Evolution of an Israeli High-Tech Start-Up

Excerpt

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Chapter 1
Inside Information

“Roni, Koichi is calling!” my receptionist bellowed clear across the workspace. The lines of programmers in the room between us looked up angrily from their computer screens.

Five minutes earlier I had left my desk to mingle with the development team and paused, as usual, beside the big windows overlooking Tel Aviv. From up high, the “white city,” as it is poetically described, sparkled. The steel-and-glass skyscrapers reflected the autumn sun. The Tel Aviv of my childhood, with its modest low-rise houses, muddy streets, and open seashore, was now hidden under the rising metropolis. No doubt there are cities more beautiful, but none had Tel Aviv’s special charm.

“Lonnie,” the receptionist screeched again, mimicking Koichi’s Japanese confusion of the letters “r” and “l.” “Telephone, it’s urgent!” The collective anger was now replaced by chuckles of appreciation. Even I was having difficulty suppressing a smile. I returned to my office to pick up the call.

Koichi was our representative in Japan. On the way past the rows of programmers back to my office I glanced at the clock, or rather clocks. After a series of mix-ups and hitches we had placed a row of clocks on the main wall. At any given moment we knew the time in any city in the world in which we were represented.

It was October 30, 1998, right before lunchtime. In Koichi’s Tokyo it was 7:45 p.m. There was no reason at the time to think this was anything but a routine call, yet it was to be the start of an adventure that would change my life.

Koichi and I had known each other for eleven years. We’d been introduced by our European distributors, Boole & Babbage, when my company, New Dimension Software, was looking for a way to expand its customer base in East Asia. His English was good, and we were favorably impressed by his energy. We appointed him and his company to represent us in Japan.

We would meet from time to time—at our offices in Israel, in Europe, or in Japan. Koichi was hard—working and thorough, and did a good job of bridging the culture gap. His accent sometimes caused amusing mistakes—he would say, “walk” and mean “work,” for example—but we never corrected him. I even got used to answering to the name “Lonnie San.” He had helped us gain control of a significant share of the market for our operations software packages in Japan, and at the same time made a fair amount of money himself.

I wondered what could be so urgent that he was calling after his office hours. Money. It’s never too late to talk about money. He probably wants us to raise his commission again. I settled into my chair and picked up the receiver.

To my pleasant surprise, something other than money was on Koichi’s agenda. He wanted to check the details of a sales transaction that was in its final stages. A Japanese bank was buying two of our software products, which were designed to streamline operations and reduce costs dramatically. We stood to make a handsome profit from the deal, so I was glad to answer his questions and promised to phone Boole & Babbage Europe the next day to clear up the unresolved issues.

“Why don’t you just ask BMC?” Koichi said. “After all, they’re about to buy Boole & Babbage.” I heard him but it didn’t quite register.

“What did you say? Who’s buying whom?” My other telephone had started ringing and I was getting cranky.

“BMC is buying B&B.” Wait a minute, I thought. That’s impossible. Maybe I didn’t understand him because of his accent. Maybe the connection was bad.

“Koichi San,” I said, speaking slowly and clearly to make sure there was no misunderstanding. “Did you say that BMC is buying B&B?”

“Yes, yes, that’s what I said. Tomorrow or the next day there will be a press release. BMC is buying B&B.” So I’d heard him right. Koichi was telling me that the giant Texas-based company BMC Software was buying Boole & Babbage (USA), the parent of our European distributors. This was critical inside information on a huge transaction that affected us directly, and for a moment I felt completely lost.

“Lonnie San? Don’t tell me you didn’t know?”

I was still shocked and utterly speechless. I didn’t want Koichi to know how surprised I was by his news so I avoided replying and ended our talk as calmly as I could.

Programmers began to get up from their computers to stretch their legs and get ready for lunch. Outside it was a glorious, bright autumn day, and everyone was looking forward to something hot and tasty. Poor fools! If they only knew what I’d just found out, they would quickly lose their appetite. How many of them would I soon have to fire? Where would they be eating lunch in a month’s time? Only BMC knows! My loud receptionist also got ready to go up to our rooftop cafeteria. On her way to the elevator she smiled impishly at me, and my heart filled with sorrow. It was as if I’d already dismissed her.

What a blow! If the news was right—and I had no reason to doubt it—there was a real possibility that BMC would simply liquidate our business in Europe. The excellent network we had worked so hard to build would collapse, and our customers would take their business elsewhere. We had done very well with B&B Europe for more than a decade, and now everything was about to go down the drain. Bang—we’d be finished. And? Do I just sit here with my arms folded and wait for the final curtain? No way! I had to do something or I’d go out of my mind.

I needed to think about what to do and in what order. I had to update our CEO, Dan Barnea. Then I’d have to call my business partner, Galia Streiker, who was in California. It was nearly four in the morning there. I decided to wait till she’d had her morning coffee. Right now I needed to check the agreement. Maybe there was something in it that I could latch on to.

Our third distribution agreement had been signed nearly two years earlier. I found it and took it back to my office. Then I did something uncharacteristic: I closed the door. I believe in the open-door policy and love eye contact with my colleagues. But this time I couldn’t rely on my poker face and didn’t want anyone to see how worried I was.

The document was thick—twenty pages plus numerous addenda—and that made me even more nervous. A software distribution agreement should be small and simple: the price of the product, the distributor’s commission, and the payment terms. But such contracts tend to become huge because during negotiations the lawyers try to outdo one another with implausible-sounding scenarios. They elaborate on imaginary calamities and expand the document with dozens of hypothetical clauses to cover every eventuality and misfortune: If Party A does this, Party B will do that. Lawyers say that in a complicated business, a dispute is only a matter of time. We’ll soon see.

I start reading the huge document, looking for any reference to a scenario like the one we were now facing. The agreement time period was three years. Not good! Our company, New Dimension Software, would be tied to our European distributors, B&BE, for another whole year. Next. Clauses, sub-clauses, sub-sub-clauses. So much legal babble. Does the contract contain any protection for Party A, in the event that someone buys its distributor (Party B), causing said party to cease operating as an independent entity? That’s what I wanted to know. There was something about that in the contract somewhere. I’m sure there was. My search was now focused and I could reconstruct things.

Most of the negotiations leading up to the signing of the agreement had taken place between me and Han Bruggeling, the manager of B&BE. As we were about to close the deal, Han flew to the U.S to meet his boss, Paul Newton, CEO of the parent company, B&B, to get final approval. Newton, who attended to everything in minutest detail, blocked the signing of the agreement, and summoned us both to California. “Roni, my friend,” he told me, “your products account for 35 percent of our sales in Europe; you’re very important to us. If someone buys you, it’ll cause us a lot of damage.” Back then in 1996, Newton’s concern was that a competitor would buy us, distribute our products with its own, and wouldn’t have any need for B&BE’s distribution services. Almost half of B&BE’s sales volume would be wiped out. That was definitely cause for concern.

The tension in the air was palpable. They say that flattery gets you nowhere but I reckoned it could do no harm, perhaps even ease the strain. My tone became almost obsequious.

“That is right, Mr. Newton,” I said. “If competitors buy us, you’ll suffer a lot of damage. In your opinion, what will the extent of the damage be?” “That is a huge unknown,” he replied. “I have to think and calculate.” I agreed. “Instead of guessing, let’s look at the worst-case scenario.”

At that time, we knew of three companies that were likely to have an interest in acquiring New Dimension Software so as to reduce competition in the field. They were IBM, CA, and Platinum—all American companies that were developing similar products and had distribution systems capable of selling our software programs as well. Newton added BMC and Sterling to the list, and we continued to discuss the compensation calculations. “Mr. Newton, the duration of the agreement we are discussing is three years, 1997 to 2000. If someone buys us in 2000, what’s the compensation that will be due to you for the loss in sales? And if it happens in 1999, how much?”

We drew a parabola that showed the various options. If they bought us one month after the signing of the new distribution agreement, B&B would have to be paid about six million dollars in compensation. If the purchase took place halfway through the agreement, that would be when maximum damage would occur and so the maximum compensation would be due. It could run to 12 million dollars. Beyond that point, the amounts due in compensation would steadily decrease. If we were bought two months before the end of the agreement, B&B’s compensation would be a lot less, because by then their distribution rights would have almost expired.

We worked together on these various calculations and reached agreement on the compensation we would pay. That set Newton’s mind at ease.

And then I played what I thought was my trump card. “Mr. Newton,” I said, “what will happen if someone buys you? What will then happen to us?”

Though somewhat taken aback, he gave me the answer I’d hoped to hear: “The same, Roni, my friend.”

Nevertheless, I insisted on clarifying matters: “And what about the numbers?”

“The numbers are also more or less the same,” he replied. “Let’s not complicate things any more than they need to be.” And that’s what we settled on. In the new agreement there would be symmetry on the compensation issue—in other words, full reciprocity.

I said goodbye and took the draft to my board of directors for their approval. After my presentation they pounced. “How could you agree to such high compensation? After all, it would be total lunacy if we had to pay. You’ve lost it!” Calmly, I explained that the understanding stemmed entirely from Newton’s legitimate demand. To put the two parties on equal footing, I had negotiated a balance to that demand. “Besides, there’s a 70 percent chance that a competitor would buy B&B before they buy us, and don’t ask me how I know—clairvoyance or maybe divine inspiration—but I urge you to approve this agreement because re-opening the negotiations simply won’t work.” They were angry and scared, but they approved it.

It was that clause—the one that had so upset the board—that I was now feverishly searching for. Then, suddenly, there it was in black and white: “Agreed Compensation: If one of the parties is sold prior to the end of the Agreement Period …” What the clause affirmed was that as of that day, B&B, or in this instance, BMC, who was buying B&BE, had to pay us about 10 million dollars in compensation. But I was still anxious. I called the company’s lawyer, Mickey Spigelman, and then phoned Galia in California. Both assured me that the clause was valid and binding, and that we definitely had the right to demand the compensation that had been agreed to. Very well. What had seemed to me at the time a major risk was now turning into a substantial opportunity.

Two days later, there was an official announcement of the acquisition deal. Good. Now they’ll pay, I reassured myself. Boy, are they going to pay! An acquisition process of this magnitude, with its many details and pitfalls, would take several months. The best thing for me to do was to wait a few days before calling Han Bruggeling at B&BE in Holland. I couldn’t hold it against him that he hadn’t even dropped a hint of the impending takeover—in his shoes I would have done the same. Nonetheless I was livid. Keeping my cool, I offered my congratulations and wished him and BMC good luck. Now would he be so kind as to arrange a meeting for me with the new management before they receive my demand for compensation.

“Does BMC know about us at all?” I asked casually. “Do they know that New Dimension accounts for 35 percent of B&BE’s sales, more than the sales of B&B’s own products in Europe?” Han replied that they would soon find out when they look more closely. I detected tension in his courteous tone. “As to a meeting with them,” he went on, “it’s a great idea. It’s always better to talk face—to— face.” The marketing VP of BMC, Rick Gardner, Number 2 in the company, would soon arrive in Germany to organize the merger, which involved hundreds of B&B employees and thousands from BMC. Han suggested that we should come to Europe, where he would arrange a meeting for us with Rick Gardner. Till then could we please hold off saying anything about compensation, to avoid tainting the atmosphere?

The agreement allowed the injured party thirty days in which to make a claim, so I agreed not to rock the boat, and thanked him for the invitation. Behind the politeness and niceties, I was hopping mad. Who could tell what, if anything, would come out of the meeting in Germany? Even if the compensation were agreed to, it would be ages before we were paid. No one likes to part with money, not even a large, reputable company like BMC. I consulted my board, and we made a unanimous decision to strike a preemptive blow and set up a base for an independent branch in Europe, something we’d planned to do in the past, but had put off. We would act quickly because now that the acquisition of B&B had been announced, customers might start to make other arrangements. B&BE sales and support staff who worked with us might disperse, and they were people we would want to hire for our contemplated new branch.

I flew to London, Madrid, and other capitals in Europe, to meet some of the key people whom we had already talked to during our 1994 round of recruiting and to interview new people. A European company was engaged to headhunt personnel for management and sales positions. In short, we laid the foundation for establishing New Dimension Europe.

On my return to Israel, my wife, Matia, met me at the airport with two pieces of news. Our daughter-in-law Shirit was pregnant with our first grandchild. The other news was worrying. Ramon, our third son, was on unexpected leave from the army. Matia knew I was going through a rough patch, so she had put off telling me about it.

One side of Ramon’s face had become paralyzed, a condition known as Bell’s palsy. In patients of Ramon’s age, late teens, the paralysis usually goes away within a short time, but it was worrying. When I was in college I had the same condition, and it went away without treatment. I hoped his case was similarly mild. “Have you brought him what he asked for? He hasn’t touched the piano since he got home,” Matia said. Of course I’d brought what Ramon had asked for. No matter how much pressure my work puts on me, I always keep my promises to my children.

Ramon had played piano since childhood, but his army service in a Patriot missile unit meant he could play only when he was on leave. Before I went to Europe, I’d been given a list of sheet music to buy for him in London. I was there a short time and went by cab from the airport to get it, so that the cost of this present turned out to be higher than it would have been had I bought it in Israel. But obviously there’s nothing like a gift that Dad brings from abroad.

We went into the house and I felt a pang in my heart when I saw the serious expression on Ramon’s face, due to the paralysis, and the lopsided smile when he saw me. He gave me a hug, opened his present, and, to my joy, began to play. Matia breathed a sigh of relief and I immediately went to the phone in the bedroom and started looking for a specialist in neurology.

The BMC conference in Germany was drawing near, but I decided not to go. My heart and mind were occupied with Ramon. A paralyzed nerve was preventing the eyelid from closing and moistening the eye, and it had to be watched to ensure that it didn’t dry up. He had to have frequent checkups, and needed transportation. Matia and I made every effort to be at his disposal. We came back early from work and welcomed his army buddies when they came to see him. The IDF gave him a temporary leave of absence, and the music I’d brought for him worked overtime.

Gradually the treatments began to have an effect, and time did its part too. The sleeping nerve woke up, Ramon was better, and once again I was able to focus on my work. As it turned out, I was even able to travel to Germany for the conference. Galia arrived there from the U.S., and the delegation from Tel Aviv consisted of New Dimension’s CEO Dan Barnea and me as chairman of the board. Han Bruggeling went out of his way to be gracious. He even sent a car and driver to pick us up at the airport.

Just as BMC was an unknown to us, we were a mystery to them. B&B hadn’t lied to them about us, but it takes several months for such an acquisition deal to be realized. The buyer makes an offer, the parties agree to it, and then the due diligence process begins. The buyer, for his part, begins looking for hidden snags; the seller tries to ensure that there aren’t many. All that takes time. We attended the meeting that Han had arranged for us with Rick Gardner, without knowing whether BMC had already realized that B&BE without us was no great bargain or, as I’d surmised, they were still very much in the dark on this issue. We had come in order to pave the way for us to receive the agreed compensation in as positive an atmosphere as possible—only an idiot would pick a fight with a giant like BMC.

Because we didn’t know the people involved, or what they wanted, we decided to go with open minds and hear what they had to say. There was no point in trying to make plans. We were going on a “blind date,” without knowing whether we were heading for a stormy love affair or the war to end all wars.

The conference took place in a village near Frankfurt, at an austere German hotel that reminded me of the spa guesthouses that my mother had loved in the Israel of the 1950s. Rick Gardner turned out to be a genteel fellow, a man of the world. Rather quickly it became clear to us that my hunch was right. When they signed the acquisition deal, BMC had been unaware of our importance to B&B, and had no clue that there was a reciprocal compensation clause in our distribution agreement. In fact, until this meeting they had not really been aware of us at all.

My concerns about the true nature of our negotiating partner vanished as the discussion became ever more positive. I was frank in my explanation of where we all stood, and told him without false modesty that New Dimension was the core of B&BE’s business. As for the compensation due to us, I pointed out that the payment couldn’t be put off. We needed the money to hire sales people now employed by B&BE, and to set up New Dimension Europe.

“What’s the compensation due to you?” asked Rick Gardner.

“Ten million dollars. And it’s urgent,” I said politely. “People will disappear. There’ll be employees who’ll leave, and those who won’t want to work at BMC. That’s why we have to move right away.”

Gardner shook his head, poured wine into Galia’s glass, and was silent. Han took up the conversation, and soon it flowed smoothly, even though we were all aware of the gravity of the matter that had just been put on the table. We waited for Rick Gardner’s reaction. In light of the sum I had just mentioned, I was bracing myself for an unpleasant response. But when Rick decided to end his silence, he smiled pleasantly and said, “Why are you concerning yourself with ten million? We’re talking about hundreds of millions here.” As if I hadn’t heard I stuck with my line. “We have to catch the people as soon as possible … we have to move all kinds of mountains …”

“You’re not on the right track, Mr. Einav. What’s ten million dollars? Small change. It’s not at all the issue. I’m talking about hundreds of millions, so let’s not be hasty. What do you think of the wine?”

At that point we already had an annual turnover of one hundred million dollars in dozens of countries, had set up our own distribution network in the U.S., Australia, and Mexico, and were about to do the same in Brazil. We knew that on the NASDAQ our shares were flying high, and that provided us with a valuation of the company. Exactly how much did BMC think we were worth? That we didn’t know. We also didn’t think that the subject interested them. After all, they were engaged in acquiring B&B. Now, at the German restaurant, after Rick Gardner had for the second time said “hundreds of millions,” I suddenly realized where we were heading, and that Dan and Galia had also figured out which way the wind was blowing. Han Bruggeling raised an eyebrow.

What did those high numbers that Mr. Gardner had thrown into the air actually mean? Was BMC interested in buying us? The twinkle in Galia’s eye indicated that the same thought had just crossed her mind. Dan Barnea sat up straight in his chair. “So how much are we worth, in your opinion?” I asked. “Just in case someone, maybe you, wants to buy us tomorrow morning, how much are we worth?” Rick Gardner, obviously delighting in the wine’s clarity as he held it up against the light, replied, “In my estimation, New Dimension is worth six hundred, maybe six hundred and twenty million dollars.” Then he laughed, and emptied his glass.

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