needed to understand all the nontechnology aspects of the business to use the consultants effectively,” says Bowles.
“ It was a steep learning curve for them to understand that we had to change focus from technology to marketing, then build customer segmentation and pricing strategies to meet the investor’ s requirements,” says Bowles. Active’ s banner product, Funnel Web, was initially only sold to Webmasters. Under a strategy Bowles adapted from the AGSM’ s Fit model of determining product price points and strategic marketing plans, specialised products were developed for a newlysegmented market of corporate, small business and technical customers. Pricing was initially $ US199, a figure Bowles said customers equated to‘ freeware’, but was later adjusted to $ US1199 to indicate enhanced functionality.
As McLean explains:“ We had to rebrand the company for global reach and drive its value up while looking for attractive exit opportunities for the owners”. That involved coaching the Active team to take a pretty big leap in perspective,“ from a small business mentality to one of thinking and acting globally,” says McLean.
In just six months Bowles, with the assistance of McLean and Williams, grew Active’ s head count from five to 20 and opened up offices in London and San Francisco as part of the global expansion and revenue generation strategy. The team also expanded its online and retail sales distribution channels to include OEM( original equipment manufacturer) contracts with larger vendors to increase market penetration.
These OEM contracts were essentially licensing agreements, where an original manufacturer sought to add value to one of its core or new products using Active’ s technology. One such contract, for example, involved Active licensing Udu Software to plug in Active’ s technology to its ASP model( which Udu sold to Internet service providers).
Around March last year one such OEM partnership offered something more tangible for Active than royalties from increased sales. While in the US, Bowles was approached by Quest Software’ s CEO Vinnie Smith and president Dave Doyle.
What started as a simple OEM negotiation developed into a full-blown acquisition play by Quest.
“ Quest could see that Active had leading-edge technology which it needed to build an all-encompassing Web application development solution,” says Bowles.“ They wanted to buy Active’ s intellectual capital because they didn’ t have the time to build equivalent technology from scratch.” While flattering, Quest’ s offer effectively threw a spanner in the works for Bowles, McLean and Williams, who were focused on building a strong, growing business.
“ The way Quest was talking meant we had to move fast,” McLean says.“ We had to decide whether to continue with our existing expansion plans for Active, which were going well, or seriously consider Quest’ s advances.” One of the key questions for Active in the early negotiation stages was whether potential licensing revenues would have made them as much money as a straight acquisition by Quest.
Active Concepts decided that it would have effectively cannibalised its own revenue aspirations and market share had it licensed or allowed Quest to build its own technology. Unlike other OEM contracts, which were product-specific, Quest wanted unfettered use of intellectual property, which would have effectively set up a competitor. As a result, Active agreed to pursue acquisition negotiations even though its European and Australian operations were achieving solid sales volumes.
McLean and the board had to calculate all possible outcomes of such an acquisition. What did a buyout mean for Jafco? What would it mean for Active to work for Quest and what would be the advantages given that Active was still in a period of high cash burn prior to second round funding?
The ensuing due diligence stage truly tested the commercial skills of Bowles and McLean. During their first US meeting they played hard ball on a buyout price knowing that Active owned what Quest needed. As Bowles puts it:“ Our opening gambit was $ 100 million worth of cash and
DEAL-MAKERS Negotiating a deal such as this amid macro market revaluation drove home to Cameron McLean( left) and Michael Bowles the necessity for new valuation benchmarks for the emerging technology sector.
www. agsm. edu. au AGSM | 9