Local Firm Builds Brain Trust Through Acquisitions

When Kintera Inc. acquired American Fundware Inc. last month, it was the seventh purchase this year by the San Diego-based company that makes software that helps nonprofit organizations manage their fund-raising activities.

During the last two years, Kintera has acquired a dozen smaller companies, most of them making some type of software that enhances Kintera's main product line.

Kintera's aggressive buying strategy has propelled the company's revenues through the first nine months of 2004 to nearly $16 million, more than triple the $5 million it reported for the like period of 2003.

For the full year, Kintera expects to generate between $23 million and $27 million in sales, up from about $8 million in 2003.

Likewise, its staffing numbers have risen from 163 employees at the end of last year to about 410 by the time the purchase of American Fundware, a Colorado subsidiary unit of Intuit, Inc., is completed.

Kintera founder and Chief Executive Officer Harry Gruber said the strategy is necessary to reach his intended goal of becoming the premier firm that assists nonprofit organizations manage their fund raising.

"We're trying to build a substantial company in a short period of time," he said. "We're building a brain trust and acquiring the best and brightest management teams in the industry."

Gruber, who has a track record for launching successful high-tech companies, heads up Kintera's "pilot team" to determine which firms to buy. Two others involved in the process are Dennis Berman, the executive vice president of corporate development, and Steve Klein, the senior vice president of business development.

Narrowing The Field

The two key determining factors to narrow a field of potentially hundreds of targeted acquisitions are the particular sector the firm is in (such as health, human services or religion), and the technology the firm is providing.

"The number one reason is the quality of the management team, and number two is (the team's) knowledge of a particular sector," Gruber said.

"The technology itself is less important because we rebuild it anyway to fit our platform."

After conducting an analysis of a particular company, looking at its managers, the software and its customers, Kintera makes an offer based on the collected data. The major factor in deciding a firm's value is annual revenues.

In most cases, before any final agreement is signed, Gruber visits the company in person and meets with owners, employees and customers.

And in most cases, his offer is accepted.

"I've never had an outright no, but I've had a few 'not yets."'

A few companies prefer to continue operating as they are, and aren't interested in joining a larger firm, Gruber said.

A Change Of Heart

About four years ago, Gruber tried to buy the Carol Trevelyan Strategy Group, a Washington, D.C., firm that provides software to nonprofits for recruiting and fund raising, but the owners turned it down.

In March, the company agreed to be sold for $5 million in Kintera stock and $250,000 in cash. The price was just about what CTSG's annual revenues were for 2003.

The fact that Kintera is a public firm (traded on Nasdaq under KNTA) has helped the company strike its deals. Many smaller firms can easily view the company's financial condition through public, audited reports, Also, the founders realize they can more readily achieve their dreams by joining forces with a much larger entity than by themselves, Gruber said.

While buying firms in most industries often results in job consolidation and layoffs, especially at the top, that isn't the case in the software industry, he said. Generally, the management team is retained, and given incentives to stick around as it continues guiding the firm's growth.

Gruber said that most acquired firms' management teams remain after the acquisition is final.

Overall, less than 10 percent of the staffs of newly acquired companies leave once the deal is final, Gruber said.

For the most part, the integration of disparate businesses operating in different parts of the country has gone smoothly, he said.

"You run into problems, and you solve them," he said. "The most difficult thing with some is understanding what their new alignment is, getting everyone to agree on what their role is."