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Take Back

  • By Mark Gordon
  • | 9:28 p.m. August 13, 2009
  • | 2 Free Articles Remaining!
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Lou Oberndorf won a long-fought gamble to buy back the medical education company he co-founded, putting up at least $10 million of his money in the process. His new quest: To beat the recession by blunt force.

Don't be fooled by the impressive growth numbers posted through 2008 by Lou Oberndorf's medical and education technology business: The company is still in a recession-driven fight of its life.

For starters, annual sales are down as much as 17% in 2009. And the company's core clients, such as state-run teaching hospitals and nursing schools, are facing deep budget cuts.

But Oberndorf, a onetime Air Force pilot and Vietnam Veteran turned entrepreneur, isn't daunted by the battle. He plans on winning it by combining the past and the future, sprinkled in with a little extra of the here and now.

Oberndorf also says the company, Sarasota-based Medical Education Technologies Inc., needs to get its edge back — something it lost as sales growth flowed like a spigot on steroids the last five years.

“It's easy to be smart and celebrated when the economy is booming,” says Oberndorf. “But now is the time a senior management team can shine.”

Oberndorf's company, known as METI, is a manufacturer and seller of computerized mannequins — lifelike human patient and surgical simulators for use in medical training and education. The company, a runner-up for the

Review's 2005 Technology Innovation Award, is considered a pioneer in the field, which has led to some international attention and acclaim. It has even gone Hollywood. (See related story.)

And its sales growth belied the recession up until this year. It reported $63 million in 2008 revenues, a 21% increase over its $52 million in 2007 and a 58% jump over the $40 million it had in 2006 revenues.

But METI is projecting its 2009 revenues will fall back to the $52 million mark it hit in 2007, the result of a postponement of orders due to the recession, company executives say. The company cut its employee numbers from a little more than 200 to about 170 over the past year, although it doesn't plan any other layoffs, President Michael Bernstein says.

METI does, however, plan to further cut its expenses. Its plan includes moving its manufacturing process to a lean production system, says Bernstein, a onetime METI investor and non-executive board chairman hired as president July 22.

“[Cost] efficiency has never been one of the primary focuses of this business,” says Bernstein. “It will be now.”

Cunning and agile
Oberndorf and Bernstein agree that returning to double-digit percentage revenue growth is going to take more than going lean and cutting expense budgets.

In fact, the weapons for Oberndorf's recession fight are triple-edged.

There is the future, for which Oberndorf is relying partially on his wallet: Late last year, he initiated a $63 million debt and equity financed buyout of METI from its corporate parent. Oberndorf used the $7 million to $10 million he had personally put into the company over the past 12 years has part of his leverage to get the deal done.

Oberndorf also teamed up with Chicago-based private equity firm Baird Capital Partners to buy METI from publicly traded defense contractor L3 Communications, which had held an 85% stake in the company for about 10 years.
Now Baird Capital owns about 55% of METI, while Oberndorf and Thrivent Financial for Lutherans, a Minneapolis-based nonprofit financial services group, own a little more than 20% apiece. (See related story.)

The deal was precarious, coming to fruition at the heart of the late 2008 credit crunch.

“The fact that we could hold the deal together is a real tribute to the attractiveness of METI,” Oberndorf says. “It was really about bringing the company back to a place where we could realize its full potential.”

One other aspect of the company's future is its new, 76,000 square-foot-headquarters that's currently under construction a few miles away from the current office it shares with L3. The new building, being developed by the
Sarasota based Starling Group, is part of a larger medical and office complex off Bee Ridge Road, just east of Interstate 75.

Then there is the past, for which Oberndorf is repeatedly telling his troops: Treat every decision like the company is a startup, just like it really was back in Gainesville in 1996. Oberndorf co-founded METI back then by working with some scientists at the University of Florida who had patents on what would be the original METI products.

“You always take the approach of an underdog when you are a startup,” says Oberndorf.

Essentially, he wants the company's managers to work like meeting the next payroll depends on every decision they make. The engineers, technicians and researchers have to be smart and savvy, yet cunning and agile.

And everyone at the company, says Oberndorf, has to perfect the art of following through and over-delivering for every customer, every time.

Finally, there is the current aspect of what METI is doing to fight the recession. It recently introduced a new line of products after a $3 million, three-year research and development effort. Executives hope the move hits a recession nerve with customers, as these new simulators, at $27,000 each, are some of the lowest-priced ones on the market.

METI also recently restructured its leadership team, bringing in health care industry executive Bernstein as president. Oberndorf gave up the president title but was elected chairman of the board to replace Bernstein.

Bernstein's past career stops include running a health care IT company and serving as chief operating officer of the entity behind Blue Cross and Blue Shield of Wisconsin. “METI has a pronounced and creative culture,” Bernstein says. “It's one of the coolest companies I've ever come across in health care.”

Stan the man
Cool, however, doesn't necessarily turn into sales, especially in what is now an 19-month economic downturn. The biggest problem, says Oberndorf, is that METI's clients are in the education business, including many state-funded schools and training facilities that tend operate on thin budgets. The recession only further exacerbates that situation.

“As states have suffered, it has had a drag that has translated to us,” says Oberndorf. “We have to work harder now to get business.”

One cushion has been METI's expansion into global markets, as countries such as England and Canada have slowly come around to adapting technology to the medical field. METI has also developed a product line tailored to the military, another sales boost.

But the company's best tool in fighting declining customer budgets is its METIman. That product, the result of the three-year, $3 million research effort, is the evolution of iStan, the company's core human simulator.

The METIman takes the best parts of iStan and incorporates it with web-based software that can be accessed remotely by a laptop. It's sold mostly in two markets: Nursing education and pre-hospital training.

“We haven't sacrificed the power of our technology,” says Oberndorf. “And now we have more products that fit more budgets.”

Oberndorf says METIman wasn't designed specifically to meet the new budget realties of the recession. But it sure has helped, as clients zero in more than ever before on value for a buck.

And to Oberndorf, METIman also represents the best of METI. It's products like those, he says, that will help the company reclaim its edge.

“We haven't escaped the impact of the recession,” Oberndorf says. “But we continue to innovate and advance the health care and education field.

Going Hollywood

Savvy small business owners and entrepreneurs tend to share several common traits, few more so than this: Always protect the brand.

The idea that a company's brand and image is its best currency is echoed from corporate boardrooms to business schools. After all, it's the first and sometimes only way potential customers identify with what they are buying.

Lou Oberndorf gets all that. Oberndorf is the co-founder of METI, a $63 million firm that manufacturers and sells computerized mannequins — lifelike human patient and surgical simulators for use in medical training and education.

But Oberndorf also gets another big entrepreneurial rule: No risk, no reward.

That's why Oberndorf allowed Hollywood TV producers and writers for popular medical drams such as Grey's Anatomy and ER to incorporate METI's products into scripts. METI's iStan, its core human simulator product, appeared on Grey's Anatomy last November.

The shows had full access to METI and executives didn't ask for and had no control over the script or how its products were portrayed. Oberndorf decided to allow the TV plugs in the hope that the risks would be rewarded through positive brand promotion on a large scale.

The results since the shows aired, especially the November episode of Grey's Anatomy, have been priceless, says Oberndorf. Right down to the random couple he recently met in England, who upon hearing what Oberndorf did for a living, said they had seen iStan on TV.

“It really is the gift that keeps on giving,” says Oberndorf. “As a small business, the leverage this have given us has been invaluable.”

— Mark Gordon

Anatomy of a deal

Lou Oberndorf's first strike against the recession actually took shape in 2006, during the boom.

That's when Oberndorf first began thinking about buying back METI, the medical and education technology company that was then under 85% control of L3 Communications, a publicly traded defense contractor. Oberndorf had co-founded METI in 1996.

It was in June 2006 when L3 co-founder and CEO Frank Lanza died.

Oberndorf had been friends with Lanza for years and considered him a business mentor. But Lanza's death, says Oberndorf, also gave him an opportunity to reexamine whether a then-$40 million company that makes lifelike human simulators for medical training had a place in a $13 billion defense company. Says Oberndorf: “The conclusion is that we didn't fit.”

The trick, of course, would be to come up with $63 million — the market valuation for METI, which reflected the company's assets and future sales potential.

Oberndorf met with some investment bankers and other investors throughout 2007. Then, in February 2008, Oberndorf had a chance meeting during a round of golf in Sarasota with Jay Logan, the branch manager of the local

Robert W. Baird & Co. private wealth management office.

Logan was actually aware of METI and the company's desire to pull out of L3: The wealth adviser had played golf the previous year with another METI executive, who told Logan about the company and its L3 quandary.

Logan told Oberndorf that Baird's equity capital arm might be able to aid the buyout.

Timing was key. METI was hosting a large product conference in Tampa just two weeks after Logan and Oberndorf hit it off on the links at the Founders Club in Sarasota. Oberndorf wanted to showcase METI at its best.

Within a week of the golf introduction, Gordon Pan, a top equity manger from Baird Capital Partners' Chicago headquarters was in Sarasota. He met with Oberndorf and other METI executives. Health care executive Mike
Bernstein, then an adviser with Baird Capital, was there too.

“We were blown away,” says Pan. “There was a perception that the company was a lot larger than it was.”

Pan also thought Oberndorf's vision was being shortchanged under the largess of L3. Plus, even more important, Pan and Bernstein believed METI's products had a lot of room to grow in its current space and into new markets.

Only one hurdle remained: In early 2008 the economy was just beginning its downward slide. And by the fall, when the deal to buy back METI was ready to close, the global credit markets were in crisis mode.

But Baird Capital, Oberndorf and a third investor, Minneapolis-based Thrivent Financial for Lutherans, held steadfast to the deal, which ultimately closed Oct. 9. Pan says Baird wasn't scared away by the larger market issues because METI was such a good find.

“At the end of the day we want to buy market-leading companies with strong management teams,” says Pan. “And that fits with METI.”

Now, with a 20% stake in the company, Oberndorf is METI's largest individual shareholder. Baird Capital controls about 60% of the company and Bernstein was recently appointed president.

Oberndorf announced the buyback deal to METI's 200 employees in a rousing companywide meeting that quelled any circulating rumors. In what Oberndorf called “one of life's unique moments,” the room erupted in cheers upon hearing the news.

— Mark Gordon


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