The ManTech president noted his appreciation for the writer Malcolm Gladwell and started his remarks with a discussion of two “Tipping Points” in his own life. The first event occurred when Mr. Varner was nearing the end of his graduate work in the mid-1970’s and an office-mate asked if he wanted to come along for a trip to California and an interview with a new business out there. He gave it some thought but decided to direct his career more toward the east than the west. Despite the success he has enjoyed since, Mr. Varner still wonders how things might have been different if he had joined Intel as an electrical engineer in 1976.

The second “Tipping Point” moment came not long after when ESL, the company where Mr. Varner went to work after completing his masters, was acquired by TRW. The unit that he worked in was prohibited from the transaction due to OCI concerns and the group chose to put itself up for sale. The uncertainty of the situation and the work that went into valuing the business and finding a purchaser inspired him to learn more about the business side of engineering, and he went on to get an MBA.

He spent a number of years with TASC, the company that bought ESL. During that time the business was involved in a number of acquisitions, some as the acquiring entity and some as the entity being acquired. His technical engineering knowledge and experience combined with his MBA and familiarity with business combinations made him the ideal candidate to head ManTech’s MCTS group, and that’s where he has been since 2009.

Over the course of his career, Mr. Varner has determined that there are 6 key components that make a business an attractive target for acquisition.

• Customers—Does the target serve a customer base beyond that of your current business?
• Contracts—Does the target have ongoing contracts that provide value to the acquirer?
• Capability—Does the target offer services or expertise not currently available from the acquirer?
• Culture—Will the combined entity offer a workplace similar to the one both businesses enjoyed prior to the transaction?
• Technology—Does the target offer a product that the acquirer does not?
• Geography—Does the target have offices in locations that support the acquirer’s mission?

Mr. Varner pointed out that the ideal combination involves some level of overlap in these areas to make sure that the combined entity functions effectively going forward. He noted that in his experience, the recent acquisition of WINS by ManTech may have provided one of the best examples of a transaction that satisfied all 6 of his criteria. He praised a recent article about that deal in Washington Technology magazine, saying that it provided an excellent account of the process from all of the parties involved.

In 1998, Plateau acquired Sensory Computing, a small technology business founded by Ed Cohen, a brilliant education technologist who became Plateau’s long-standing CTO.  Sensory had developed a suite of tools that could be used to create and manage courses and training content online.  This helped bring Plateau and its offerings to the Web, allowing it to manage all forms of training and content delivery, from stand-up lecture to self-paced, automated online instruction and collaboration.

By 1999, Plateau had one of the most robust, enterprise-ready LMS products on the market, but only had a few million dollars in sales and was competing with well-capitalized competitors, which at the time, included companies such as Saba and Docent.  Poised for greatness and eager for growth, Plateau management sought venture capital.

As is often the case, the quest for venture capital was not easy and consumed management for a couple years. Unfortunately for the DC-based venture community, they all passed on the opportunity. The market was good for raising capital, Plateau had revenues, and they had great customers — General Electric, Bank of America, the Internal Revenue Service (IRS), and Capital One Services, just to name a few.  Despite the positives, the difficulty in raising growth capital was frustrating management.

Finally, a breakthrough occurred when one of their best customers, GE, made an introduction to GE Capital.  Soon afterwards and with the help of GE Capital, Plateau was able to attract Euclid Partners and AIG to pull together an $18 million first round. Morgan Stanley Venture Partners joined the party later and Plateau had the capital it needed to compete and grow the business.

In early 2000, Plateau Systems delivered an integrated J2EE-based talent management platform, which allowed organizations to link learning and training with employee performance to measure whether employee goals were aligned with corporate objectives.  This was all being delivered in a perpetual license software model.  In the mid 2000s, Plateau shifted its offering from a perpetual license model to Software-as-a-Service (SaaS) – aka: “Cloud Computing.” The business model shift was painful and costly, but they successfully converted their customer base to the highly valuable recurring revenue model and continued to build sales.

A fast growing software company can eat through cash quickly.  Although the initial rounds of venture capital were in the bank, the previously profitable company’s struggles with cash flow were not over.

At one point in the early 2000s, CEO Paul Sparta and long-time President Brian Murphy gambled everything by turning down what would have been a highly dilutive capital round despite facing a severe cash crunch and the prospect of potentially missing a payroll within 30 to 60 days.  But the forecasted sales in the pipeline came through just in time and the company pulled through this critical period, regaining profitability and vital positive cash flow.  The high-stakes gamble paid off.

In 2007, Plateau acquired Nuvosoft, a provider of Web-based compensation management software and integrated Nuvosoft’s functionality.  Not just an LMS anymore, Plateau was offering multiple modules within the Human Capital Management (HCM) space and now dubbed its product a complete “Talent Management Platform.”

As Plateau crossed the $50 million revenue mark, around 2008, larger enterprise software players began to take notice.  There were some acquisition and buyout discussions but nothing attractive enough to lure Plateau management and its investors into a deal.  The Plateau executives held true to their principles and continued to grow the business profitably without the need for additional outside equity capital.

Then came along the deal they could not refuse.  On April 26, 2011 it was announced that Plateau Systems would be acquired by SuccessFactors (NASDAQ: SFSF) for $145 million in cash plus $145 million in stock totaling a $290 million deal.  It was the highest valuation ever paid in the HCM space. Management’s decision to walk away from previous offers in past years paid off.

Now, in the hands of the high-flying, multibillion dollar cloud computing pure-play, Success Factors, Plateau shareholders that held their SFSF stock were once again well-positioned for value creation.  Throughout 2011, the cloud computing sector was taking off and valuations were peaking.

Despite their long dedication to the perpetual license model, the traditional ERP software behemoths, SAP and Oracle, have been beefing up their cloud offerings over the last several years.  Both were undoubtedly taking notice of the rapid growth, high activity, and lofty valuations in the cloud computing sector.

As far as large cloud deals go, Oracle was the first to strike by landing RightNow Technologies for $1.5 billion.  Oracle paid just over 6x trailing twelve month (TTM) sales which is about twice the typical 3x to 4x TTM sales it paid for companies like PeopleSoft (ERP) and Siebel (CRM).  The high valuation bar for big cloud companies was established.

Then it was SAP’s turn, and time for the Plateau/SFSF shareholders to benefit.  SAP announced the acquisition of Success Factors in December 2011 for $3.6 billion, or $40 per share which represented about a 60% premium over the previous day’s trading price and a lofty 11x TTM revenue valuation.  This all-cash transaction closed on February 16, 2012 and represents the largest and highest valued (i.e., for deals over 500 million) cloud computing transaction to date.

Not far behind SAP, Oracle struck again with its announcement on February 9^th, 2012 of the $2 billion acquisition of Taleo, another cloud-based talent management company.  This transaction is expected to close by mid-summer 2012.  The transaction’s enterprise value is roughly $1.9 billion, but that figure is net of Taleo’s cash of roughly $115 million bringing the total equity value to $2 billion.  This valuation, like RighNow’s, is about 6x TTM revenues.

Why did SAP pay so much more for SuccessFactors (11x sales) than Oracle did for Taleo and RightNow Technologies (6x sales)?  Some would argue the reason is SuccessFactor’s stellar 60% growth rate which is twice that of Taleo’s.

Whatever the reason, it really does not matter anymore to Plateau’s management, employees, early investors, and the venture capital investors that believed in this company and management team.  Together, they all scored the highest valuation in HCM history and then, less than six months later, the largest and highest valued deal in cloud computing history.  The long wait for liquidity is over, and patience and hard work have paid off. Well done.

The contest is called the ACG Cup, and a scholarship and serious bragging rights are on the line.

In this year’s business case study battle, the enterprising group from American University’s Kogod School of Business was able to overcome all challengers, including the team from George Washington University to take the title.

The American University team members were:

• Michael Hirschberg
• Sanjana Banerjee
• Andrew Boutros
• Selma Kikic

This year’s contest took place on February 7, 2012 and was hosted by BDO at their corporate offices in Bethesda, Md. The American University team presented their case studies to a panel of distinguished judges, including:

• Jon Silverman, VP, Corporate Development, Sallie Mae
• Brian Gieseler, CFO/COO, NAEYC.
• Tim Hall, Former Director at CapitalSource
• Jim Sanders, Director, Columbia Group

The American University team will next appear at the ACG National Capital February Monthly Meeting, when the guest speaker will be ManTech’s Bill Varner.

If you’re interesting participating in next year’s ACG Cup Competition as a judge, reach out to the chapter leadership at acg@acgcapital.org.

Bill has been president and COO of MCTS group since 2009. MCTS is responsible for ManTech’s business in the Intelligence, Defense, and Civil Communities, providing technical support, systems engineering, information technology, and operations and cyber security support. The group provides services in all aspects of computer network operations, including computer-network defense, specialized systems engineering, full-scope security engineering, and enterprise IT architecture.

Before joining ManTech, Bill was vice president of Intelligence Operations for Northrop Grumman TASC, where he led more than 1,000 employees in delivering innovative technical solutions and operations support to the Defense and Intelligence Communities.

Previously, he served as vice president of TASC’s Signal and Information Processing Group, with responsibility for hardware and software development and specialized systems engineering. Before joining TASC, Bill was with ESL, Inc., where he developed adaptive-speech and signal-processing systems and advanced simulations of complex systems.

Bill is a member of the board of directors of the Intelligence and National Security Alliance (INSA) and Science and Engineering Board of the National Defense Industrial Association (NDIA). He is also a member of the University of Maryland University College (UMUC) Cyber Think Tank. He also works with several universities and schools to support all aspects of Science, Technology, Engineering, and Math (STEM) programs, and works to advance the attractiveness, applicability, and quality of cyber-security engineering and policy education in the United States.

Bill will be bringing his vast experience and knowledge of the region’s information technology market to the ACG National Capital membership when he appears at February’s monthly meeting. For more information, or to register to attend, visit the ACG Web site.

By Mark Ellenbogen, Assurance Partner at BDO USA, LLP in Bethesda

The 2012 U.S. IPO market outlook has attracted a lot of speculative chatter as some big names in technology and retail, like Facebook and Gilt Groupe, respectively, are expected to go public in the coming year. Despite the hype caused by these imminent offerings, the prevailing sentiment among the investment banking community is that we will see much more of the same this year, as last.  In fact, according to the 2012 BDO IPO Outlook Survey, capital markets executives predict only a net six percent increase in the number of U.S. IPOs, at an average of $291 million.

As revealed in the survey, respondents’ confidence in a robust 2012 IPO market is tempered by political and economic concerns: When asked to identify the greatest threat to a healthy U.S. IPO market in 2012, two-thirds (67%) of capital markets executives cite global political and financial instability.

While the lackluster numbers and pervasive economic concerns do not bode well for the overall 2012 market outlook, technology companies are expected to outperform other industries in IPOs, indicating that the D.C. regional economy could benefit from the expected activity.

Another sign that the IPO market is more robust in D.C. than in other markets is the region’s focus on developing tech accelerators.  As discussed in the article Silicon Hill: The Rise Of The New D.C. Tech Scene, the D.C. area is successfully challenging Silicon Valley’s monopoly on emerging technology startups, positioning it as a hot spot for IPO activity.  The D.C.-based tech startup LivingSocial Inc.—an electronic commerce site that offers daily deals and discounts—will be a company to watch for a 2012 IPO, despite shelving its initial IPO plans after raising $176 million in a private offering during a funding round to raise $400 million in late 2011.

Finally there is a strong desire among local deal-makers to do local deals.  To help facilitate a vibrant deal community, the National Capital chapter of ACG will hold a Capital Connection and Dealsource event at their upcoming Strategic Growth Conference in April.  A number of local investment bankers and private equity firms have already signed up.

Participating Investment Banks & PE groups to date include:

• Aronson Capital Partners
• Bluestone Capital Partners
• Chertoff Capital
• Clearsight Advisors
• Harris Williams
• Houlihan Lokey
• Imperial Capital
• Inverness Graham Investments
• Lincoln International
• The McLean Group
• Pierce Capital Partners
• Prospect Partners, LLC
• Raymond James
• Sagent Advisors
• Seabrook Partners LLC
• Signal Hill
• WWC Capital Group

If you’re interested in attending, you can find additional information and register at the ACG National Capital Web site.

In his most recent “Carl Grant on Business” videos, Carl Grant, the Executive Vice President of Business Development for Cooley, LLP, discusses some of the things that executives should and shouldn’t do when looking to raise capital for their business.

In the first video, Carl discusses non-disclosure agreements (NDA) and why the ethics and character of the people you choose to do business with are worth more than a signature on a piece of paper.

In this second video, Carl discusses valuation. Knowing exactly what your company is worth can be a big challenge for executives. Carl provides some tips and tricks for identifying just what your business’ value is.

Inova Health System CEO Knox Singleton spoke about factors driving change in the healthcare industry to ACG National Capital’s January meeting.

After an introduction by Michael Farber from event sponsor Booz Allen Hamilton, Mr. Singleton told the members that the industry as a whole is in a place that he hasn’t seen before in his 40 years of experience. The high degree of uncertainty makes shifts very hard to predict; from the pending Supreme Court ruling on healthcare reform to the ongoing revolution in treatments and research brought about by new medicines, tools and bioinformatic data management.

One of the few certainties in today’s healthcare system is that the economics are not working at just about every level. While clear forecasts may be hard to come by, he described three forces currently affecting healthcare and offered his insights on where they might lead the industry in the next few years.

Mr. Singleton noted that the aging of the American population is creating a greater demand for treatments. The fastest growing segment of the population is the 85+ age bracket, and they spend significantly higher amounts on healthcare than younger groups. He also pointed out that family dynamics are causing some urban populations to age more rapidly. In our area, he explained that the population is aging ahead of the national average because elderly parents move here to be near children who need to continue with their careers as they step into the role of caregivers. Overall, he suggested that even if unit costs remain stable, the increasing volume could cripple the current Medicare system.

Next, Inova’s CEO talked about how the healthcare reform law might affect the industry, assuming that the exchange concept is not overturned by the Supreme Court. He expects that the exchanges would lead most small to mid-size employers to get out of the business of providing healthcare to employees. He likened the exchange system to the Western European model of healthcare that he experienced during a fellowship opportunity after graduate school. That system would typically overpromise and underfund healthcare, leading to long waits for non-emergency procedures. The delays would drive those who could afford it to purchase private coverage that would provide another tier of service beyond that available to those in the exchanges.

He also suggested that the reform law as enacted would lead to reductions in payments to doctors and hospitals, with an ensuing consolidation among physician practices and medical centers. Among doctors, Mr. Singleton feels that older practitioners will retire, those who continue to work will look to form into practice groups, and the doctors fresh out of school will be looking join those practice groups. He predicts that free-standing hospitals may cease to exist within five years, as the economics of the business will require those institutions to join a healthcare system or shut down.

Lastly, the Inova executive focused on changes in the science of medicine that will lead to significantly different processes for research and treatment. He described how our understanding of the human genome has significantly improved the healthcare industry’s ability to predict individual medical problems and either prevent them or detect them early. As the research moves forward, more and more patients receive care customized to their body’s ability to respond. Physicians can look at the genomic receptors in a patient to determine what course of treatment will activate that person’s defenses against a particular disease. As for the research itself, he pointed out that long trials on humans may not be as critical in the near future, as tests can be performed on collections of tissue samples to predict how the human body will respond.

Mr. Singleton closed with a look at the growth of Inova Health System, from an idea formed around a dining room table in the late 1970’s to a nationally recognized regional health system today. He attributed the system’s success to leadership in medical service and personalized medicine, a fully integrated and comprehensive health care delivery model, and a commitment to education and clinical research.

Please join us for our next monthly meeting on Friday, February 17, when our speaker will be William Varner, President & Chief Operating Officer, ManTech Mission, Cyber & Technology Solutions Group.

Are non-competition agreements enforceable?  The answer is becoming more complicated and difficult for businesses, especially in Virginia.  Following a trend of narrowing employer rights, the Virginia Supreme Court in Home Paramount Pest Control v. Shaffer recently overturned a twenty-two-year precedent that permitted broad non-competition restrictions on former employees.  The November 2011 decision is a wake-up call for all employers to review their restrictive covenants to safeguard their business interests.

When Justin Shaffer was hired as an exterminator by Home Paramount, he signed an employment agreement with a fairly standard non-compete clause.  It prohibited him for two years after leaving the company from engaging “directly or indirectly” or concerning himself  “in any manner whatsoever” in a pest control business in a location where he had worked for Home Paramount.  Shaffer resigned to take a position as an exterminator with a competing pest control company, where he solicited Home Paramount’s customers.  Home Paramount sued Shaffer for violating his non-compete and his new employer for interfering with his employment contract.

The Court found the clause to be unenforceable, reversing its own 1989 decision in which it upheld identical non-compete language.  While the Home Paramount ruling involved pest control, it has particular relevance for high tech industries, government contractors, and professional services companies where the skills and “intellectual capital” of employees are major components of the enterprise value.  Courts in Virginia and other jurisdictions will review a restrictive covenant under a three-part enforceability test, asking is it: 1) drawn narrowly to protect the employer’s legitimate business interest; 2) unduly burdensome on the employee’s ability to earn a living; and 3) against public policy?  To evaluate these factors, courts focus on the functions or activities, the geographic area, and the duration covered by the restriction.  While Home Paramount is precedent in Virginia only, its reasoning may be utilized elsewhere.

Under Home Paramount, a non-compete should, in general, be focused narrowly on preventing the former employee from directly competitive employment doing the same job or functions that he performed previously.  However, the Court did not even consider if Shaffer’s new job was actually the same or whether he was soliciting Home Paramount’s clients.  Instead, it focused on the hypothetical application of the restriction.  The Court found the restriction to be overly broad because Home Paramount could not provide evidence of a legitimate business interest supporting its possible application.  For example, it could prevent Shaffer from owning stock or working as a janitor in a competing business.  Moreover, Virginia courts are among a minority that will not modify an otherwise overly broad covenant to make it reasonable under the law. Thus, the Court in Home Paramount struck the entire restriction.

There are various “tools” businesses may use to create enforceable rights and leverage to prevent competition and protecting trade secrets when employees exit.  Among these are: 1) return of company property; 2) precluding disclosure and use of confidential information; 3) ownership of intellectual property; 4) no-raiding of staff; 5) no-solicitation of customers or prospects; and 6) non-competition.

As facts supporting enforceability vary among businesses, copying covenants from the Internet or using a shotgun approach may result in no protection, particularly in states where such restrictions are disfavored.  Indeed, the common misconception that restrictive covenants are unenforceable is due largely to poor drafting, or “using a baseball bat to kill a fly.”  Given the Home Paramount decision, prudent employers would likely benefit from reexamining their restrictive covenants to avoid risking their most valuable assets.

Jeffrey Berger represents high-tech companies, government contractors, and executives in employment and labor law matters.  www.bergerlaborlaw.com.

The networking and educational opportunities that ACG delivers to its members has helped it grow into a global organization with 56 chapters. And ACG continues to grow, even in light of economic downturns and financial instability in the global marketplace.

Just today, ACG Global announced a major milestone: the association has surpassed 14,000 members. In the past year, 4,073 new members have joined the association, driving the total membership up to 14,084.

Here is the official press release from ACG Global:

ASSOCIATION FOR CORPORATE GROWTH MEMBERSHIP PASSES 14,000

Milestone number a record for the association which caters to the middle market growth community

CHICAGO—The Association for Corporate Growth® (ACG) announced it has achieved a significant membership milestone, surpassing 14,000 members—14,084 members to be exact. This includes 4,073 new members that have joined over the last 12 months, which represents a six percent increase.

“This record-breaking membership level is testimony to the hard work of chapter leaders, members and executives,” said Gary LaBranche, ACG president & CEO, FASAE, CAE. “It also reflects the strength of ACG in the middle market and the value that it provides to members.”

ACG continues to be the home for the middle market both in the U.S. and globally. Such growth was underscored in 2011 with the formation and launch of two European chapters in Spain and the Czech Republic and a third planned for Q1 of 2012 in the United Kingdom.

Founded in 1954, ACG is a global organization with 56 chapters. Doing business in the middle market is at the heart of the ACG membership experience. Chapters in the U.S., Canada, Europe and Asia bring dealmakers together to help them achieve their business and professional goals. Face-to-face events, online tools, structured networking opportunities, exclusive member benefits and leading-edge market intelligence provide ACG members with powerful business-building resources.

ACG membership consists of private equity professionals, investment bankers & intermediaries, attorneys, auditors & accountants, lenders, corporate development officers, company leaders and others focused on the middle market.

“ACG continues to expand its reach supporting its mission, Driving Middle-Market Growth,” said Andy Rice, chairman of the ACG Board of Directors and senior vice president of the Jordan Company. “ACG is and will continue to be the home of the middle market.”

For more information about ACG, visit www.acg.org.

Congratulations to the entire ACG family for reaching such a momentous milestone. The unprecedented growth of the association over the past year, coupled with such honors as ACG president & CEO, Gary LaBranche, being named the 2012 Association TRENDS “Association Executive of the Year,” illustrate the value that the association brings to its members.

In his most recent videos, Carl discusses angel investing for small, start-up enterprises. Angel investors are usually individuals that are unaffiliated with banks, private equity firms or other investment or financial company that invest their own personal money into a company. Angel investors are becoming increasingly popular in fundraising and can be extremely important in standing up a new enterprise.

In his first video, Carl sheds his tie and gets down to business, discussing how small companies can find and attract angel investors that they don’t already have relationships with:

In his second video in the series on angel investing, Carl dives into important questions that start-ups will most likely face from potential angel investors, including corporate valuation: