Preselling The Company
The acquisition of Forefront was arranged and the dowry was set before the company was even born.
Amid the celebrity of last year's megabucks mergers, nobody paid much attention when one of the country's bestknown microcomputer-software publishers acquired one of the country's most obscure microcomputer-software developers. The snub was understandable, since the payment of 500,000 shares of Ashton-Tate common for all of Forefront Corp. appeared on paper to be the conventional outcome of a typical high-technology venture. But in fiscal fact, the clever folk at Forefront added a Lewis Carroll twist to the annals of start-up financing. And, for their part, the people at Ashton-Tate added a touch of patience to the annals of acquisition -- and product development. You have to admire the Through the Looking-Glass sequence. First, Forefront's founders sold the company to Ashton-Tate for a nifty profit. Then, they started it up.
In mid-1983, when this unusual saga began, Robert Carr and Martin Mazner had recently left positions elsewhere and were designing the elements of a sophisticated software package they called Fred. Carr possessed programming skills and Mazner marketing smarts, but infant Fred demanded pure capital -- a minimum of $5 million, they figured -- to form a business strong enough to enter the software market. To be sure, they could have tapped a venture pool, since in those days a person needed only a key to a garage to whet investor appetites. But the pair decided that they didn't want to go that route.
One concern was that to part with that kind of money, venture capitalists would seek a huge payback, achievable only through building the proposed company into a massive vertical entity. And anyone who aspired to such fast growth, Carr fretted, would hold that the goal of business was return on investment. "We had the same end in mind," he admits, not entirely berserk, "but we wanted to create a special place for software development along the way, attracting top talent, removing them from money worries, and creating a nest." Of course, that would be a different culture from the one venture capital would spawn. "We can do it better," Carr urged Mazner with enthusiasm, "and let's have fun while we do it better."
More to the point, before you design ambitious five-year business plans, they reasoned, you ought to get the product at least partly working. Even then, you're going to have to go out and sell the damn thing, and that means spending venture capital on management and salespeople -- excess baggage in the nest they envisioned. Since their program was well enough along to suggest its finished state, Carr and Mazner decided to get Fred a hearing at an extant software publisher whose treasury might accelerate the development process. They had nothing in particular in mind, except that the goal would be toward symbiotic benefit: like a shark and a pilot fish, if one fared well, the other would, too.
The pair studied the list of corporate associations they felt might appreciate Fred's mutual potential -- among them, VisiCorp, Digital Research, MicroPro International, Lotus Development, Ashton-Tate, Software Publishing, and Microsoft. Not wanting word to spread, they contacted only two of the companies for starters. By the luck of the draw, one was Ashton-Tate, a quick trip down the coast in Culver City, Calif. The other was Lotus Development Corp., in Cambridge, Mass., whose head, Mitchell Kapor, was scheduled to be in California the same week. At first Ashton-Tate's then-chief executive officer, David Cole, in the process of bringing his company public, turned them down. Ironically, Lotus almost got a peek at Fred first -- with who knows what consequences, since it was but a few months before Lotus's own competing Symphony came out.
But the fates of free enterprise decreed that integrated software should have two prime contenders. Cole consented to a one-hour audience, and the rest is history. Ashton-Take kept Fred -- soon to be called Framework -- and its two guardians for 47 additional hours. In that interval, a letter of intent was drafted, capitalizing Forefront as a going concern, and a formula was devised to determine the amount of the cash-out three years down the line, in August 1986.
Ashton-Tate had proposed buying everything outright then and there, as any normal company would do when faced with the opportunity to add immediate substance to its product line. "We said no," Carr relates. "Their eyebrows raised, and they looked baffled. We said we want to do something different: start a company around the product, and then have you buy the company in a few years. We believe in Framework so much that we're willing to bet on the come."
In this case, the come was no vague roll of the dice, but a strict formula that at merger time would factor the profitability of the start-up times an earn-out ratio (relating to how well Framework performed within the Ashton-Tate line) times Ashton-Tate's average price/earnings ratio. Pitting it measurably in open contest against Ashton-Tate's stalwart dBase II and dBase III in the end-user arena would demonstrate Framework's profit potential, Carr calculated. Deferring to the company's P/E ratio would be a short-cut to appraising Forefront: how Wall Street assessed Ashton Tate's market value in relation to its earnings should apply to Forefront as well. And, even more brazenly, Forefront's profitability (essentially, net profit over sales) would give the savviness of the to-be-acquired talent its proper due. Hastening to seal the deal, Ashton-Tate presented Carr and Mazner with $25,000 in earnest money -- enough, surely, to phone the luckless Kapor person-to-person and tell him next Sunday's dinner was off.
Ashton-Tate agreed to invest $975,000 toward the completion of Framework by plowing $750,000 into development and buying 15% of Forefront for $225,000 -- sufficient for the tiny company to gear up and plunge ahead. But when Framework was done, Forefront would need a revenue stream. So Ashton-Tate became Framework's publisher, being granted marketing rights in return for which it would pay Forefront royalties. With the tail now wagging a salivating dog, the public company was held to minimum performance standards by which it was obligated to roll out Framework as soon as development was complete, and to spend a stipulated minimum on advertising in the first year. There was also a floor price of acquisition below which the deal would not be consummated, even if Framework fizzled but Ashton-Tate still wanted to own the development company.
