'Because God Ordained It'
ENTREPRENEURS by Jean Gruss | Editor/Lee-Collier
Inside a cavernous ballroom at the Ritz Carlton in Naples this spring, Arthur Allen sat on a stage in front of dozens of corporate customers while Fox News Anchor Neil Cavuto peppered him with questions.
How much would Allen personally reap from selling his Naples-based software-services company, ASG Inc., to the public, Cavuto asked?
$500 million, Allen estimated.
So why not cash in?
"I don't have to answer to shareholders and directors; I just have to answer to my customers," Allen replied.
More precisely, Allen plans to build the company he founded 20 years ago to $1 billion in revenues by 2010, from a projected $200 million this year. ASG provides corporations such as American Express, General Electric and Merrill Lynch with software and services to manage huge databases and make their employees more productive. In addition to being the founder, Allen is the company's president and chief executive officer.
Allen owns 100% of ASG, which reported revenues of $169 million last year. He estimates ASG will post $200 million in revenues this year and $250 million in 2007. The company has about 1,000 employees at headquarters in Naples and is spread in more than 50 offices around the globe.
Allen, who bears an uncanny resemblance to retired General Electric Chief Executive Jack Welch, has all of the traits of an entrepreneur - great business instincts and customer focus among his best.
Retired at age 34
In 1981, Allen sold his first software company for $18 million, retired to Naples at age 34 and bought an oceanfront house on Gulf Shore Boulevard for $875,000.
For five years, he dined out nearly every meal, perfected his tennis game and made millions of dollars investing with New York options trader Victor Niederhoffer.
With the exception of the Niederhoffer investments, he says, he usually lost money whenever he listened to money managers. An investment in a coal mining operation was a bust, for example. He grew bored too: "This retirement is a myth," he says.
One day Allen got a call from Ronald Yon, a software developer who had worked for him at an earlier company. Yon had written software to manage large databases more efficiently and asked Allen to create a company to sell it. At first, Allen was reluctant. "I didn't want to go through the grief and aggravation," he says.
But Allen drafted a business plan, and ASG, which stands for Allen Systems Group, was born in March 1986 with $2,000 in cash and a $100,000 loan from Barnett Bank. The collateral was Allen's Gulf Shore house.
His home: 'My angel investor'
Time and again, Allen borrowed against his home to build ASG. Allen estimates he has made more than 30 software-company acquisitions since then by borrowing against his home, which has gradually risen in value and was recently appraised at $12.5 million.
"I've got $6 million to $7 million on my house now," he says. "It's my angel investor."
ASG has grown by acquiring products and developing new ones. Allen understood software and sales because of his background in data processing with General Motors and software-services firm Cutler-Williams. "I had a vast array of knowledge about computers and business," he says. "I could talk to customers."
As word spread that he was starting a company, acquaintances started flocking to him with products they wanted him to sell.
One of the first significant deals came from Harry Turner, chief information officer at the Christian Broadcasting Network (CBN) founded by evangelist Pat Robertson. Allen knew Turner because he had supported Robertson's 1988 presidential bid. Turner had devised a program that made computers run faster, and Allen bought the program for $1 million.
The CBN software was a big success. "It funded my business," Allen says.
How he structures deals
Most of Allen's deals are structured around paying royalties. Typically, Allen will pay sellers cash as a down payment, hires them on as employees and promises to pay 15% to 25% royalties with a cap. "I've made a lot of people millionaires," Allen says.
Some people understand computers and customers' needs but are poor business managers. At one company Allen acquired in California, he says, the owner didn't know how much money was in the company's cash account. Once he had signed the deal with ASG, Allen discovered the company had $400,000 in cash in a corporate checking account. "It's happened to me twice," Allen says.
Allen is well known inside and outside ASG for his persistence. The 2002 acquisition of publicly held Landmark Systems Corp. of Reston, Va., had been in the works since 1992. ASG repeatedly sought to buy the company but refused to overpay. Allen says he doesn't try to low-ball. "I flat out tell them what I can pay," he says.
Says Kathy Clark, Landmark's founder and former chief executive: "He can be a pretty intimidating guy. We certainly had our disagreements, but the key was Art and I always had a good relationship."
Clark also felt her employees would be better off with ASG than a much larger company. "If we had been bought by CA or BMC, we would have been a little pimple on their butt," Clark says. "With ASG, it was such a huge deal it would increase their revenues by 50%. They were going to need a lot of our people," she says.
One big challenge for Allen has been to expand overseas and adapt to different business cultures. For example, he realized that French companies are often reluctant to do business with outsiders. Instead of opening an office in France, Allen bought four French software-services companies. Now, he says, 85% of large French corporations do business with ASG's French affiliates. He's now working on expansion in China and Brazil, among other locations.
The private advantage
All of ASG's main rivals are publicly held: CA, BMC Software and Compuware Corp. CA in particular has been plagued recently with accounting problems and top executives have resigned, providing an opening for ASG.
The advantage Allen has, says Clark, is that ASG can take a quarterly loss to satisfy a customer without suffering a backlash from shareholders and directors. "Bankers and lenders are easier to keep happy than Wall Street," she says. ASG says it charges 30% less than its competitors' list prices. "Protect customers with your life," Allen counsels.
One disadvantage of being privately held is that Allen isn't well known outside the software industry. "That bothers me a lot; I spend a lot of time worrying about it," he told Cavuto at the Naples conference.
But Allen is well known in Naples, especially as a philanthropist to local charitable causes, including Florida Gulf Coast University, United Way of Collier County and Ave Maria University. Allen also is an avid tennis player and plays every day. The Cambier Park tennis center in Naples was renamed the Arthur L. Allen Tennis Center in February after he donated $500,000.
Visit customers; a higher power
Allen jets around the world in his Gulfstream 550 to visit with customers in Asia, Europe and Latin America. He's on the road 240 days of the year, and he says it's essential to meet with customers face to face. "It's amazing what happens when you listen to a customer," Allen says. "The smallest tidbit of information could be a pot of gold."
For example, years ago he tried to sell a software program to the Tennessee Valley Authority. It was a hard sell, and when Allen quizzed the utility executives, it turned out they only needed one of the software's multiple functions. He unbundled that portion and ended up selling 2,000 of them in the next year versus 10 of the larger program.
Overseas clients are especially pleased when Allen personally visits with them. "That's a tremendously powerful message," says Yon, who has traveled with Allen on the company jet and is ASG's senior vice president/global solutions architect. "It helps open the door to new opportunities," he says.
ASG doesn't just sell its own software. It also has partnered with companies ranging from Oracle to IBM to share software technology.
Most of the company's revenues come from software services. In 2005, the firm reported $128.2 million in services revenue and $41.1 million in license revenue.
How did ASG land such high profile customers as Coca-Cola and Merrill Lynch? Allen picks up the phone and mimics dialing the numbers. "It's as simple as calling in," he says. Because Allen has been involved in the software business for nearly four decades, he has an extensive network of industry contacts. "Developing those relationships was paramount to making this work," Yon says.
In the end, though, Allen attributes his company's success to a higher power. Asked about his success winning over clients, Allen says: "Because God ordained it; I truly believe that."
A plaque in the lobby of ASG's building reminds visitors who the ultimate boss is: "God gave us our company and our building."
HOW TO MANAGE IN A DOWNTURN: BE BOLD
Arthur Allen learned some valuable lessons during the tech downturn of the early 1990s.
First, when acquiring a new company, it pays to lay off people on the first day. That way, employees of the acquired company don't work under a lingering cloud of uncertainty.
Second, a chief executive should review the company's structure every six months to see how well employees fit in that structure. If you do this exercise twice a year, then you can eliminate positions gradually and keep payroll lean.
Third, it's important to grow through a downturn. "Most people think when times are tough, the most successful way to raise cash is to sell something," Allen says.
He did that himself in 1991. Allen had to lay off 20% of his staff. To make payroll, he sold a valuable stretch of real estate along the Marco River. "It was real scary," he recalls.
But Allen believes the better way to make it through a downturn is to buy a business that generates positive cash flow that will carry the business through the down cycle.
In 2002, for example, he bought publicly held Landmark Systems Corp., based in Reston, Va., in the depth of the tech downturn for$60 million. His bankers didn't want to go along. "Don't get in my way," Allen recalls saying.
Allen had tried to buy Landmark as early as 1992 because it owned valuable software that operated large mainframe computers. Landmark's business had grown substantially since then, growing to $56 million in annual revenues in 2000 with 300 employees.
Instead of relying on bankers, Allen persuaded the two principal owners of Landmark, Chairman Patrick McGettigan and CEO Kathy Clark, to finance ASG's purchase of the company over five years and pay the remaining public shareholders in cash at closing. "I bought a $60 million business with $5 million," Allen says.
What's more, Allen acquired the company at nearly half the price he had offered a year earlier as investors soured on tech stocks in late 2001. In 2000, Allen offered to pay $9 a share, but Landmark's board turned him down and accepted an offer from an undisclosed competitor, according to Landmark's proxy filings. When that deal later fell through, Landmark's board called Allen back. By then, Landmark's stock had fallen to below $4 a share, and Allen revised his bid to $4.75 per share.
Facing what appeared to be bleak prospects and a protracted downturn in tech stocks, McGettigan, Clark and the Landmark shareholders agreed to sell Landmark to ASG in February 2002.
Allen repaid McGettigan and Clark in just 15 months.
Arthur Allen's Travel Guide
Arthur Allen travels 240 days a year on his private transcontinental jet, a Gulfstream 550, so he has had many opportunities to be slowed by illness and jet lag. Here are his pointers for global road warriors:
• Think about long trips one hour at a time. When he's on a transcontinental flight that is scheduled to last more than eight hours, Allen says it's easier to think in one-hour increments be-cause you can count those in minutes.
• Always carry medicine. He recommends filling a prescription for antibiotics in addition to traveling with cold and sinus medicine.
• Never brush your teeth with water from the faucet. Use bottled water only.
• Wash your hands after every meeting.
• Jet lag isn't as bad when you travel in a westerly direction. It's much harder on your body when traveling east, say from the United States to England. Don't arrive in London at 5 a.m. and go to work at 8 a.m. Take a day off.
• If you're timid about traveling to exotic locales, don't travel to Asia.
• Eat cooked foods. Never eat anything raw.