Out-of-state deals stymie chance to build N.E. pillars

Maybe I'm a glass-half-empty sort. Maybe I refuse to acknowledge the reality of the financial markets, and the need for entrepreneurs to deliver a return for their investors within a reasonable time.

But I can't help feeling that, whenever a New England company is sold to an out-of-state acquirer for big bucks, we've missed another chance to build a "pillar" company of our own.

When Dell Inc. pays $1.4 billion in cash for New Hampshire's EqualLogic Inc. this year after the storage start-up had filed to go public, it feels as if we've missed the opportunity to cultivate another EMC Corp. in our backyard. When VeriSign Inc. buys m-Qube Inc., one of the pioneers of content delivery to cellphones, for $250 million, that's a potentially significant anchor tenant we've lost for the mobile software com munity here. When Microsoft Corp. buys Softricity Inc., that's a pioneer in application virtualization - delivering software over a network connection - no longer seen as a leading player in the field, and headquartered right here in Boston to boot.

Let me present the glass-half-full case first. Acquisitions make a lot of money for founders and venture capitalists, who can then fly off and pollinate new companies. Most of the management team of m-Qube is now running other local start-ups like Matchmine, Turbine Entertainment, and Quattro Wireless. Former chief executive Jeff Glass is now an investor at Bain Capital Ventures in Boston.

Thanks to a decade of fairly steady acquisitions by non-New England purchases, our region is now home to outposts of most major technology companies, from Google to Microsoft to IBM to Oracle. Even cities like Atlanta, Chicago, or Austin don't have such a concentrated cluster of branch offices.

In some cases, an acquirer will keep growing the group it acquired. Dell is looking to hire more than 50 people at EqualLogic's old headquarters, mostly in engineering. Two of the company's three founders are still there, but chief executive Don Bulens left in June.

At a time when the stock market's interest in new offerings seems to have died, it's good to be producing companies someone wants to buy. Just last week, Hewlett-Packard Co. bought Colubris Networks of Waltham for an undisclosed sum. (I'm told by someone involved with the deal, but not authorized to talk about it, that the purchase price was only a bit more than the $50 million that had been invested in the company.)

And taking a company public is expensive. Charley Lax, one of the venture capitalists who put money into Colubris, says that "it costs us $4 million to take a company public because of Sarbanes-Oxley regulations, which create all sorts of additional paperwork. What company can afford that if their revenues are $40- or $50-million?" GlassHouse Technologies, another of the companies in the portfolio of Grand Banks Capital, Lax's Newton firm, filed to go public last December but hasn't done so yet. Based in Framingham, GlassHouse earned $40 million in the first nine months of 2007, selling services and technology to help customers manage their data centers.

Now, my glass-half-empty case.

Having a branch office is not the same thing as having a pillar company. Pillar companies like Google, Apple, and Intel pull smart people to Silicon Valley from all over the world and attract media attention. Companies that have been bought by out-of-state acquirers, like Monster.com or TripAdvisor (both Massachusetts sites owned by New York parents), often complain to me that no one remembers they're based here.

By not cultivating our own big companies - this seems obvious - we don't have a big pool of executives who have experience running big companies. "As you're looking for CEOs to run midstage or later-stage companies, what you don't have here is the executive-level talent who have the experience running significant enterprises, beyond EMC," says Lou Volpe of Kodiak Venture Partners, a Waltham firm. "That's because all the big tech companies are on the West Coast."

In 2006, Kodiak sold one of its companies, IMlogic, to Symantec Corp., a Silicon Valley security company. It was a good deal for everyone involved: roughly $100 million, all cash. At the time, IMlogic was earning about $10 million a year. But IMlogic's chief executive, Francis deSouza, is now a senior vice president at Symantec's California headquarters, and a few months after the IMlogic acquisition, Symantec laid off 71 people at its Waltham office, according to press reports.

I know that locally run companies can lay off people, too - but somehow job cuts always feel worse when done by remote control.

Innovative products created can vanish, or become less competitive, once they're absorbed within a big company. In March 2006, Microsoft bought a promising Cambridge start-up called Onfolio, which made software for managing links and information collected during Web research, and moved the team of six people out to Redmond, Wash. Two years later, Onfolio users were posting messages on Microsoft's Onfolio site with headlines like "Onfolio is dead." One user commented, "A nice example on how to destroy value. Microsoft acquired it and haven't updated since." (Founder J.J. Allaire left Microsoft last fall and returned to Boston.)

"There's a culture here in Boston where low-profile success is expected and high-profile success is not," says Paul Deninger, the vice chairman of the investment bank Jefferies & Co., observing that the "accumulation of great wealth" and larger-than-life entrepreneurial personalities seem to go against New England's puritanical grain. (Deninger sold his local firm to New York's Jefferies in 2003.)

"You need not just financial drive to go public, but emotional drive," says former m-Qube chief executive Glass. "You have to want to be a stand-alone, lasting, self-sustaining company." The team at m-Qube had talked about going public, but concluded that their company wasn't yet mature enough.

A123 Systems, a Watertown developer of next-generation batteries, seems to have the drive. They filed earlier this month to raise $175 million in the public markets.

But with every substantial company that gets bought, I wonder what might've been.

EqualLogic chief executive Don Bulens had bought his ticket to go to New York last November. On Tuesday, Nov. 6, he planned to run training sessions for the sales forces at Goldman Sachs and Credit Suisse, and then start meeting with potential investors.

But on Monday, EqualLogic got bought. It was the biggest all-cash acquisition of a venture capital funded start-up, ever.

We should all be happy, right?

Scott Kirsner can be reached at kirsner@pobox.com.