Forever Young: Safeguard celebrates its 60th birthday with an enduring spirit of entrepreneurship

Posted by | September 20, 2013

In 1953, the average cost of a new home was $9,550. Gas was 20 cents a gallon, and the average annual wage was $4,000. The term “venture capitalist” was as foreign to the public as the “Internet.”

That didn’t stop Pete Musser and Frank Diamond from starting Lancaster Corporation on Sept. 11, 1953 to “engage directly or indirectly in the development of electronics, atomic energy, chemical, metal and petroleum industries and in the development of basic natural resources.” They initially raised $300,000.

Sixty years later, the Wayne, Pa., company, now known as Safeguard Scientifics, is a solid presence in the Greater Philadelphia area and beyond. Safeguard withstood the test of time and has forged trends, not followed them. “The birth of innovation in this region is largely a function of Safeguard and its activity,” says Stephen M. Goodman, a partner at Morgan, Lewis & Bockius, who represents emerging growth companies.

Even at age 60, Safeguard retains an entrepreneurial spirit. “It means willing to take a risk; it means trying new things,” Musser says. “It means willing to work with other people who may have the knowledge that you don’t have — we did a lot of that.”


The Ultimate Entrepreneur

When Musser was growing up in Harrisburg, Pa., entrepreneurs seeking funds turned to banks, family members or private investors. It wasn’t until the 1940s that firms such as the American Research and Development Corporation sowed the seeds of venture capitalism.

Musser didn’t set out to pioneer venture capitalism in Philadelphia. Armed with a degree in industrial engineering from Lehigh University, he came here as a trainee in a two-year Pennsylvania Bell program. Bored and more interested in securities, he took a job a Hornblower & Weeks, an investment banking and brokerage firm.

In 1953, he and Diamond launched Lancaster Corporation, which made two significant initial investments: one in Safe-Guard Check Writer Corporation, which made machines that imprinted dollar amounts on checks, and one in Jerrold Electronics, Inc., which made antenna equipment. In 1963, Lancaster sold its shares in Jerrold to Ralph Roberts, the founder of Comcast.

In 1966, Lancaster became Safeguard Industries. “Safeguard” was a “broader-serving name,” Musser explains, “just like ‘Acme’ is today.”

Certainly Safeguard had broad interests, including companies that offered merchandising services and those that made automotive parts and business forms.

Safeguard went public on the American Stock Exchange in 1967. By 1968, it had added 11 companies to the portfolio. Trading on the New York Stock Exchange began in 1971.

In the 1970s, automotive parts and business systems remained a heavy emphasis. Earnings from Safeguard Business Systems — the sector that evolved from the check-writing company — grew 32 percent a year; auto parts and other industries grew 10 to 15 percent.

Safeguard Industries in 1980 spun off Safeguard Business Systems. Its stock rocketed to more than the price of both companies combined prior to the spinoff.


High Tech. High Rewards.

In 1981, the newly rechristened Safeguard Scientifics made an investment in Utah-based Novell Data Systems, a computer company that soon faced competition from IBM. “We couldn’t possibly bring our manufacturing costs down to the point at which we could compete,” recalls Jack Messman, who became executive vice president of Safeguard in 1980. “Pete said to shut it down.”

In the process, Messman discovered software that linked computers on a local area network (LAN) system, and Safeguard infused the newly named Novell Inc. with fresh capital. (Messman was CEO of Novell until Ray Noorda took over in 1983.)

The funding partly stemmed from a “rights offering.” Safeguard shareholders could buy Novell stock at $2.50 a share. (The amount of shares available to each was proportionate to the amount of Safeguard stock they owned.)

When Novell shares hit the public market, they were priced higher, giving Safeguard investors an immediate profit. “It made money for the shareholders, it made money for Safeguard, and it made money for Novell,” Musser says. Safeguard would issue about another dozen or so Rights Offerings in the late 1980s and throughout the 1990s of other partner companies.

Safeguard also transformed CompuCom Systems from a systems integrator, endowing computers with a sense of “vision,” to a PC and network service provider. By 1993, it topped $1 billion in revenue. In 1989, Safeguard invested $3 million in Cambridge Technology Group, which in 1991 spun off Cambridge Technology Partners. USA Today called this public offering the “most successful IPO for a technology company” in 1993.

In 2001, when Cambridge didn’t meet its forecast, Messman, who’d left Safeguard, returned to take over Cambridge. He was also on the board of Novell, whose CEO at the time, Eric Schmidt, wanted to add consulting services. Novell bought Cambridge, and when Schmidt went to Google, Messman became CEO of Novell for the second time.


The Rise of the Internet

By 1998, 50 percent of Safeguard’s partner companies were Internet related. “The Internet was really revolutionary,” says Robert Keith, who with Ira Lubert founded TL Ventures, which received funding from Safeguard. (Keith was chairman of Safeguard’s board from 2000 to 2009; Lubert was vice president of acquisitions for Safeguard from 1988 to 1997.)

“Anything having to do with the Internet could raise money,” Keith says.

Indeed, the interest prompted Walter “Buck” Buckley, who’d joined Safeguard in 1987 as a financial analyst, to create Internet Capital Group (now ICG Group) to specialize in that industry. Musser helped raise $40 million for the new business. “Pete believed in us and gave us confidence and momentum,” Buckley says. In 1999, when Internet Capital Group went public, its stock more than doubled.

As fears of Y2K escalated, many realized that the Web’s infrastructure was still too young. Market valuations were inflated; business plans weren’t sustainable. “The rocks started to roll downhill,” Keith says. So did Safeguard partner companies’ stock.

To complicate matters, Musser had bought technology stocks on margin, using his Safeguard stock as collateral. When Safeguard’s stock slid, he had to pay the debt, which necessitated selling some of the Safeguard stock.

Musser retired in 2001, and Tony Craig became president and CEO. “Safeguard is a very different company than it was a year ago, as we move rapidly from an early state portfolio company towards a software and services based solutions operating company,” wrote Craig in the 2002 annual report.


Safeguard in the 21st Century

Safeguard liquidated legacy investments to generate cash for new projects. The sale of CompuCom in 2004 generated $128 million in gross cash proceeds for Safeguard.

When Peter Boni became president and CEO in 2005, Safeguard refined its focus on information technology and life sciences. By 2009, Safeguard had 10 partners in life sciences and seven in information technology.

This focus reaped rewards. In 2010, GE Healthcare acquired Clarient for $587 million; and Eli Lilly purchased Avid Radiopharmaceuticals, which developed molecular imaging products to detect the pathology associated with neurodegenerative diseases, for $300 up front.. In 2011, Shire acquired Advanced BioHealing for $750 million; and McKesson acquired Portico Systems for $90 million.

With an influx of cash, Safeguard reduced its debt, a task that current President and CEO Steve Zarrilli had made a mission since joining Safeguard in 2008 as chief financial officer.

“From 2000 to 2008, people wondered if we were going to survive,” says Zarrilli. “Safeguard fell off the map; people hunkered down. But beginning in 2009, Safeguard’s hard work and determination was paying off and Safeguard was back on the map as a go-to resource for growth capital. I believe that over the next 10 years, 60 years, we’ll have an even stronger voice.”

Safeguard has not only done well after the dot-com crash and recession, but it has upgraded its portfolio and “created a leaner, more functional management team,” Goodman says.

Yet Safeguard remains rooted in people not bottom lines. Boni led the effort to open the Philadelphia office of the Network for Teaching Entrepreneurship, which trains high school students, particularly in low-income areas. Safeguard employees are active volunteers and the board Boni built is made up of successful fundraisers, says executive director Sylvia McKinney.

Safeguard also remains committed to helping partner companies with more than money. “They make good on their promise to provide meaningful value,” says Ned Moore, CEO of Clutch, a mobile commerce company that received $5.5 million of capital from Safeguard earlier this year.

Clutch used Safeguard’s network to recruit board members, advisors and team members. “It gives our team a broader market perspective,” says Moore, who also co-founded Portico Systems.

Like Lubert, Keith and Buckley, former Safeguard employees have gone on to create venture capital firms or start businesses, something that Musser, a true people-person, encouraged.

He’s proud of Safeguard, but he’s particularly proud of the current and former staff’s accomplishments. “It is,” concludes the founder, “a very satisfying legacy.”

This post originally appeared in the imPACT Times.


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