STRATEGIES

November 11, 2003

High-end hosting provider Data Return survived a January 2002 acquisition by incubator divine, and then divine’s February 2003 bankruptcy, to emerge as a stronger, profitable, standalone company.

“In February, when divine filed for Chapter 11, our business was actually internally being run profitably,” Sunny C. Vanderbeck, CEO & co-founder, told ASPnews. “And so as we were going through that process of effectively divesting the assets from divine, it looked like an opportunity to re-ignite the business. In the context of the auction, we had a number of parties bid that understood the value of the business, that understood that we were just shy of our fifth quarter of profitability.”

Managed-host buyout firm Saratoga Partners ended up winning the auction, purchasing the Data Return assets of divine for $24 million. The deal closed on May 15, less than 3 weeks after divine declared bankruptcy. “They’ve really been very supportive of the management team. They understand the big picture as far as what’s evolving in the industry and what the opportunities look like,” Vanderbeck said. “There was always some risk in the mix, just because of the size and scale and nature of a bankruptcy like that. But it was clear that our part of the business was healthy. I think that really helped customers quite a bit in terms of going with their instincts to stay with us and stick it through. It was a very short process, and that helped as well.”

The time as a unit of divine was not all bad for Data Return. While before the acquisition, the company was exclusively a Microsoft shop, under the divine umbrella it was merged with the operations of Host One and Intira, which now makes up Data Return’s Unix team, accounting for about a third of Data Return’s business.

“We now offer services on all major platforms and have proven ability to deliver there as well. It’s given us the ability to broaden the service delivery, but to do it in such a way that it wasn’t distracting from our original focus on Microsoft,” Vanderbeck said.

Key to Data Return’s success was a decision early on not to invest in infrastructure, but to focus on intellectual property. Its digitalOps enterprise lifecycle management system deals with things like change management, event aggregation and notification, customer notification and prioritization, system architecture, system design, logical asset management, etc.

“At the end of the day, instead of having a lot of square footage and a lot of debt, we had no debt and a million lines of software code that let us run our business more effectively, that created new value for our customers, that drove availability up, that drove customer touch up, so the business ran better,” Vanderbeck said.

“We couldn’t have imagined being in the datacenter business. That business depends on a stunning amount of capital, and the risk associated with that much debt on the business means that two things have to happen — you had to be willing to change, and you had to be able to change. Even the companies that had a model that was extremely capital-intensive that were willing to change, in a lot of cases didn’t have the opportunity because of the capital structure of the business. We had a level of flexibility that a lot of companies didn’t have, and we had a willingness to flex and make it work.”

By having the core framework of digitalOps to build around and to have a base to build from, Data Return was able to take the product knowledge and the operational experience that the teams from Intira and Host One had and integrate that into the Data Return delivery model.

“We have the same ability to deliver a highly customized product, but a highly repeatable business across all platforms. We deliver a quality of service and a capability that you could not deliver internally without building the software,” he said.

Data Return’s focus is on customer delivery — making sure they can actually solve the problem for the customer. Today, a service provider generally has the option of aligning itself with one of the large telecommunications firms who have hosting divisions, or working with hosting divisions of large equipment manufacturers. With Data Return, the service providers have the option of working with a company which, at its origin, was a software development company who understands what it means to build and manage applications.

“We have the ability and willingness to troubleshoot application code. We’ve got developers on our support team, and while we’re not in the business of creating new functionality for our partners, there are customers who look to us for someone to lead the charge when it’s 2 a.m. and the application blows up and no one knows why,” Vanderbeck said.

“The most common scenario is that the infrastructure team, whether in-house or outsourced, and the application team both blame each other. That’s how it works. We don’t think that’s a good enough answer. We think the right answer is for us to take charge of the problem and work it until it gets solved. If that means we hang a debugger off the side of it and step through the machine language code until we find the problem, we’ll do it. If it means we need to get all the way down to a line of source code to help you, we’ll do it. The ability to drive all the way down into the thing and to never have to hear ‘That’s not our problem’ is really what our customers rely on.”

One other thing that is different about Data Return, version 2, is the possibility of pursuing acquisitions, Vanderbeck said. “Because of our blinding focus on Microsoft, acquisitions really weren’t in the cards for us. They didn’t sit with the strategy of the business. I would say that’s changed notably. Given our financial position now, the amount of capital we have available from our financial partners and generally the state of the industry, you should expect to see that we’re active in that regard.”

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