Terry Cunningham’s Adventures: Crystal and Coral8 (Part 5)

SM: With all the companies you merged, what types of people made it through those mergers?

TC: They were the ones who could get to the table and arm wrestle over the issues. They could then go for a beer after and have some fun. They didn’t take themselves too seriously, and they understood that one day we thought we knew what we were doing while the next day we would change directions. The knew we would keep morphing and evolving.

SM: Let’s talk about the financial engineering of this $350 million deal.

TC: Steve was the mastermind behind it all. Seagate looked at this as a way to improve their blended margins. They did $8 billion in revenue at 21 points margin on disk drives. They wanted to put a billion in software revenue at 90 points margin as that would move the stock.

During the first conference call, after our CFO went through the script, the first question was, “Al, if you take the software revenue out of your numbers what are your margins?” He hit the mute button and slammed his fist on the table. Clearly they needed to know the software business was doing well, but disk drives were clearly the $8 billion business in the room so it could not be overshadowed.

They spent $33 million in cash buying up all of these companies. Some were big and some were small. There were some $15 million acquisitions, Crystal was $20 million, and the biggest one came as part of the Conner merger. They had bought another backup company called Palindrome, and got Arcada as part of the Conner merger. Those were two competitors, arch-rivals who hated each other’s guts in the marketplace.

SM: The good news is that you had the customer base coming together. How did you resolve the arch rivalry?

TC: These people hated each other. I remember after the merger we got the management teams from both companies sitting at a long table. I made everyone turn off their cell phones and pagers. At that point, Palindrome was losing money and Arcada was break even at best.

There was no eye contact across the table. There was lingering hostility. They looked at me and if I asked them a question, and they would address each other indirectly through me. My mandate was to create a profitable software company out of this. The financial model was broken and it had to be fixed, and they were mature companies who were doing $60 million-$80 million. I went to the whiteboard and wrote $100 in revenue, 8 points in COGS but let’s round to 90% gross margin, R&D 15%, admin 10%, sales and marketing 35%, and 25% EBITA. I said, “this is what we are going to do”, and the whole place broke into laughter. That was the first time anyone laughed.

They were laughing because they thought what I had written was impossible. We laid out a 7-quarter plan and how we were going to get from where we were, one quarter at a time, to how we were going to get to where we needed. That became the cause. An interesting thing then happened. Instead of sitting there and spitting at each other, they became on the same team as they told me I was crazy. Little glimmers of hope then began to appear. They started thinking how they could get R&D to 18%, and creative juices started flowing from there. I saw them literally come together. It was magic.

We used to do quarterly management meetings. I killed all the executive perks. Every company we bought had vice president parking and stuff like that. Instead, we just formed a decision team. It was the CEO, the VPs, and directors. We had 47 people in these meetings every quarter. The point was not to just make a decision, but to help communicate it and get buy in. The decision team was not built based on title but on function. It made all the difference. That was one of the things we did really well.

This segment is part 5 in the series : Terry Cunningham’s Adventures: Crystal and Coral8
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