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Get Four
|  | AUGUST 13, 2004
By Peter Burrows frog design's New Lily Pad Star designer Hartmut Esslinger's firm has been acquired by contract manufacturer Flextronics. Is he cashing out or embracing a new challenge? On Aug. 3, one of tech's most influential entrepreneurs quietly cashed out on an illustrious 35-year career. Or, to hear him tell it, he paved the way for future achievements of an even grander nature. The luminary in question is Hartmut Esslinger, the co-CEO of frog design. Since he and wife Patricia Roller founded the company in 1969, the 60-year-old free spirit has helped define the aesthetics of the Information Age. Sony's (SNE ) Triniton TV was designed by frog in 1978. Also in the firm's portfolio: Apple's (AAPL ) Macintosh in 1984, and the redesign of Dell's (DELL ) e-commerce Web site in the late 1990s. "Hartmut [brought] a sense of Eurodesign to Silicon Valley. He showed [that] all the beautiful things he did for European and Japanese companies could now [be done for] electronics and computers," says Chee Pearlman, former editor-in-chief of I.D. Magazine. GREEN ACQUISITION. Maybe more important, the German-born Esslinger's larger-than-life persona made him high-tech's first industrial-design superstar -- and set the mold for design firms such as IDEO, Lunar Design, and Pentagram Design that now help corporations around the world better connect to their customers. He brilliantly capitalized on the fame that came with laying out the minimalist "Snow White" design language employed by Steve Jobs in Apple's groundbreaking products of the 1980s (Esslinger would also design the chic "Cube" PC made by Jobs' NeXT Computer in the late 1980s). In 1990, he appeared on BusinessWeek's cover, dressed in leather and sitting astride a motorcycle. "Before Hartmut, industrial designers didn't know how to promote themselves," says Robert Brunner, a partner at Pentagram. "This profession needs icons, and he has definitely been one." Now he's a much wealthier icon, to boot. While frog's Aug. 3 press release said only that it had taken an "equity investment" from contract manufacturer Flextronics (FLEX ), BusinessWeek has learned that frog has basically been acquired. Flextronics paid nearly $30 million for a majority share of the 170 person outfit, of which Esslinger and Roller own 93%. Flextronics has an option to buy the remainder in three years, say sources. GOOD TIMING. After 35 years as a private company, it's a surprisingly rich payday. Design firms -- especially ones that are so tied to one individual -- traditionally have limited market value. After all, they're worth very little if the creative talent walks out the door, and they're not big enough to weather cold spells for too long. But frog's timing was excellent. After difficult years during the downturn, Esslinger says the company didn't need an influx of capital. "We're very profitable," he says. Net margins for design houses tend to be 20%-plus. And he says he has declined offers from numerous suitors of late. In fact, Roller, the other co-CEO, says she's still receiving phone calls from investment bankers who don't know that frog has already been sold. All the interest is one reason Flextronics ultimately valued the company, which had 2003 revenues of around $35 million, at well over that rate, say insiders. That's a healthy multiple, since design firms traditionally have sold at one time their revenue rate. Roller says during the tech bust, frog got numerous bids to buy the beleagured firm for well below half its revenue. Now, though she won't confirm the figures, she says, "The valuation was clearly higher than we thought it would be -- and we could have got more." "BIGGER VISION." So why sell to Flextronics, and why do so now? Some say it's because frog has lost its edge in recent years. Firms like IDEO have gone way beyond designing products to designing services and experiences -- to the point that they often end up competing with the likes of McKinsey & Co. And some say frog isn't even as competitive in straight-ahead product design. The company now gets roughly half its $35 million in annual sales from designing Web sites, software manuals, online branding campaigns, and the like. "From a product-design perspective, they've kind of fallen off the radar," says Brunner. "We rarely run into them." Roller responds: "We got a good valuation based not on revenue, but on profitability. We're doing this deal at a time of extreme strength, which is why Flextronics was interested in us. So that kind of kills [the critics'] argument." Esslinger denies that he's trying to get out while the getting is good. Rather, he says merging with Flextronics can help him flex frog's product-design muscles far more than in the past. "I don't deny the money is important," he says. "But suddenly, a bigger vision is possible. We were ahead of the curve when we started the company, and then a then a bunch of people copied what we did and began claiming that they were better than frog. That will never happen again. We're jumping ahead of the curve again." WANTING TO STAND OUT. Specifically, he says combining with Flextronics will create a unique soup-to-nuts product-development outsourcer. In recent years, a host of mostly Asian "original design manufacturers" have been designing brand-name products for Dell, Motorola (MOT ), IBM (IBM ), and many others. But they focus on designing the electronic guts of products -- not on creating a look and user experience that a customer can fall in love with. The new Flextronics-backed frog could be a powerful new competitor. Flextronics is one of the world's largest contract manufacturers, with 82,000 employees and 12 million feet of factory space in 32 countries. Besides assembling products, it also has sophisticated logistics capabilities that let it efficiently procure billions of dollars worth of parts each year. Then there's a $200 million-a-year business designing digital cameras, PDAs, and other products for big brand-name customers. With frog's industrial-design expertise, Flextronics CEO Michael Marks hopes to help his company make products that stand out among these me-too offerings. "Industrial-design firms care most about getting their good ideas out into the world," says a rival design shop's CEO. "Hopefully, frog can influence [Flextronics] to care more about the lovely bits they put into their designs -- and not compromise them away for cost reasons."
BW MALL
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