800 Safeguard Building
Safeguard Scientifics, Inc., is one of the few publicly traded venture capital firms in the United States. Like most venture capital firms, Safeguard offers financial backing to fledgling businesses. The company is regarded as unique, however, for its policy of entering into partnerships with its acquisitions and providing extensive support in the forms of administrative, legal, marketing, and entrepreneurial training in return for an administrative fee. Once the young company is strong enough to stand alone, Safeguard makes its profits by either taking the company public or spinning it off to its shareholders.
Safeguard began as the Lancaster Company, which was founded by Warren Musser and a business partner, Frank Diamond, in 1953, for the purpose of raising money from independent investors to fund small, promising businesses. Primarily a venture capital holding company, Lancaster was considered an unusual business for its time. After raising $300,000 from private investors, Musser and Diamond backed two companies. The first, a fledgling cable television company called Jerrold Electronics, built a cable television network in Tupelo, Mississippi. In 1963, Lancaster's share of the business was sold to entrepreneur Ralph Roberts, who later developed the business into Comcast.
The second investment, Safeguard Industries, proved more successful and became Lancaster's principal subsidiary. A printing operation founded in 1900, Safeguard attracted the attention of Lancaster through its invention of a highly successful check-writing machine that imprinted checks with the dollar amount by perforating the paper. Safeguard also successfully marketed an accompanying bookkeeping system that automatically recorded the dollar amount each time a check was printed.
As Safeguard sales grew steadily through the 1950s and 1960s, profits from Lancaster's initial investment were used to purchase interests in automotive parts, business forms, and merchandising service companies. Fueled by frequent acquisitions and a business forms market that grew by 15 percent annually in the mid-1960s, Lancaster's total sales grew from $5 million in 1963 to $20.4 million in 1968. During this time Lancaster also acquired Display Manufacturers, Inc., in 1967; DeMarco Business Forms, Inc. and Central Business Forms in 1968; and Butler Industries, Inc. in 1969. Lancaster went public in 1967, and the following year its name was changed to Safeguard Industries Inc. The original Safeguard Industries became known as Safeguard Business Systems in order to help distinguish it from Lancaster's new name.
Safeguard spent much of the 1970s regrouping from its buying spree of the 1960s. Butler Industries was sold in 1972, and the company began focusing on its core operations in automotive replacement parts and business systems. That year, Safeguard Business Systems expanded its distributions and product lines. Net earnings for 1972, including automotive operations, totaled $1.8 million on sales of $73.9 million. During the first half of the decade, sales and earnings from Safeguard's Business Systems remained strong, growing at a rate of 32 percent annually, while Safeguard Industries' auto parts and other businesses grew at an annual rate of ten to 15 percent.
In 1977, Musser suggested to his board that spinning off Safeguard Business Systems would allow stock market pressures to raise its per-share value to an amount that properly reflected its strong sales growth. Given that Safeguard Industries had a sizeable debt, and that Safeguard Business Systems brought in 60 percent of company revenues, board members and bankers were reluctant to approve the plan, fearing that Safeguard's other businesses could not survive on their own. Nevertheless, by 1979, Musser had convinced the board that the businesses would survive, and the following year a tax-free spin-off was completed in which stockholders received one share of Safeguard Business Systems for each share of Safeguard Industries. Safeguard Industries was then named Safeguard Scientifics, Inc. Within a year, shares of Safeguard Business Systems split three-for-two and were trading at 16 3/4, while the new Safeguard Scientifics traded at 15 3/8.
During this period, Safeguard Scientific's combined sales dropped from $46 million to $39 million, while earnings dropped 50 percent. Musser, however, remained optimistic, and, convinced he had a great idea, he began looking around for other up-and-coming companies that he could finance, help grow, and then spin off as he had with Safeguard Business Systems. In 1981, Musser identified two such companies: Imreg, a new biotechnology concern that had developed a drug with potential to restore damage created by the HIV virus, and Novell Data Systems, Inc. (NDSI), a fledgling computer firm based in Utah. Safeguard entered into a partnership with both, allocating $1.2 million to Imreg and $7 million to NDSI. In addition to financing, Safeguard began its unique process of entrepreneurial consultation, providing administrative, management, legal, and marketing support where needed. The company also held, beginning in 1982, regular "senior partner councils," where heads of Safeguard's different partnerships could exchange ideas and information.
After Safeguard entered the partnerships with NDSI and Imreg, the company's share price jumped by 78 percent in three months, and trading of its stock was suspended. Investigations by the Securities and Exchanges Commission revealed that Gary V. Lewellyn, an independent stockbroker, had covertly acquired a 58 percent share in the company by embezzling $16 million from his father's bank, First National Bank of Humbolt. When news of the fraud hit the markets, Safeguard's share prices dropped from around $16 a share to $5. Angry brokers attempted to take control of Safeguard and boost share prices, but Musser held on. In the summer of 1983, Safeguard agreed to buy shares back for $4.50 apiece. Shareholders were appeased, but the incident, Musser told Barron's in 1986, "cost us about two years of our lives."
In the meantime, Safeguard's investment in NDSI was deteriorating under the weight of strong competition from IBM and Japanese manufacturers. In 1983, Safeguard took a $6 million write-off and closed NDSI. Using NDSI's tax carryforward, Safeguard created a new corporation, replacing NDSI's executive management with a team headed by Raymond Noorda. Noorda quickly turned the company around by developing a software system to connect local area network (LAN) system that became known as the best in the industry.
Novell became Safeguard's biggest success. It continued to prosper, and, in 1984, Safeguard offered its shareholders a "rights offering" of Novell stock. Through the rights offering, holders of Safeguard securities were allowed to purchase one share of Novell at $2.50 a share for every two shares of Safeguard they held. The remaining shares were sold on the market, which dictated a price of $5 on the first day, giving Safeguard shareholders who had purchased Novell stock an immediate 100 percent profit.
Safeguard realized $5.3 million from the transaction, as its share in Novell dropped from 51 to 24 percent. The company then took these profits and liquidated a failed enterprise that produced computer systems for the automotive industry, leaving an after-tax profit of $1.26 million. In 1985, Safeguard reported earnings of $3.3 million on sales of 58.8 million.
During the 1980s, the company took several fledgling information technology companies under its wing. In 1984, Safeguard purchased a 31.5 percent share of Machine Vision International Corp. (MVI), a systems integrator that endowed computers with a simulated sense of vision. The company was in need of a strong cash infusion, so Safeguard made a rights offering in 1985. Due to an industry-wide slump, MVI continued to lose millions of dollars annually. When it posted a $13 million loss in 1987 and laid off two-thirds of its employees, Safeguard focused the company in another direction. MVI changed its name to CompuCom Systems Corp., moved its corporate offices from Ann Arbor, Michigan, to Dallas, and began supplying microcomputers and accessories to corporate clients. By 1990, CompuCom was Safeguard's biggest operation, with earnings of $3.6 million on sales of $343.3 million.
Not all of Safeguard's acquisitions attained the success of Novell and CompuCom. Premier Systems, a developer and marketer of software to manage bank trust accounts, founded in 1980, lost its major customer, Bank of America, in 1988. Unwilling to give up on its investment, Safeguard refinanced Premier in 1989 and replaced its senior management early the following year. CenterCore, an office furniture company that Safeguard bought into in the early 1980s, made its first rights offering to Safeguard shareholders in 1988, but fell well below Safeguard's expectations for profits.
Some partners, such as Rabbit Software Corp., never had a profitable year. Rabbit, which designed and marketed units that allowed microcomputers to communicate with a mainframe computer, made a rights offering to Safeguard shareholders in 1986. When it failed to turn a profit by 1990, Safeguard replaced members of the company's executive team with management from Novell and Safeguard. Under new management, the company began improving its product lines and seemed poised to improve its bottom line.
One risky partnership from which Safeguard withdrew involved Unison Technologies, Inc., a producer of uninterruptable power sources and supplies. Safeguard invested in the company in 1987, but Unison was slow to bring its products to market. By the time Unison was ready to begin selling, competition had already captured much of the market. Unwilling to invest in a heavy marketing operation, Safeguard sold Unison to Trippe Manufacturing Co. for $1.8 million in 1991.
In 1990, Safeguard entered into a partnership with another venture capital fund, Radnor Venture Partners, LP. Radnor and Safeguard invested in Cambridge Technology Partners--a designer, integrator and developer of corporate computer systems--and Micro Dynamics, Ltd.--a developer and marketer of document imaging systems.
By 1993, Safeguard was managing partnerships with 15 different companies. With the exceptions of Sky Alland Research (a market researcher for the automotive industry), Pioneer Metal Finishing (a metal anodizing operation), and The Nichols Company (office and commercial leasing), all Safeguard's partnership were with information technology firms. Safeguard controlled three publicly traded firms: Tangram Enterprise Solutions (formerly Rabbit Software), CenterCore, and CompuCom.
While analysts expected Safeguard to realize impressive growth through the 1990s, all venture capital firms involved considerable risks. The company enjoyed tremendous success with Novell, offering investors an 800 percent return on their investment, and in 1993, industry analysts cited CompuCom as Safeguard's "next Novell," ranking CompuCom sixth on Fortune magazine's list of the fastest-growing public companies. But for every success like Novell, Safeguard nurtured a dozen or more companies whose future was uncertain. Nevertheless, known for its creative financing and loyalty, Safeguard has proven its ability to realize profits from risk.
Principal Subsidiaries: Cambridge Technology Partners; CenterCore; Coherent Communications Systems; CompuCom Systems Corp.; Diamond Technology Partners; Laser Communications; Micro Dynamics Ltd.; New Paradigm Ventures; The Nichols Company; Pioneer Metal Finishing; Premier Solutions; Radnor Venture Partners, LP; Sanchez Computer Associates; Sky Alland Research; Tangram; XL Vision Inc.
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