn't about putting excess capital to work," Roper said.
While the investments can reap financial rewards on their own, there needs to be a strategic fit between the two companies, company officials said.
The right fit is driven mostly by what customers want or where the company making the investment thinks technology is headed, company officials said.
AMS of Fairfax, Va., struck a deal with govWorks Inc. of New York in March as a way of bringing a more complete electronic commerce solution to its government customers, said Katherine Morales, vice president in AMS' state and local government solutions group.
Her company's strength is in back-office financial management applications.
With more governments looking to field electronic commerce applications, it made business sense for AMS to form a close alliance with a provider of the Web portal technologies to build the online applications, Morales said.
"The equity means we are committed partners," she said.
AMS and govWorks have worked together on solutions such as paying parking tickets and utility bills and completing school registration online. More projects are expected to be announced soon, she said.
With the close relationship in place because of the equity investment, the companies often work together on product development, marketing, training and other activities, company officials said.
Cash often isn't the motivator for the company receiving the equity investment, said Kaliel Isaza-Tuzman, chief executive and co-founder of govWorks.
"We knew early on that as a product company, we needed to partner with a services organization," Isaza-Tuzman said.
The close relationship with AMS allows govWorks to concentrate on what it does best: developing its products, he said.
The relationship also means that govWorks products work better and more quickly with AMS' services. "We live together, so we'll continue to be a perfect match even as the market changes," he said.
In addition to AMS, govWorks is working on equity relationships with Arthur Andersen and FleetBoston Financial Corp., he said.
If the investment is large enough ? usually over 10 percent ? an official from the company making the investment may receive a seat on the board of directors of the company being invested in, company officials said.
For example, SAIC's most recent equity partnership was with Ultra-Scan Corp. of Amherst, N.Y., which makes live-scan fingerprint applications. Mark Hughes, an SAIC sector vice president, joined Ultra-Scan's board as a result of SAIC's investment.
Many of the investment ideas that SAIC, Andersen and Deloitte pursue come not from companies making pitches for cash, but from their own business units that are in the field developing solutions for their customers.
"Each of our industry groups are looking at what our clients want in terms of services or products," Andersen's Wilkins said.
When a business unit finds a company with a hot technology or other offering, the idea gets funneled up to the venture capital group, he said.
"We don't like to do deals unless there is an internal line sponsor," SAIC's Roper said.
When the venture capital organization finds an investment opportunity on its own, it then looks internally to SAIC to find a business unit that will act as a sponsor, he said.
When no internal sponsor can be found, the investment is called an "orphan," he said. "And orphans don't do as well."