Mutual Benefits

Analog Device's daring strategy for coping with change has led to unique relationships with small companies around the country.

Jon Peddie felt vaguely uneasy, perhaps even a little irritated as he sped along California's Highway 17 last October, on his way from Berkeley to Monterey. With him were two of his top managers from Jupiter Systems, a fledgling maker of high-performance graphics equipment, of which Peddie was founder and president. Their destination was a resort hotel overlooking the Pacific Ocean, where they were to attend some sort of business conference -- for what purpose Peddie was not exactly sure. He had made the commitment to go several weeks before, but now he had visions of spending two days in boring meetings followed by boring banquets while, back at the office, a major bid sat waiting to be completed. Quite frankly, the prospect made him apprehensive.

What was this meeting all about, anyway? Peddie knew little about the other participants, or their companies, or the businesses they were engaged in. What were they going to talk about? What did they have to say to each other? Why were they even being brought together?

Indeed, they were a disparate group -- the founders and managers of 10 young technology companies working in fields that seemed only tangentially related. Their products spanned the diverse frontiers of information processing -- from super-fast integrated circuits to specialized microcomputers to medical imaging systems. Some of the companies had annual revenues approaching the $20-million mark; others had no revenues at all. But appearances notwithstanding, the companies did have at least one thing in common: Each had recently sold a minority equity interest to the host of the two-day gathering in Monterey, a $214-million, Massachusetts-based electronics company by the name of Analog Devices Inc. And therein lies a tale.

Founded in 1965, Analog Devices was in the business of making electronic components for scientific and engineering applications. Over the years, it had managed its growth well, seizing diversification opportunities as they presented themselves and developing most of its new products from within. But about four years ago, as the pace of technological innovation began to quicken, Analog founder and chairman Ray Stata looked ahead and saw trouble. The market for the company's electronic components was changing, and changing fast. Within a few years, new products would be available with capabilities that would far surpass those of Analog's old products. Unless the company found better ways to respond to this challenge, he feared that the days of impressive growth would soon be over. "To do what we needed to do," Stata explains, "we had to regain some of the facility and flexibility of a much smaller company." The question was, how to do it?

Stata didn't believe that Analog had the internal resources to respond effectively, and he knew that he could go out and acquire a bunch of young companies only at the risk of losing key talent through defection. Instead, he decided to try something different. "Our idea was to create a series of relationships with promising companies," Stata says.

By "relationships," Stata meant quasi-partnerships -- arrangements that would serve both Analog and the companies with which it became involved. Each relationship would have to be nurtured individually, in keeping with the interests of the small company founders and their key employees. Some of the companies might eventually be acquired; others would not. If the approach was going to work, notes Stata, "everything had to be built on mutual benefits."

All of this could, of course, prove expensive. Somehow Analog would have to find the cash to finance the outside investments without undermining its own ability to fund internal product development. Stata and senior vice-president Larry Sullivan decided to approach Standard Oil Co. (Indiana), which was a minority shareholder in Analog, and one with diversification ideas of its own. Standard Oil agreed to advance Analog $10 million a year to invest in promising young technology companies. In exchange, the giant oil company would receive options to buy additional shares in Analog at a future date.

With Standard Oil's money, Analog established relationships with the 10 companies that gathered in Monterey last October. In a sense, the companies represented Analog's vision of the future, a vision that was still in the process of being defined. With that in mind, Analog had called the conference -- to give the far-flung entrepreneurs a chance to explore the ways in which they might learn from each other and the directions in which the various reIationships might lead.

The entrepreneurs soon realized that they were part of an unusual experiment. Meeting in a second-floor conference room of the hotel, they began to feel a certain camaraderie. "It was almost as if we were members of a club," Peddie recalls. But what kind of a club? Were they simply pieces in an unorthodox venture capital portfolio? Were they future candidates for acquisition? Or were they pioneers developing an entirely new type of corporate entity? Nobody seemed to know.

Indeed, everyone shared that sense of exploring the unknown -- even Ray Stata, who stood up to make some after-dinner remarks following the first day of meetings. "Many of us expected him to raise the flag and talk about how Analog reached the $200-million-mark and grew to 3,000 employees," says Peddie. Instead, Stata presented himself as another entrepreneur who, like everyone else in the room, was still searching for solutions. "He told us that he was still muddling through problems one step at a time, much the way he did when he ran a $5-million or $10-million company. And he said something that made an impression on a lot of us. To be successful, he said, you couldn't just depend on doing things better. You also had to be willing to do things differently."

 1 | 2 | 3 | 4 | 5  NEXT