Andrew Flip Filipowski founded a company called Platinum Technology Inc in 1987, following an acrimonious split with his co-founder at long-vanished DBMS Inc, a software company built on the success of the Cullinet pre-relational database IDMS, a product that faltered in the mid-1980s. Filipowski had previously held an executive level position at Cullinet. Flip lived to see both Cullinet and DBMS acquired by what even sedate CNN called in its report on the CSC grab a software scavenger called Computer Associates International Inc, and to add to his woes, he was forced out of DBMS in a boardroom dispute, a struggle that resulted in litigation (now settled), a grim episode that seems to have provided the pony-tailed and diamond earringed Baby Boomer a lot of spiritual rocket fuel and need to get to be undisputed top dog. Platinum Technology, the company he founded in Oakbrook Terrace, Illinois, a featureless suburb of Chicago was focused for the first seven years of its life wholly on the DB/2 market. Flip matched move for move the actions of the other main player in that area, BMC Software Inc.
By Gary Flood
The strategy worked; partly by discounting heavily to gain market share quickly, the fledgling company boomed. Its first full year’s revenues (1988) were $1.4m; it had risen to $49m by 1992. For every $1m backers invested in a 1989 financing, they received $80m back on the day of the IPO. But Flip saw that DB2 was no longer a long term growth prospect, and, quite sensibly, he determined to makeover Platinum, making it a broader based, mainstream software tools company. This he did with a highly ambitious program of enforced growth through acquisition. For he is convinced that size matters when it comes to enterprise software: CIOs are dealing with fewer and fewer software vendors. Clearly, he sees Platinum as being such a one – There are a handful of billion dollar plus software companies, and once we are in that leadership group we are worthy of consideration and attention by any investor. Given that he has untold numbers of products in a number of core IT business streams, he has certainly managed that, albeit he has not hit the $1bn mark yet. Yet Platinum’s market capitalization – which is a crude yet accepted kind of Wall St financial virility test – only values Platinum at only $1.85bn, when its closest real rival, CA, which admittedly is at least seven times its size taken in terms of its 1997 revenues of $4.04bn (released last April), rates a hefty $31bn confidence tag from the market. Platinum’s 1997 full fiscal and fourth quarter figures, released earlier this week (CI No 3,345), show why. For in contrast to the Charles Wang-Sanjay Kumar money factory operating out there in Islandia, Filipowski, the Bill Gates of Chicago, according to an Illinois business paper, while building his company up to a respectable size – ten- year old Platinum, when still a DB2 tools company, closed 1992, the year after it went public, on sales of just $49m – has failed to fully assimilate the ongoing costs of building his operation up so rapidly. The company has failed to make a net profit for four full fiscal years now. For the fourth quarter ending December 31 Platinum saw revenues rise 39% year on year, from $151.m in the same period in 1996 to $211.2m, with revenue for 1997 as a whole rising 33%, from the previous year’s $468.1m to $623.5m.
Overhead or millstone?
But to balance this impressive increase in sales of both software products and professional services, increasingly an important aspect of Platinum’s overall business mix, there is the overhead – or is it millstone? – of all the acquisitions Flip’s instigated in order to grow the business. If these various restructuring, one-time, and merger-related charges hadn’t had to be taken into account, the company would have been able to report net income for the fourth quarter of $9.7m, and net profits for the year of $34.9m. But factor those costs in as we must, Platinum had to own up to net losses of $23.7m, including after tax charges of $56.0m for merger costs and acquired in-process technology; for the same period in 1996 the company lost $27.7m, including after-tax charges of $37.4m. And for the year as a whole, the company lost $117.8m on that $623.5m – and without charges, that would have been $34.9m, compared to an operating loss of $12.2m. In 1996, the total losses after charges (of $52.8m) was $64.9m. Platinum spent $13.5m on general administrative/other one time charges, $57.3m on restructuring costs, $67.9m on acquired in-process technology, and $8.9m on merger costs over the year, or $134.1m, almost as much as it spent on product development or support for the year, $187.5m. Even Flip can’t remember if he did eight or nine buyouts last year, judging from the conference call. (We think it’s eight, but in general we’ve long since given up counting.) According to Michael Cullinane, the firm’s executive vice president and chief financial officer, Platinum has seen growth in all six of what it sees as its key business areas – database, up 35% for the year, systems management (up 57%), application lifecycle (15%), Data Warehouse (42%), professional services (16% growth) and Year 2000 (up 50% from the third quarter alone). A year ago (CI No 3,088) we reported on a wild Wall St rumor putting Platinum in play, with CA itself given as one likely purchaser. Certainly the past 12 months since that rumor went nowhere has seen some excellent deals for the company. In July, it was able to announce a headline-winning tie-in with Microsoft, helping to bolster and support that company’s repository technology for team software development. Platinum will make the thing available on Unix, mainframes and other platforms such as the AS/400, and it is still expected Platinum will merge its own repository developments toward the Redmond model over time in addition. And just after New Year (CI No 3,317), it received an equity investment believed to be in the $40m range from Intel Corp, as sweetener on a deal to co-develop products to cut cost of ownership and other desktop management issues. But like a struggling alcoholic going back to the bar one more time after swearing off the juice yet again, Platinum just can’t stop itself buying companies, and thus adding to the merger overdraft, no matter how often Flip says it’s done for the moment – in January it couldn’t resist snapping up the rump of burned out process management software specialist Learmonth & Burchett Management Systems Inc, for around $70m-$80m in stock, dependent on price at close of sale (CI No 3,319). This deal is taking longer to complete than anticipated, said Flip in the conference call, as the Securities and Exchange Commission is taking a very close look at how true a pooling of interests (for transaction purposes) the deal is, given that the originally British company sold off a large chunk of business to Select Software Tools Inc last year (CI No 3,077) for $2m cash. So on the one hand the endless hunger for growth and more Platinum customers; on the other the postponement of achieving profitability. the seesaw keeps swinging. Last May (CI No 3,152) Flip told Wall St analysts he’d completed all the acquisitions he wanted, and that he was ordering a round of job cuts (10% were culled) and efficiency measure to achieve profitability. A theme he reiterated in October (CI No 3,267), discussing the third quarter’s numbers, and yet once more this week: Profitability is a high priority for us… We will concentrate now on growing rapidly and as profitably as we can. Certainly, the company is aware of the need to do something about the red ink, recently securing $145m in a private placement for convertible subordinated notes due in 2002, in order to be more flexible in structuring long-term financing arrangements with customers, which we anticipate should ultimately decrease our cost of capital. Cullinane sees significant opportunities for improving margins, overall, and also reports himself pleased with the way DSO was down to 76 days in the fourth quarter 1997, down from 89 in the
fourth quarter 1996. The company continues to win customers, with some 40 multi- million dollar license and service agreements concluding in the quarter alone, with three over $10m. It’s released some terrific products in 1997, too, like its ProVision integrated systems and database management suite and Advantage application development framework, is plunging into Year 2000, and is overall making the right moves. But it’s this endless seesaw of grow-quick-by-buy and endlessly-living-on-credit that worries us, as it must Platinum’s investors. Flip has got to the stage of boosting his company’s ability to seamlessly integrate all acquired businesses into one cohesive company, implying that this skill could do with more practice! And in fact the company does intend, yet once more, to purchase companies in 1998, though this time not small, usually fairly undeveloped product and technology companies, but consultants. This is Flip’s next priority area, as he believes that to adequately cover the 200 metropolitan areas in the US he wants to work in, he’ll need 8,000 consultants overall, perhaps even 10,000, by the end of the decade. Since his headcount for that sort of employee is less than half that right now expect yet more acquisitions, this time in professional services for firms that can help him address that geographical weakness. It would be surprising, then, to see Platinum close fiscal 1998 in profit, if this is all still in the pipeline. In a way, does this matter? Short of a board revolt or a shareholder coup, no one seems in a position to get Flip to curb his growth ambition and concentrate on profit making. The oft-made contrast between CA and Platinum may be helpful here.
Pink slip flamethrower
CA grew by acquisition, too, and until 1991 or so, when it started to build its own real products (CI No 3,209), its reputation, fairly earned, was of a company basically buying kaput type software companies, and raiding their captive customer bases until their pips fairly squeaked. Making profit on this business plan was a lot harder than Filipowski’s version. For all Wang had to do was play his pink-slip flamethrower over the acquired hulk a couple of times, burning out all the admin and marketing types and leaving alive only the remaining wretched developers. The resulting operation he could then run it at expense rates tighter than Placido Domingo’s waistband. Flip, on the other hand, has done it the hard way, aiming at small, new, technology companies, often with fairly negligible customer bases. He’s assumed a technology development and R&D burden Wang never had to face. Conclusion? Flip’s style may annoy some people, and he’s certainly one given to puffing his chest out, but overall he’s doing a good job over there in Chicago. The only danger is that he can maintain this tightrope walk he’s doing between bulking up and paying the taxman long enough to get to the other side of the chasm. Think what a $1bn Platinum that was really focused on gaining market share through technology could do, say, or what Flip could build if he hadn’t got to worry about the endless merger costs. Or maybe the real truth is that he just doesn’t give a damn about the overhead and just wants to walk the Big Walk – in which case he may be a much more dangerous character to Platinum’s investors than we’d like to think. And as far as the market thinks – Platinum’s share price has nearly climbed back to year high of $31.125 from low of $10.25, closing Thursday at $30. Now if it only made money, think how higher that could be!
