Spin Doctors

Dec. 21, 2004
No company spins better than Thermo Electron, master of the new venture.

While many technology-oriented companies have strapped a new engine of venturing to their basic rockets of growth, Thermo Electron Corp. (TME), Waltham, Mass., has built nearly its entire company around the concept of developing and spinning new companies out into orbit. Last year 85% of its $3.6 billion in revenues were derived from these satellite companies. Begun as a think tank in 1956, TME lived off contract research while developing core competencies including environmental and alternate-energy technologies, biomedical devices, and materials. In 1983 TME went to the public markets and raised enough capital to spin out Thermedics Inc., with its electric heart-assist device. Since then, TME has spun out and IPOed seven public subsidiaries, which in turn have begot 16 companies of their own. TME also maintains two other wholly owned subsidiaries. Since the first spinout, TME revenues have grown at a compounded annual rate of 22.7%, with share price climbing 25.2% per year. Key to the TME success is the nature of the technologies spun out. "We use the expression spinout, not spinoff," says John Hatsopoulos, president and CFO. "Companies that spin off do it with things they dont want. We spin out our very best technologies." In classic TME spinout fashion, a new venture begins as a division of the company, which does central research with about 100 potential opportunities active at any one time. If a division can prove to the TME board that it has the potential to grow at 30% per year compounded, can field a management team capable of running a public company, and has a business plan to utilize the funds TME will generate, it can launch into orbit. TME always holds a majority of stock in the spinout; its new management gets 7% to 10%, and all of the employees are offered stock via a purchase plan. Once in place, the spinout often uses its public funding to acquire new businesses, installing TME technology and revitalizing the acquisitions with new management and strategic approaches. In 1997 alone, the spinouts and their progeny made 24 acquisitions valued at $924 million. The biggest spinout challenge is developing management to run the venture. "Entrepreneurs and technical people dont necessarily make good CEOs and business managers," says Hatsopoulos. "So the challenge for us is to decide which ones can and cannot make the transition. Then the second challenge is, for the ones we dont think can make the transition, to persuade them that being an entrepreneur or scientist is equally important to being the GM or CEO. That takes a lot of persuading, and sometimes egos get a little bruised, but we have not lost a key employee in the last 12 years."

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