Investors angry over Flip's flops
Tech entrepreneur faces a steep climb back after Divine's stunning collapse shreds his credibility
May 12, 2003
By Julie Johnsson
chicagobusiness.com
The first time Andrew "Flip" Filipowski lost a company, his ouster played out as farce.
When an estranged business partner appeared at Naperville-based DBMS Inc. on a March morning in 1987 with armed security guards to eject Mr. Filipowski from the premises, the habitually tardy CEO hadn't arrived yet.
"They had to summon him from home so they could escort him out," recalls Richard Reck, a former financial adviser to Mr. Filipowski.
Comic relief is notably absent from the iconoclastic entrepreneur's latest misadventure, the collapse of Chicago-based Internet-incubator-turned-software-industry-roll-up-vehicle Divine Inc. Bankruptcy Court proceedings in Boston have parceled out what remains of Divine in an auction that pointedly excluded Mr. Filipowski from the bidding.
A more striking difference this time around is the scope of collateral damage and the difficulty Mr. Filipowski will face mounting another comeback.
Mr. Filipowski left DBMS as a relative unknown with one embittered ex-partner. Little stood in his way as he quickly re-established his software business, launching Platinum Technology Inc. a month later with a workforce of 20 programmers hired away from DBMS. He soon took Platinum public and sold it a decade later in a $3.6-billion deal that netted him $200 million and set the stage for Divine.
The bitter and the loyal
Divine's collapse, by contrast, was one of the most spectacular flameouts of the dot.com era, reverberating throughout the private- and public-equity markets and scorching the highest levels of Chicago's financial elite as it vaporized $1 billion in investors' money.
Mr. Filipowski strained, and in some cases snapped, relations with longtime supporters he once counted on to finance his ventures.
"He's burned a lot of bridges," says Mark Tebbe, a former Divine director and investor.
Also working against Mr. Filipowski as he ponders his next move is the reputation he earned at Divine and Platinum for enriching himself while public shareholders earned subpar returns. Adding more tarnish to his résumé is the grand jury investigation of certain transactions involving a Divine subsidiary.
Mr. Filipowski didn't return calls seeking comment for this article, but friends say the 52-year-old is already mulling his next venture, probably a software company. He likely will base future operations in North Carolina, where he has lived in recent years and where he co-owns a minor league baseball team and runs a publicly traded propane gas company, Blue Rhino Corp., with his brother-in-law, Billy D. Prim.
Mr. Filipowski will bring considerable strengths to any new enterprise. He still has a huge fortune and the charisma to captivate a roomful of prospective investors. Indeed, a core of loyalists stands ready to back the ponytailed college dropout in whatever he might undertake.
"I consider Flip to be an outstanding individual and if he needs me for support, I'm there for him," says Craig Duchossois, president of Elmhurst-based Duchossois Industries Inc. An early investor in Platinum and Divine, Mr. Duchossois has served as a director on all four publicly traded companies founded by Mr. Filipowski.
It seems clear that Mr. Filipowski has the wherewithal to launch another business. The test will come when he needs to tap a broader circle of investors to give a new venture the financial fuel it will need to grow. That's when he'll confront the bitter legacy of Divine.
"I've lost everything; it's over and that's it," says Aleksander Szlam, who invested $1 million in Divine before it went public. Mr. Szlam for a time was also Divine's largest stakeholder; he owned 35 million shares last year, after selling his Georgia company, eshare communications Inc., to the Chicago software and services firm. "Twenty-four years of my life is gone — every patent, every invention."
To fund Divine, Mr. Filipowski leaned heavily on contacts cultivated through the Young Presidents' Organization (YPO), a global executives group. YPO members invested about $31 million, led by William Wrigley Jr., who plunged $17 million into the high-profile Internet startup.
In the dot.com delirium of 1999 and early 2000, a stake in Divine became the hottest financial ticket in town, and the group of investors eventually included such notables as Michael Birck, CEO of Naperville-based Tellabs Inc., and Chicago-based insurer Aon Corp.
But the original conception of Divine as a launching pad for Internet companies soon proved to be little more than a fantasy. Mr. Filipowski managed to push through an initial public offering (IPO) in July 2000 — after Internet stocks had crashed — but the company quickly spiraled downward.
Recasting Divine as a consolidator of struggling software firms didn't stop the slide, and Divine landed in Bankruptcy Court earlier this year.
The meltdown spared neither public shareholders nor the gilt-edged private investor group Mr. Filipowski had assembled before Divine's IPO.
"He lost a lot of money from a lot of big-name investors who I don't think he'll ever see again," says William Weaver, partner at Chicago law firm Sachnoff & Weaver.
Mr. Filipowski's success in attracting private investors to any future venture will largely depend on his ability to dangle the carrot of an eventual IPO cash-out. But the institutional money managers who control access to the public markets are still nursing wounds from previous investments in Mr. Filipowski's companies.
Two of the public companies he launched, Divine and Naper-ville-based music company Platinum Entertainment Inc., wound up in bankruptcy. Even Platinum Technology, his most successful venture, produced paltry returns for public investors.
Lucrative eleventh-hour grants
In its years as a public company, 1991 through 1999, Oakbrook Terrace-based Platinum saw its shares appreciate 184%, far less than the 344% gain for the Standard & Poor's 500 Index and the 1,499% rise in S&P's index of system software company stocks.
"You'll be hard-pressed to find a lot of investors who were terribly impressed with (Mr. Filipowski's) performance from a value-adding perspective," says Drew Cupps of Cupps Capital Management LLC in Chicago, who invested in Platinum shares as a money manager at Milwaukee-based mutual fund powerhouse Strong Capital Management Inc.
Although Platinum was one of the largest purveyors of software to manage large mainframe computers, its stock was trading below $10 when Mr. Filipowski negotiated the sale of the company to New York-based Computer Associates (CA) in 1999 for $29.25 per share.
The deal proved especially lucrative for Mr. Filipowski. According to merger documents, Platinum issued him an option to purchase 125,000 shares at an exercise price of $13 on Feb. 9, 1999, eight days after it hired an investment bank to pursue strategic alternatives. Mr. Filipowski received another option grant for 675,000 shares, priced at $9.88, on March 26, just three days before Platinum's board approved CA's $29.25-per-share offer.
The eleventh-hour option grants boosted Mr. Filipowski's total take from the merger by $23.4 million. All told, Mr. Filipowski received $193 million in the merger for his Platinum stake. That was in addition to $32.4 million he made cashing in 1.8 million Platinum options between 1990 and 1998, according to federal filings.
Mr. Filipowski further enhanced his haul in the merger by negotiating consulting and non-competition agreements with CA. The consulting deal paid him $2 million over two years, and the non-competition agreement is worth $23 million over eight years.
The terms of the latter applied to Mr. Filipowski in his role as CEO of Divine, limiting the scope of the company's business. In effect, CA held veto power over the company's acquisitions and any other initiative that might infringe on the New York firm's turf.
"CA was not involved with Divine's acquisition plans or strategy," a CA spokesman says, defending the agreements as "common industry practice."
Mr. Filipowski is slated to receive $3 million from CA this year under the agreement as he contemplates his next move. His primary business interest at this point is Blue Rhino. The North Carolina company, which distributes bottles of propane gas for owners of barbecue grills, continues to grow steadily, despite suffering recent hiccups — including a 34% drop in its share price in February as investors questioned its purchase of two entities previously controlled by Mr. Filipowski.
But many in the software industry expect Mr. Filipowski to return, possibly by repurchasing some portion of the Divine business outside the bankruptcy proceeding.
"Failure is just part of the ride" for entrepreneurs like Mr. Filipowski, says Bartlett-based technology consultant John Karnatz, a principal at Market-Path Corp. "Other people would be decimated, but it's just part of the process for them."
©2003 by Crain Communications Inc. |
