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Tech acquisitions are bittersweet: Investors win, but state loses headquarters

April 24, 2006

In the past two weeks, central Indiana's two fastest-growing high-tech companies have announced their sales to larger out-of-state firms. Local leaders are of two minds about it.

On the one hand, there's the enormous payday for investors. Massachusetts-based Hologic Inc. is buying Indianapolis-based medical-device maker Suros Surgical Systems Inc. for at least $240 million. And St. Louis-based TALX Corp. scooped up Carmelbased Internet testing firm Performance Assessment Network Inc. for $75 million.

Optimists hope to see much of that money reinvested locally in other high-tech startups.

But the silver lining has a touch of gray. Although the businesses will continue to operate here, with current management in place, they'll be divisions of companies headquartered elsewhere.

Indianapolis needs big headquarters companies because their executives tend to become community leaders and generously support not-for-profits and other local organizations, said Brian Payne, president of the Central Indiana Community Foundation.

"Short term, the upside will be big," he said. "Long term, we're always talking about how to grow the next generation of company headquarters. And now here's two that won't be in that next generation. That's a big problem we're going to have down the line."

Few speculative ventures ripen as quickly as Suros did. Even fewer avoid acquisition by larger companies. Consider the process that led to Suros' deal. In December, management began preparing for an initial public offering and hired investment bank JP Morgan to shepherd the process. Company leaders had every intention of continuing Suros' rapid growth independently.

But IPO plans often attract suitors. And Suros had more than one, said its chairman, James Baumgardt.

"We had every confidence in the world if we did an IPO, we'd know how to spend that money. We had penciled in, 'End of year, let's have a great '06,'" he said. "But legally, you don't have much choice ... you've got a fiduciary responsibility to your shareholders to weed out bad offers and bring the good ones to your board."

The best turned out to be from Hologic, which had been distributing Suros' minimally invasive breast biopsy system for three years. In addition to offering $240 million in cash and stock, it dangled another incentive: Over the next two years, investors will get to keep all the revenue that exceeds the $27 million the company recorded in 2005.

If Suros management hits its 2006 revenue target of at least $40 million, investors will get another $13 million, with the opportunity for an even larger upside the following year.

"We didn't want to merge and go away," CEO Jim Pearson said. "We wanted it to be rewarding for everybody who got us here, and to continue to grow."

With such an attractive offer in hand, the uncertainty of an IPO became less appealing, and investors chose to cash out. Suros had attracted $19 million in venture capital since its founding six years ago.

The first $7 million came almost entirely from Hoosier investors and institutions, Baumgardt said. They still own 60 percent to 70 percent, giving them a payday topping $144 million.

One of the earliest Suros investors was Terre Haute-based business incubator Rose-Hulman Ventures, affiliated with the Rose-Hulman Institute of Technology. Indiana's resident high-tech guru, Scott Jones, the man who helped invent voice mail, called it a validation of the vision he and his peers have long imagined for the state.

"I think it's great for Indiana. It's just a huge feather in the cap for Rose-Hulman Ventures and proves out their [business] model," Jones said. "They may invest in dozens of companies, and every once in a while you hit a home run that makes up for all the others trying to get there. I am positively sure Indiana is going to have more of these."

Rose-Hulman will plow profit into the creation of more real-world opportunities for students, said Rose-Hulman Chairman Robert Bright. But the university won't invest any of its gains into hightech startups. It stopped doing that a year ago when former President Jack Midgley reorganized Rose-Hulman Ventures, a controversial move that helped lead to his departure last year.

"All our resources are focused on the same thing, and that's enhancing the educational component we have for students," Bright said. "Our focus is on education, rather than investment."

Indianapolis-based Twilight Venture Partners was another early Suros investor. Chief Investment Officer Ron Henriksen said Twilight likely will put its profit back to work locally in other life sciences startups.

"We intend to keep doing what we're doing," he said.

Successful high-tech companies are always going to attract suitors, said Joe Broecker, senior managing director of Indianapolis-based Periculum Capital Co., which helped write Suros' original business plan.

The best response, he said, is to focus on the upside. The sale of Suros could spawn another half-dozen successful companies. The same goes for PAN, or for banking software-maker Baker Hill, which was acquired by California-based Experian in August.

"These are global market phenomena. We can't build a picket fence around Indiana," Broecker said. "Some people may want to take their money and buy a coconut shop in Key West. But my guess is the vast majority [of the more than 50 investors] would be very interested in the next opportunity."

Many central Indiana community leaders agree with that take.

"In Silicon Valley, when entrepreneurs start a private company and it's ultimately sold as part of an exit strategy, that is celebrated. People in Silicon Valley don't sit around wringing their hands," said Gordon Hendry, interim president of local economic development agency The Indy Partnership.

"We need to create a similar atmosphere here in central Indiana where people start companies and when they're sold, that's viewed as a positive."

Central Indiana Corporate Partnership CEO Mark Miles expressed similar sentiments, although he called the loss of Suros' headquarters "bittersweet."

"All in all, we have reason to look at it as a community victory," he said. "That high-tech companies are born and acquired is a fact of life."

"I do think success breeds success," Miles added. "All the ingredients were brought to bear here. You also see it with PAN and Baker Hill. Indianapolis is establishing itself as a place where bright people with good ideas can find success."

But if Indiana's best prospects can't grow into corporate titans, some fret that bodes poorly for the future of the city and state.

"Ten years from now, these companies might have grown to as much as half a billion dollars in annual revenue," Payne said. "There'd be whole executive [teams] who would have a lot to offer the community. There's talent and leadership that comes from individuals who are here because their business is here. And that's what we'll be challenged on in the long term."
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