Book : Excerpt
Glossary of Banker Speak :: Due
On April 1,
1997, a smiling Dan Gillis, president of the American division
of Software AG, stood on the front stage of a large ballroom
at the Hyatt Dulles in Reston, Virginia. Hundreds of Software
AG employees packed into the conference room, while others
listened in on global conference calls from sites across the
United States, Japan, and Israel. Employees arrived early.
It was standing room only, a first for an employee meeting
of the U.S. division of the German software maker since Gillis
was named president in May 1996. In a memo to employees the
week before, he had told them only that the meeting was for "an
update of our progress" in the first quarter along with
a few "special announcements." But there was an air
of nervousness and uncertainty in the room. They knew it was
much more than a simple update. But was it good news or bad?
had been a lot of speculation. Employees of the U.S. division
were aware that their German parent was losing money and wasn’t
producing new products. Morale was low and turnover had risen
to 40 percent. Too many financial types were working late hours.
There were endless closed-door meetings and hosts of lawyers
and other "suits" swirling in and out. Rumors raced
through the hallways of the Virginia headquarters that the company
was on the block. At one point, it looked like SAP might buy
the German firm. Maybe Oracle would buy them. Then the word spread
that Gillis was firing his entire executive staff. Worst of all,
there was a rumor that Computer Associates would be the acquirer,
a frightening prospect that would have meant the loss of probably
60 to 80 percent of their jobs. Most people were sure the news
could only be bad.
So now, as the
lanky president stood at the front of the room and joked that
he hadn’t brought them together to discuss
the dress code, there was a sense of nervous expectation. After
a few opening remarks, Gillis put up a slide stating: "Software
AG has now become an independent software company." There
was a half-second of stunned silence. After all, it was April
Fool’s Day. Could this be a joke? Then the entire room
filled with applause. "As of yesterday, we signed all the
papers and became an independent software company," Gillis
said, pausing between each of his last words to savor the victory
and allow the concept to sink in.
As Gillis described
the deal and answered questions, he kept driving one point
home: The company was now the master of its own destiny. "The
key point is our success now is totally dependent on us," he
told them. "I think in the past,
we tended to look for excuses, and we could point to our parent
company as an excuse. It is no longer an excuse. There is a tremendous
upside here, but there is also a tremendous responsibility. We
control our own future now. And that feels really good to me.
How about to you?" Robust applause and wide grins, with
just a hint of nervousness, reflecting the trepidation of cutting
loose from the mother ship.
But for a company
that had always waited to see what headquarters in Germany
would say before proceeding, it was a hard message to absorb.
Toward the end of the Q&A session, a question
came in over the loudspeakers from an employee in Seattle. Gillis
had told employees that the buyout would allow the U.S. company
to pursue its own software development and acquisitions. The
caller asked, "Are we constrained in any way from acquiring
or selling technologies that may fit our market but not Germany’s?" In
answer, Gillis pointed to the overhead and read, "Independent
software company. Thank you." After the exhilarating applause
died down, he continued, "We are in no way constrained in
our strategy. No way. We can set our own strategic direction
and it is our own. Nothing can stop us from implementing it.
That’s got to sink in, doesn’t it? I think that’s
the power of this. That's really what’s happening."
do you think, is this a great announcement or what?"
he listened to the applause, even Gillis didn’t know
at that point how great an announcement it really was. None of
Banging the Gavel on the NYSE
was the culmination of months of nonstop labor by Gillis and
CFO Harry McCreery to make their dream of ownership a reality.
They had maneuvered a multinational minefield of complex and
vexing issues to hit a target the size of a pin. They had worked
with our private equity firm to put together financing for
the deal and hammered out an agreement with their German parent
in an incredibly tight timeframe driven by the parent company’s
German banks. Gillis and McCreery had managed to cut the company
loose and saddle it up.
"[Many] folks were very doubtful that we could do this
at the beginning," Gillis told the employees. "The
Germans were doubtful. We were doubtful sometimes. There were
so many complex pieces that all had to come together."
They had a challenging road ahead, but it would lead them to
one of the most successful management buyouts ever. Net income
more than doubled from 1996 to 1997, and revenue increased 16
percent to $181 million. Gillis and his team put in place a bold
new strategy to rapidly grow through strategic acquisitions and
by developing highly complex middleware, which links legacy mainframes
to distributed computing networks and the Internet. Turnover
among the employees plummeted as more than 80 employees received
stock options for the first time, and morale shot through the
roof in the glow of their independence. Customers and suppliers
could feel it, too.
Just a little over seven months after completing the deal on
March 31, their IPO reached $10 per share at the close of trading,
which meant that the $1 million stake invested by the management
team already was worth more than $40 million. Gillis and McCreery,
who seven months earlier had been division managers, were now
on CNN, wealthy beyond their dreams and captaining their own
ship. Gillis was seen by millions on TV doing something that
even the most powerful corporate chieftains can only dream about:
He was grinning above the floor of the New York Stock Exchange,
banging away with the gavel to close trading. How did they possibly
The American Management Dream
It began with
the dream of a "peddler" and a "beanie." In
McCreery’s view, the world of Software AG was divided into "techies," "beanies" (i.e.,
the financial bean counters), and "peddlers" (i.e.,
marketing types). Gillis was the outsider. He came to the company
in January 1995 after another firm acquired Falcon Microsystems,
where he served as executive vice president. Gillis became senior
vice president of sales at Software AG and was named president
in May 1996. McCreery chided Gillis by calling him "a peddler." Gillis
wasn’t slick but was a hard-driving and straight-shooting
Rhode Islander--a creative leader with the vision to dream the
big dream and the persuasiveness and persistence to make it happen.
His simply adorned office is dotted with photos of family, along
with pictures of himself with visiting luminaries such as Steve
Forbes, George Bush, and Colin Powell. Beneath an exterior as
polished and soft-spoken as a private school headmaster is an
unexpected passion. It showed itself in the management buyout
and in his one indulgence that followed his newfound wealth:
a sleek, black Mercedes 500 sedan with plates reading AGS (his
NYSE ticker symbol). He is justifiably a little proud of this
up in Providence, Rhode Island, the middle of five children,
son of a railroad bridge foreman. He attended private schools
and earned a BA in management from the University of Rhode
Island before hitting the streets as a salesman for Kodak.
He had a distinguished two-decade career in the computer industry,
working at IBM, Exxon Office Systems, and Wang. In his last
job prior to Software AG, Gillis had helped grow Falcon’s
revenue from $13 million to more than $180 million before the
firm was sold.
the insider, who had worked at the company for a decade and
understood what made it tick on both sides of the Atlantic.
He is a beanie, the complex-deal strategy guy who can run the
numbers through their paces and make them dance. He has the
studied cynicism and appearance of a tough Chicago cop. (He
later commented on the buyout, "I just did what needed to
be done, same as I always have, just with a more rewarding result.")
This gruff attitude is tempered with an easygoing rapport and
pervasive sense of humor. Above all, he is a contrarian. In a
sea of high-powered European machines in the Software AG Americas
(SAGA) parking lot, his is the lone GMC pickup.
As a kid, McCreery
wound transformers in his father’s
shop in Chicago. He served as a gunner and mechanic in Vietnam,
and when he returned, he ran a service station before earning
his accounting degree at Walton College and earning his CPA.
After cutting his teeth on the books at A.B. Dick, he served
in senior executive positions with high-tech companies such as
Syquest Technology, Automated Microbiology, and MAC Associates.
He had led turnarounds and worked on half a dozen start-ups.
He thought he had put that life behind him when he started with
Software AG--until this deal came along.
About the only thing Gillis and McCreery had in common was that
they both had served in Vietnam, where they had demonstrated
their stamina and ability to hang tough under fire. And they
were back in the foxhole again. They appeared to be an unlikely
combination--in their professional backgrounds, appearance, and
personalities. But they proved to be the perfect duo, because
their differences gave them the complementary aptitudes and attitudes
needed for success.
Gillis and McCreery had built Software AG Americas into a successful
firm--doubling profits between 1995 and 1996. But their German
parent was in deep financial trouble, so it looked as if their
reward for their successes might be a German bankruptcy or an
acquisition that would dismantle the firm. It looked like a dark
time. On the other hand, they thought, this might be the moment
they were waiting for. It could be the opportunity to do more
than run the company. This might be a chance to own it.
The Opportunity Presents Itself
About five months
after becoming president in 1996, Gillis was standing on the
other side of a table in Darmstadt, Germany, in Software AG’s
austere boardroom, staring down Dr. Peter Schnell. Schnell
was the brilliant and mercurial technologist who had founded
Software AG twenty-five years earlier. Schnell had built it
from a start-up to a leader in mainframe database technology,
driving revenue above $500 million by 1989 and becoming one
of the wealthiest men in Germany. At one point in the 1980s,
he was the king of German technology, with a company as large
as Microsoft and bigger than SAP--and an ego to match.
made the mistake of dismissing client/server systems and relational
databases as inefficient computing platforms, and so failed
to develop new products for these fast-growing segments of
the market. From 1989, as global software continued to explode,
revenues flatlined. High overhead and unfocused, dictatorial
management created inefficient operations that were bleeding
red ink. These years of missteps helped bring the company to
the brink of bankruptcy.
Gillis was in
Germany for a monthly meeting of the executive committee. As
he leaned across the boardroom table, he told Schnell that
the company was going to lose DM 57 million. Schnell, who refused
to admit there was a problem, went ballistic. He ran up and
down the table, yelling at Gillis. "The partners
and managers knew I was right, but nobody would tell this guy," Gillis
said. Schnell was in denial and the company was cratering. Iceberg?
It was now October.
Gillis knew they had a limited window of opportunity in which
to act. He knew that their cash-strapped and hemorrhaging German
parent would probably need to sell off assets to pay off debt
coming due in April 1997. He knew there was a good chance the
company would go on the block, and that he wanted to be the
buyer. If anyone was going to own this company, it would be
them. But how do you acquire the $160 million division of a
large German software company that is lurching toward death?
no small order.
Back home after
the October meeting, Gillis called McCreery and controller
Gary Hayes together. "Look guys," he
said. "This is not going to continue this way. One of two
things is going to happen. The Germans will probably bring in
new management that will demand we make more money, so we might
as well start making more money and get ahead of the curve. And
number two is, if we make some money, maybe we can buy this place.
Nobody is going to be interested in it in the condition it’s
in now, so we’ve got to shape it up as fast as we can."
frequently contemplated the possibility of buying the company,
but it had always looked pretty unlikely. The German leadership
would have to be pushed to the wall to part with its U.S. division.
The U.S. software market was the fastest-growing and most sophisticated
in the world. They wouldn’t let
it go unless there was no choice. Now there was no choice, but
the deal was still a long shot. "It was finally clear they
were going to hit the wall and there would be a five-day window
of opportunity," McCreery said. "If you could key it
up and the stars aligned, it could work--so it wasn’t crazy,
but it was pretty far-fetched at the time. The Germans just don’t
needed to find a financing partner who would wait in the wings
for the time to be right, then pull the deal together almost
overnight. "This [was] buying a rather old
company from a German parent," said McCreery. "And
you had to find a buyer who was politically correct to the Germans,
which rules out 95 percent of the people capable of financing
a deal that size. We knew the Germans would want a simple deal,
quick, get it over with, no gaming and no arguing. You really
had to bring the buyer and seller together and you had one shot.
It had to be a match made in heaven."
his tongue at the executive meetings in Darmstadt, but he kept
working on his plans. After the October meeting, he asked a
board member to approach Schnell privately about selling the
U.S. firm. He thought it was an astute and politically correct
way to approach Schnell, but the word came back quickly: "No
way." The German board, finally aware of the magnitude of
the problems, had already decided to take the rare and dramatic
step of replacing the founder. Schnell had been forced out and
a successor was quickly named, but he had not yet taken the reins.
Gillis would have to bide his time a bit longer. "They were
in a position where they had to raise capital," Gillis said. "They
had to sell an asset. They had all the physical assets tied up
with the bank. So the only thing they could sell was something
of value, which was us."
$200 Million Phone Call
A lot of great investing hinges on being in the right place
at the right time. In October 1996, the gods of buyout investing
were clearly smiling down on me. I received a call from Phil
Norton, the CEO of e Plus, a local computer finance and services
company. McCreery leased computers from e Plus and had contacted
him to see if he could put him in touch with equity firms that
might be able to back the Software AG deal. I had joined the
e Plus board just four months earlier at the recommendation of
my partner Fred Malek. I had known Software AG from my days as
a high technology investment banker at Morgan Stanley, so I was
interested when Norton pitched me on the opportunity. The company
had a strong, if tarnished, legacy and a good reputation for
Two days later,
on October 7, 1996, over lunch in the bustling Market Street
Bar & Grill in
Reston Town Centre, I met with McCreery and controller Gary
Hayes along with Norton and e Plus executive vice president
Bruce Bowen. I found out that the U.S. division had an outstanding
customer base of 1,500 companies, including Sprint, Morgan
Stanley, Delta Airlines, the Federal Aviation Administration
(FAA), and Georgetown University. The U.S. unit was growing,
but had not been allowed to pursue acquisitions and was forced
to send any cash it generated back to Europe to bail out its
bleeding parent. It appeared the German company might be forced
to sell the business and the expected asking price of $85 million
was in the right range. I was impressed with the managers and
that they were willing to put $1 million of their own skin
in the game. It almost sounded too good to be true. Something
had to go wrong soon. There are hiccups in every deal.
Both sides survived
this first mutual interview. In November, after his dance around
the table with Schnell, Gillis and McCreery met me one evening
in the noisy lobby of the Reston Hyatt. There, on the wicker
couches under the sweeping glass skylights, we began to discuss
the terms of the management agreement. Gillis and McCreery
had done their homework and knew the rough terms of management
deals. We agreed management would receive options to acquire
15 percent of the stock at the investor’s buy-in
price. Of that, 12 percent would be granted at closing and the
rest contingent upon meeting performance goals. Both sides knew
that a 15 percent management interest was at the high end of
the normal range at the time, but they had created the deal opportunity
and had a strong strategy moving forward. I looked Gillis in
the eye and we shook hands. We were ready to go.
would vest over a three-year period and we wouldn’t
touch the current management compensation system. Management
would make an investment of up to $1 million for additional equity.
For all of us, this was the most important deal of our careers,
yet the agreement had just four points and fit onto a single
sheet of paper.
Keeping management compensation sacrosanct ended up being our
ace in the hole. Another buyout firm that was talking with Gillis
and McCreery about the deal had a different approach. The investor
asked Gillis what he made. Gillis responded that his total compensation
with bonuses was more than $600,000. The investor suggested that
it was too high and might have to be adjusted. Obviously not
the right answer. During that one fatal phone call, the investor
had demonstrated his penny-pinching style. This was incredibly
shortsighted. If he was willing to be tight-fisted even before
the deal was struck, Gillis thought, it was painful to imagine
what he might do when he became the majority owner of the company.
In this case,
our rival lost the deal. Given that our investment of under
$30 million had grown to more than $200 million at the time
of the initial public offering (IPO) and much more afterward,
that call had cost that would-be investor well over $200 million--a
little pricey no matter what your calling plan. These deals
are all based on trust, on all sides, and it doesn’t
take much to spook a potential partner. This incident helped
to highlight our emphasis on supporting the managers we back.
It is penny-wise and pound-foolish to sink so much into a company
and then quibble with the very people who have the power to
make the investment pay off.
In my meetings with Gillis and McCreery, we had put together
the structure of the buy-side of the deal. The management agreement
was set and the overall strategy for financing was in place.
Now, all we needed was a willing seller.
Becoming the White Knight
it would take a little while for the new CEO to come to the
full realization of the company’s predicament.
As expected, when CEO Erwin Koenigs appeared at his first meeting
in Darmstadt, he was upbeat. "In December, he still felt
pretty good," Gillis recalled. "He was going to save
But then the
full weight of the company’s problems hit
him. His "welcome to the company gift " was finding
out that he was losing $3 million a month and had $70 million
of bank debt coming due in 120 days. Rough day. Shortly after
Koenigs had this epiphany, Gillis received a troubling call from
his German boss that the company may go bankrupt if other banks
decided to call their loans. It was only eleventh-hour negotiations
by the aggressive and intelligent Koenigs that kept bankruptcy
at bay. Even so, they only earned a reprieve to show a profit,
raise cash, or face default by March 31. There followed a brief
period of euphoria when it looked as if SAP would buy out its
German compatriot, but the SAP board ultimately turned down the
deal. There would be no white knight to ride in to save them.
The clock was ticking.
direct. He started the January meeting with the words, "Gentlemen, we have a problem." Bank
loans were coming due very soon. He began to lay out the situation
and said they would need to do something dramatic. The situation
was utterly grim. Koenigs was telling his top management team
that this venerable, thirty-year-old global software giant
was going under. They were toast.
at the meeting were probably tuning him out and trying to remember
where they could dig out the latest version of their resumes.
They hoped Microsoft was hiring. But, oddly, deep down inside,
one man in the room was smiling. It was the U.S. country manager,
Dan Gillis. This was the moment Gillis was waiting for--his
whole life. At the break, he walked up to Koenigs and asked
him, "Do you
have a backup plan?"
uttered the most important phrase of his career: "I
have one for you."
buy the U.S. company from you."
Koenigs got it immediately. It would be a triple bank shot,
and Gillis had just teed it up for him. He would sell all or
a piece of the U.S. business, pay off the banks, save the company,
and preserve German jobs. The deal would put the money into the
coffers of the German firm in time to meet its March 31 bank
loans. But that was less than three months away. Could that get
done? Koenigs was planning a trip over to the United States in
two weeks, and Gillis suggested they meet then to discuss the
On January 30,
1997, Koenigs flew into Washington for a meeting with the managers
of the company’s U.S. division. When
Koenigs arrived at the Reston Hyatt, he was having second thoughts
about the deal. He wasn’t keen on the idea of getting into
bed with some hotshot U.S. financiers. He was afraid that after
selling the company, the U.S. buyer might flip the acquisition
for a tidy profit. McCreery had already spent the evening and
entire day preceding Koenigs’s visit arguing the merits
of the deal with German CFO Volker Dawedeit. After prodigious
efforts--and even more prodigious alcohol and food consumption--Dawedeit
agreed that there really was no other way to save the company.
This was their only marketable asset. They couldn’t sell
stock in the parent because the equity was tied up in Schnell’s
nonprofit trusts. Koenigs still had to be convinced. The discussions
with Koenigs stretched from 5:30 p.m. until well after 10 p.m." Finally,
he agreed. An excited Gillis phoned me at 11 p.m. to tell me
it was show time. We were set to meet with Koenigs at 8:30 a.m.
the next day.
No Second Chances
I was nearly
asleep--ready to dream about once-in-a-lifetime deals like
Software AG--when Gillis called. He said he thought we could
make a deal, but we had just one day to do it, and it had to
be tomorrow while Koenigs was in town. As I hung up the phone
and looked at the dark ceiling, I was highly skeptical. Could
a deal that came together so rapidly hold together? This was
a key German asset. Would they really sell it? And what about
Koenigs? I’d never
met the guy and in ten hours I was supposed to sit across the
table from him and do an $85 million deal.
Gillis and McCreery
had briefed me fully on the terms of the structure, but chemistry
with Erwin Koenigs would be crucial. My father is German, so
I hoped I might understand Koenigs a bit. And I was prepared
to bring out my two-word German arsenal if needed: "Wie gehts?" If he followed up in German,
I’d be dead. More seriously, if the chemistry was wrong
or he got the sense we’d damage his position in the U.S.
market, the deal would be history. There was no warming-up period
or informal meetings over cocktails. We had just one shot to
make this work. If Koenigs as much as didn’t like my necktie,
the deal could be over in minutes. I slept poorly as I churned
over the day ahead. It might have been less stressful if I were
lukewarm about the deal. But I knew if we could buy this company
with this management team, it could be a screaming homer.
We met early
the next day in a conference room at Software AG’s
Reston headquarters. The meeting began well and only got better.
Koenigs was a disciplined guy but very direct and struck me more
like a decisive Silicon Valley CEO than a German bureaucrat.
He was a man of action who needed to get something done, and
his CFO, Volker Dawedeit, was a mountainous guy with a wonderful
sense of humor. It is our style to be highly flexible as partners
and we pride ourselves on not acting like snooty New York bankers.
Koenigs and Dawedeit responded well and the chemistry was good.
We got down to terms quickly and, amazingly, hammered out the
deal. But Koenigs was blunt and any misstep on our side could
scuttle the deal. We had to nail it. Within a week, we had exchanged
a few pages of general guidelines over international fax. These
documents would ultimately become more than 300 pages of dense
purchase documents once the lawyers were through with them. It
was a long way to the closing dinner.
Every day, Gillis
called Koenigs to make sure he was still on board. The deal
of his lifetime had been put together so quickly that he wanted
to make sure there wouldn’t be a change
of plans. One day in March when he called, Koenigs asked him
expectantly: "When are we going to close this deal?" Gillis
breathed a sigh of relief. Koenigs needed this deal as badly
as he did. "It was then I knew the deal was going to go
through," he said.
Decisions in Darmstadt
In early March,
I went with Gillis to Germany to present the plans to the German
parent company board of directors (called the "Vorstand")
and labor board. The labor board, which is comprised of employees,
plays a central role in German company corporate governance.
The board's reaction could make or break the deal. About 50 labor
representatives gathered around a conference table for the presentation.
The fact that
I could manage to fire off a few rough words in German at the
meeting didn’t hurt. We knew things were
going pretty well when one of the board members, smiling, recognized
my last name as German and asked if I had relatives in the shipbuilding
industry. I didn’t, of course, but at least they were warming.
The key selling point was that the deal would allow the company
to make its bank payments and protect the more than 1,400 German
jobs. They also felt comfortable with the fact that we were backing
the incumbent American management team they had come to know
and that we wouldn’t dramatically alter the strategy after
we controlled the asset.
were hoping for a favorable outcome, I wasn’t
prepared for the reaction we received. At the close of the presentation,
the representatives began pounding their fists on the table.
I didn’t know whether this meant "Throw this bum from
D.C. off the balcony" or "Let’s close." But
they were all smiling, so I assumed, as I later found out, that
this was a sign of approval. It was music to our ears.
Suspicions of Affairs
The work was
relentless. Gillis and McCreery were in a race to see who could
get to the office first. Gillis finally conceded the competition
when he found out McCreery was coming in at 3 a.m. The two
financial people in McCreery’s office were
working night and day hammering out the details of the plan.
The work was so intense and so secretive that the wife of one
of the men later told Harry she suspected her husband of fourteen
years might be having an affair. After all, he was working eighteen-hour
days, wouldn’t tell her what was going on, and came home
every night with a smile on his face.
she wasn’t too
far off the mark. For the core group of people who worked on
the deal, most of whom had spent their careers chained to large
corporations, this dalliance with a dream was risky business.
It was a step away from the button-down corporate existence,
giving up the tired German parent for the excitement and romance
of a start-up. With this kind of heart-pumping passion, was
there any need for sleep?
was a bit too much excitement. Two weeks before closing, our
lead lender, who was providing $15 million in financing, pulled
out. We couldn’t believe it and immediately went
into crunch mode. The software business was a tough sell to the
bankers in the first place. There are few hard assets and the
technology is difficult to understand. Now, with the deal deadline
staring us in the face, we had no financing. Every deal has a
visceral panic time and we had just hit ours. Sweat was beading
on our foreheads. Miraculously, McCreery pulled out all the stops
and found another bank to step in and back the deal. That got
him the "deal MVP" honors, hands-down. "At the
last minute, it was put together with baling wire," he said.
The closing on the night of March 31 was almost anticlimactic,
with a bevy of lawyers brooding over the fine points of painstakingly
detailed documents in the Washington offices of Thayer counsel
Arnold and Porter. Anticlimactic for everyone except McCreery,
who, wrestling with details until the end, finally breathed a
sigh of relief. He did a victory dance in the office. Free at
and McCreery prepared painstakingly for this deal, they also
got some breaks along the way. "It was a lot of
luck," McCreery said. "We chose the right partners.
They threw the founder out at just the last minute. A month later
and we might not have gotten the deal done."
In the year
that followed the April 1 employee meeting, morale rose, turnover
dropped by more than half, productivity increased, and the
firm undertook an ambitious program of R&D. Within
six months, they had made their first acquisition. Gillis brought
in expert marketers from Iomega and hired a chief technology
officer along with more than 100 employees. The company, which
became known as SAGA Software, began developing its own products
that would transform it from a software distributor to a creator.
They established a strategy to lead in middleware, the software
that links the Internet to legacy mainframes.
Even with its East Coast location, the company was becoming
downright hip. Gillis started out one employee meeting by donning
sunglasses and moonwalking across the stage. No Dorothy, we are
definitely not in Darmstadt anymore.
The Road and the Claw
The roller coaster
ride was just beginning. Because the new company was performing
so well, the next step was to start a grueling two-week roadshow
leading up to the IPO. The IPO was a little earlier than we
had originally anticipated, but the company and the market
were right. Many people in finance like to endlessly debate
the merits of timing an IPO, but for me the rule is simple:
You get it done when the market window is open. You have to
feed the ducks when they’re quacking.
act on the way to the roadshow was weeks of presentations to
bankers, not to mention eighteen- to twenty-hour days preparing
Securities and Exchange Commission (SEC) filings. Just before
the road show started, Gillis ran his presentation by the bankers
at BancAmerica Robertson Stephens in San Francisco. His presentation,
designed by a committee of investment bankers, landed with
a dramatic thud. It drifted all over the place. It had no punch.
There was silence. Then, one of the older sales representatives
looked up and said, "I don’t get it." Gillis
and McCreery looked at each other and couldn’t believe
it. I was in the back of the room, bleary-eyed, watching our
dream of an IPO evaporate. If the bankers didn’t get it,
how could they sell it to investors? Crunch time again. The bankers
gave them suggestions and discussed pricing during a five-hour,
five-wine-bottle dinner, which eased a little of the pain of
the day’s performance.
Gillis and McCreery
had started that first day on the road at 5 A.M. and didn’t make it back to the elevator of their
San Francisco hotel until 11:30 P.M. And they still didn’t
even have a final presentation. McCreery pushed the button for
the elevator and looked over at Gillis. They were absolutely
whipped, yet they knew there were more than twenty days like
this ahead of them.
"How did you like your first day?" McCreery
The two men
looked at each other and burst out laughing. The elevator doors
opened and shut. Another elevator opened and shut. Still they
couldn’t get on. They were on the floor laughing. "We’ve
got three more weeks of this," McCreery thought. "I’ll
never make it."
Gillis and McCreery
tore the presentation apart the next day on the plane from
San Francisco to New York. They threw out all the investment
banker’s advice and
honed the pitch the way they wanted it. If this thing was going
to flop, at least it would do so on their terms. The new presentation
was a dramatic improvement and played to rave reviews in meetings
with analysts and individual investors. They gave sixty-eight
one-on-one presentations and about a dozen investor breakfasts
and dinners in some twenty U.S. and European cities.
They flew from Kansas City to Minneapolis to San Diego to London
to Edinburgh, typically touching down in three cities per day.
When the roadshow started, they planned to be austere. They needed
clear heads, they reasoned, so they decided they would be teetotalers
until it was over. No beer or wine for the whole roadshow! Discipline!
By the end of their first day, they got on their third flight
and demanded two beers, followed by two more.
they had a dinner meeting scheduled with an investor in a San
Diego restaurant. There was a noisy retirement party in the
background. The investment banker had arranged for a massive
tray of seafood. Gillis and McCreery picked at it as they waited
for the investor, who had gotten lost. Finally, a diminutive
woman entered the room and sat down at the table covered with
crustaceans. They offered her something to eat. "I can’t
eat seafood," she said. "It makes me sick." There
were crabs and lobsters everywhere. Gillis and McCreery burst
out laughing. Needless to say, she didn’t buy the stock.
But that wasn’t
the last they saw of that seafood. The next morning at 6 A.M.,
the two men were ready to start another day of pitches in San
Diego before heading out to Los Angeles and San Francisco.
At their first meeting, Gillis opened the book and a crab claw
fell out onto the table.
At one point,
after a series of twenty-hour days, Gillis ran out of steam.
In the middle of an afternoon presentation, he just couldn’t
"I’m out of gas," Gillis whispered to McCreery. "I
don’t think I’ve got it in me to finish."
"You’re not going to die on me, are you?" McCreery
Through an act of will, Gillis took a breath and made it through
the presentation. Such is the glamour of leading an IPO.
More than two
years after closing the original management buyout, Gillis,
McCreery, and I met again in the Market Street Bar & Grill
to look back. Back on that auspicious day in late 1996 when I
had first met McCreery at this same spot to discuss the deal,
they were crazy dreamers who actually had the chutzpah to think
they could pull off this wild deal. Now they are leaders of one
of the most successful management buyouts ever--and multimillionaires.
And through that one deal, I realized one of my largest business
dreams and became chairman of the board of a wonderful software
company publicly traded on the Big Board. A lot has changed.
Across my desk,
I see hundreds of potential deals that are just as crazy. Many
fall by the wayside because managers don’t
have the vision, know-how, or guts to make them happen. Gillis
and McCreery would be the first to tell you that this roller
coaster is not for the faint of heart. But it is one hell of
"Everybody tells you what you can’t do and you have
to totally ignore it," Gillis said. "They say you can’t
buy it from the Germans. You can’t take it public. You
can’t grow it. You can’t make it profitable. You
can’t do your own products. Don’t listen. You just
have to do your own thing. Then, once you do it, everyone says, ‘I
knew you guys could do it.’ You get all this outside noise,
but you just have to ignore it and keep going."
Was it a good
deal for the German parent? Absolutely. Software AG Germany,
snatched out of the jaws of death, survived and grew nicely
under Koenigs’s and Dawedeit’s leadership.
In 1999, following the U.S. example, Software AG did its own
IPO--the largest European software IPO ever. It is now is itself
a public company with a quarter billion dollars in the bank.
It also still retains a stake in the U.S. firm and receives a
large and growing royalty stream on product sales. "Tell
me that was a mistake," said McCreery. "You freed us.
We send through a lot more money because we are free. You’re
a healthy, viable company and it turned around the day you did
I asked Gillis
and McCreery: How has this changed your life? "Dramatically," says
Gillis. And McCreery chimes in wryly, "What life?"
"Oh, it’s changed dramatically for me and for Harry," said
Gillis. "We’re both financially much more secure than
we ever were before. It has been fun to do a deal like this.
It was exciting, and I think it’s just starting. There
have been ups and downs trying to make it work, but I think we’ve
got a good management team and we believe we can make it happen.
We’re gaining momentum."
Bringing Their Dream to the World
What was the high point of the experience? Both men agreed it
was when they took their new company to the New York Stock Exchange
with the IPO on November 18, 1997. The night before, we all drank
brandy and smoked cigars at the Windows on the World restaurant
at the top of the New York World Trade Center. The next day,
we were there for the opening bell and stayed at the exchange
through the day--watching the stock, which had a value of $1.47
when we bought the company six months earlier, climb to $10.25
at the close.
At the end of the day, McCreery woke up Gillis from the sofa
where he had crashed just off the NYSE platform. The president
of the NYSE led Gillis, McCreery, and me, along with other employees
and family, onto the crowded platform overlooking the exchange.
The trading floor below seethed like an anthill. Gillis slid
the Lucite cover off the red bell button. It looked like the
kind of button the president would push to launch a war. At fifteen
seconds to 4 P.M., Gillis hit the button that starts the powerful,
capitalistic chime of the closing bell and held it down with
his left hand as he pounded the large, weathered wooden gavel
with his right. It resounded against a pitted wooden chopping
block where hundreds of leaders of industry have brought their
dreams to the world. CNN and the world looked on. On the third
blow of the gavel, the bell stopped ringing and the trading floor
erupted into applause.
"That day was really a high point for me," said Gillis. "My
family was there. The management team was there. We were all
there. We’d just worked our asses off to get there."
"I just wish we could remember it," said
"We’d done the deal," Gillis explained, "went
through the banking, did the roadshow, and all of a sudden, you
know, the culmination is you end up in New York at the NYSE and
you’re absolutely exhausted. You’re really running
"Yeah," said McCreery. "But it doesn’t
get any better than that. It doesn’t get any better than