Neoforma.com, Inc. Acquires General Asset Recovery, LLC
B-2-B Services to Include Live Auction, Internet Auction, Classifieds and More. Neoforma.com, Inc., the global healthcare marketplace, announced today that it has acquired Arlington Heights, Illinois–based healthcare auction company General Asset Recovery, LLC (GAR) . . .
Neoforma Press Release, August 17, 1999
eBusiness and the Supply Chain
Are you at risk of being “Amazoned?” Depending on who you talk to, it’s more a probability than a possibility . . . Can a fledgling dotcom company really swoop into health care and “re-intermediate,” as Amazon.com has done in the publishing industry? . . . “Any GPO or distributor that signs a contract with an e-commerce company will have just signed its own death warrant,” says one GPO executive . . .
The Health Strategist, August, 1999
It’s funny to think of eBay and Amazon.com as the dinosaurs of the Internet. But it’s becoming clearer that the Web’s real promise lies not so much in auctions and consumer sales, but in the exploding business-to-business market . . .
Forbes, August 23, 1999
Whenever we saw a gap in our organization, Bob, Jeff, some other manager or I would meet with others to discuss the need...
If the need was short-term or temporary, we would try to outsource it. A consultant could easily be dismissed when the job was done or if they didn’t work out. If a need was critical, long-term and could not be met by existing employees, we would be forced to seek new talent.
In any company, a new hire is a risk. It’s never certain how a new hire will perform with existing employees. Even if a new person is very good at what they are hired to do, that doesn’t ensure that he or she will be effective.
The challenge is amplified by magnitudes when a big project needs to be staffed — right now. It means one person can’t be hired at a time. The company has to hire a bunch of individuals at once, throw them together and hope for the best.
It was always a precarious situation. But, in the beginning, it had been our only option for big projects. Later, we had other choices.
When Neoforma was a couple of months away from filing an IPO, our cash reserves were high and our stock had become very valuable currency. The risk-to-reward profile of pre-IPO stock made it a tantalizing treat to dangle in front of outside talent.
The more that notable talent was brought into the company, the more valuable the stock became. So, in certain cases, it made a lot of sense to look at the possibility of acquiring companies instead of individuals.
Companies that have managed to produce something have been “cycled.” They have worked out at least some of the interpersonal kinks.
When we observed that a large portion of our website visitors were seeking used medical equipment, we researched the market for secondhand equipment. It was a large and fractionalized market—two essential criteria for us to consider getting into a market.
Our first step was to leverage our substantial website traffic and Internet software expertise. We used a combination of internal developers and external software to quickly build a very functional auction site. We partnered with many existing used equipment dealers to quickly add equipment listings.
We had some success, but the many cultural, logistical and regulatory challenges inherent in the used medical equipment market seemed to be keeping us from being anything more than a peripheral player. That wasn’t enough for us. There was too much about the process that didn’t make sense.
Take your most negative stereotypical image of a used car salesperson—with slick hair and cheap suit—standing outside, among rows of evenly spaced cars and surrounded by colorful banners, waving eagerly in the breeze. He smiles very broadly, as he points to the large numbers taped to the windshield of a shiny, high-mileage coupe. Now, add some gaudy jewelry to the suit and grease to the hair.
Replace the image of the orderly car lot with that of a cluttered warehouse. Replace the shiny vehicle with a pile of dusty IV poles and bedpans. Add to the background a few shadowy pairs of foreign nationals, whispering in assorted languages, as they inspect the merchandise. That is the market our group of Silicon Valley techies was trying to enter.
Unlike the new equipment market, we didn’t have much first-hand experience with the used market. It did not take us long to realize that the gritty nature of the used market required us to build a solid bridge between our computers and the warehouses that housed the equipment.
John, one of our salesmen, was the one guy in our organization with a strong connection to the used equipment market. From the beginning of our auction program, he had been a key facilitator in establishing relationships with existing dealers. One day, a couple of months before Bob joined Neoforma, John suggested to Jeff that if we really wanted to establish a foothold in the used market then Neoforma should buy GAR.
GAR was the leading used equipment auctioneer to the healthcare industry. John thought that GAR might consider selling their business to Neoforma. There was precedent for us to consider acquiring a land-based auction house. A few months earlier, the leading consumer Internet auctioneer, eBay, had acquired Butterfield & Butterfield, the fourth-largest auction house in the U.S.
Jeff was not particularly thrilled with the idea of buying a “bricks-and-mortar” company, as non-Internet companies were called, until John convinced him to observe a large auction by GAR of used equipment.
Jeff came back to the office very excited. “We have to buy this company. It makes so much sense. It’s what our strategy has been missing.” His excitement was contagious. I wanted to see one of these auctions too.
A couple of weeks later, I stopped by General Electric’s medical equipment division headquarters in Milwaukee on the way to another East Coast meeting. GAR was facilitating an auction for GE. GE had a substantial business in the refurbishment of used medical equipment. I was particularly intrigued by this auction because I was already leading a number of discussions between GE and Neoforma. If GAR could make a very fussy company like GE happy, then they had certainly earned my respect.
I was met at the airport by Gino, the CEO of GAR. Gino was young, tall, dark and handsome, with expensive clothes and gilding— in the form of large gold bracelets and neck chains. I suddenly felt old, short, light and cute. To ensure that he would be noticed and appreciated from a distance as well, he showed up in a very posh, new Mercedes. He was so polished that I half-expected him to squeak as he moved against the leather seats in his car.
Gino greeted me warmly, immediately commenting on how much younger I was than he had expected. I told him the truth: I only looked young.
I found it difficult to focus on Gino’s words as we drove to the GE warehouses. I was entranced by the shiny wood surfaces and digital displays. I couldn’t get my mind around the idea that my company was planning to buy his company.
His was a small company, made up of about twenty employees. His company was still young and struggling to get out of the red. Yet here he was, clearly living a life of luxury. As he described his large home near Chicago, I thought about my battered family wagon with missing hubcaps and my small house on a busy street. I couldn’t imagine how someone could start a company and yet meet his own needs for a glamorous lifestyle so early on. I thought back to Jeff’s comments during our last funding round about how he and I had always put ourselves on the bottom—low salaries, no bonuses, no company cars or other perks, and the lowest stock preferences. I felt a sense of indignation about how Gino had unapologetically put himself first. Warning bells started to go off in my head.
But all of that faded when I saw Gino in action. He was a classically trained auctioneer—all fast talk and innuendoes. Watching him was a thing of beauty. In a matter of minutes, he sold more used equipment than Neoforma had sold in six months.
Neoforma ended up in a bidding war for GAR against our main competitor, Medibuy. We were already in the middle of negotiations when Bob joined Neoforma so he had a limited role in the acquisition process. Medibuy was offering substantially more to Gino than the already astronomical amount we were willing to pay. Although I hadn’t been involved in the negotiations, it started to look, at one point, like the deal was going the other way. Everyone was so frustrated with each other that the dialog had almost ceased. So I called Gino.
I talked with him, founder to founder. Then I put on my recruiting hat. I explained why short-term valuations would be irrelevant in the long run. In other words, our lower price was worth more than the other company’s higher price. After all, we were mostly talking about non-liquid stock anyway. Gino expressed his appreciation for my directness and agreed to try not to sweat the small stuff.
Ultimately, we did acquire GAR. Some good things resulted from the deal. We quickly expanded our product offering. We significantly boosted our revenue during a critical period. And we were able to establish some good relationships with large hospitals. But some bad things happened too. The gold could only gild the blemishes for so long.
Despite our two completely different cultures, GAR and Neoforma managed to get along pretty well. Neither pretended to be like the other, but, for awhile, that was okay. We only had to interact at a few key points.
Eventually, the carefully staged bluster that supported Gino’s charm began to fade. His credibility and effectiveness began to erode. He had been very aggressive in a small business but did not have the discipline to thrive in a large one. He couldn’t meet his numbers.
Under pressure to narrow its focus, Neoforma eventually sold off GAR. Nobody from GAR remained with Neoforma. Not surprisingly, Gino’s negotiations had yielded him far more money from Neoforma than any other individual made on the deal. And he eventually went right back to the same small business again.
All things considered, the acquisition hadn’t been a bad one. Had the economy not gone into a tailspin, we might have been able to make things work out. But we should have given more credence to our warning bells. And I learned another important lesson as well. When they were made of a different moral fabric, companies—just like individuals—did not have the strength to bond with Neoforma under stress.
When it came time to buy the next company, we kept these lessons in mind.
I had long believed that, prior to an IPO, we needed to address content management once and for all. As Neoforma had grown, so had the quantity of assorted valuable data we needed to manage. Most of our development resources were dedicated to developing e-commerce functionality. We wanted to capture maximum revenue from our site visitors.
In the meantime, our electronic catalogs were not being given the same attention. Our administrative interfaces made product information difficult to add, edit and categorize, and even more difficult for our visitors to find. I considered our shortcomings in this area to be our greatest company risk, by far. Without a good catalog, who would want to shop at Neoforma?
Our needs were far from unique. So, rather than try to build advanced content-management tools from scratch, I asked two of our most demanding, creative and technically astute employees, Roy and Dave, to try to find existing tools that we could plug into our solutions. After extensive research, they identified a software company that seemed to have just the kind of tools we needed.
While Pharos clearly had a great product, there was some risk in working with them. They were a small, young start-up company, based in San Francisco. Knowing that I had placed this assignment in the best of hands, I did not meet with Pharos during our evaluation phase, but I was intrigued by one thing that I heard in Roy’s reports to me: Our team and their team were getting along extremely well. I could see fondness and respect in the faces of both Roy and Dave when they spoke of the Pharos team. I knew Roy and Dave very well. Both were notoriously fussy. They could sniff out technological bluster before anyone else had even noticed. If they were this fond of the Pharos team, it was a very good sign.
Without the slightest doubt in my mind, I decided that we should pursue an acquisition of Pharos. My hunch that their team of fifteen or so was a perfect match to our development group was quickly confirmed when I met their founding team. They had a good product, but it was not their product I was after. I wanted a team of very good engineers who worked well together and understood how to organize and manage large quantities of information.
Most of the Neoforma executive team, including Bob, disagreed that acquiring Pharos was mission-critical. But unlike other times, when I had been willing to back down from my opinion for the sake of consensus, this time I would not let go.
I knew it wouldn’t be easy to get Pharos. They were a hot company in a hot space. Companies like theirs were being purchased for a hundred million dollars or more by some of the biggest Internet companies.
I had been willing to let go of much at Neoforma, but I refused to allow this hole to be unfilled. I put everything I had into convincing Pharos and Neoforma that marriage was a good thing. It was touch-and-go for awhile, but Neoforma did eventually purchase Pharos.
The members of the Pharos team were great contributors to Neoforma. A few of them became key executives in the company. Several others became crucial leaders. Others just did their jobs, but did them well.
Months later Bob would say to me, “Man, thank goodness for that Pharos team. I don’t even want to think about how things might have been without them!”
I felt very good about that. Acquiring Pharos was the most intuitive decision I had ever made at Neoforma. I had pursued them because the people felt right, not only because it seemed like a smart business decision. Too many times, I had ignored my feelings for the sake of a “smart decision,” when someone or something just didn’t feel right. And I’d almost always regretted it.
In those early years, Neoforma made a number of other acquisitions—some large, some small. In all cases, if the cultures were disparate, the results were somewhere between poor and disastrous. Matched cultures did not ensure success, but they greatly increased the odds that the people involved would be able to act naturally and cohesively when improvisation was required.