The Legacy of Mercury Interactive

Note: This article was originally posted on Loadtester.com, and has been migrated to the Northway web site to maintain the content online.

The story of Mercury Interactive needs to be told. I hope someday someone within the company will write a book on the early years and discuss their great successes. It would probably be a fascinating tale. I think a lot of people would also like to know more about events which led up to the HP acquisition last year. I am not sure we will ever know the whole truth. What is known is that in 2004, Mercury was aiming for a spot as one of the top five software companies in the world. In 2006, they were sold. What happened? I don’t have any really juicy insider information, only what I have read online and my personal experience with Mercury as a customer and solutions partner. Is there a “story behind the story”? There very well could be. It’s only a theory, but I think it’s important that we try to learn how the actions of a few had huge impacts on an entire company.

Pay By The Drink

In order to understand the context, we need to go back to 2004. Does anyone else remember when Mercury decided to make a big deal out of “software on demand”? I distinctly remember it because I was a customer at the time, and all of the sales guys were pushing it hard. Christopher Lochhead, chief marketing officer of Mercury, stated at Sand Hill Group’s Software 2004 conference, “I believe the traditional enterprise software model is dying.” Merrill Lynch was all over it, even creating an index for it. But not everyone was in love with the idea of term licenses. Why? Because of deferred revenue.  Mercury ended 2003 with $150 million of it. For the uninitiated – when companies sell a 1-year subscription of “software as a service” or “managed service” using a term license, they typically hold off showing all of the money as revenue at the time of sale. If I buy the service for 12 months in January, the company would only count the first three months in their 1st quarter earnings, and each quarter they would add more. Thus the revenue is deferred until it becomes realized throughout the term. If I would have spent the same amount of money on a permanent license, the entire amount would show up in first quarter earnings, making revenue look better for the company. Wall Street always wants to see bigger revenue numbers  – and right now! In this Information Week article, it discusses how the current model (perpetual licensing) needs to be fixed. Merrill Lynch is one of the few financial companies that seemed to understand the model. They went on record to state that if you look at the numbers through their index which accounted for the term licensing model, Mercury stock was “much cheaper than conventional[price-to-earnings] wisdom might apply”. There was no doubt that term licensing was big on hype. THIS published document by Gartner in October 2004 goes so far as to say it will be THE business model of choice in 2008. Does anyone see that happening next year? I don’t think so. But that was the talk of the town back then

What does any of this have to do with the sale of Mercury to HP? My theory is that Amnon Landan’s vision for Mercury started pointing in a different direction than that of the board of directors and major stock holders. Perhaps it started with the issue of term licensing, but there could have been other things that began to add up too. I am not a financial analyst by any means, but I know Mercury was a darling of Wall Street up to that time. Mercury never got bogged down in services and focused on selling software. Unlike Compuware, Mercury used their solution partner ecosystem to handle most of the testing services and only maintained a bare bones professional services staff for the high profile, high dollar stuff. They put their money and effort into research and development in Israel. This combination of things is apparently what made the stock so well favored within the software sector. So what changed? At some point in 2005, I noticed that the hype stopped. The sales teams started saying that perpetual licenses were good again and term licenses were not that great after all. Something caused this change in direction. When in doubt, follow the money. I think the stock holders wanted less deferred revenue to make more money now rather than later. I don’t think Amnon wanted to make decisions on how to run the company based on that way of thinking. The audit started. In August 2005, Mercury filed this 8-K document with the SEC notifying them that restatements of their financial records was likely – they tried to explain the licensing models here as well.

Amnon wanted to be one of the big dogs on the IT block. In an American company, the bigger you get, the more important it is to spend more and more effort making the stock holders happy. It’s kind of like a rock band who plays music on their own terms, but gets popular. Once they get a record deal, they get used to eating in better places and selling out to the big corporate record labels doesn’t seem all that bad.  I believe everything became overshadowed by revenue numbers and making decisions based on what was best for the stock holders and not what was always in the best interest of the company. There may have been a struggle internally if that was the case, because Amnon always struck me as the kind of guy who knew what he wanted and how he wanted to get there and he didn’t really care what people thought.

The Zingale Shuffle

In March 2005, Tony Zingale was asked why he was brought on at Mercury. His response was “To help build one of the top-five software companies in the world. ” It was not “to help sell this company”.

In April 2005, there was a shift to get “wallet share”, which meant trying to get more money out of existing customers. They wanted big, multi-million dollar deals. With this type of growth, and adding more customers through additional software company acquisitions (this was before Systinet) they had $1 billion of annual revenue in their site. And perhaps this was actually the plan to get there at the time. This was the stated goal at Mercury World 2004 partner session. I was there and I remember it well.

I also distinctly remember how I felt on November 2, 2005 when I read the news that multiple executives at Mercury – including Amnon Landan – who had stepped down after being found guilty of participating in 49 violations of stock option date changing. I could not believe it was true. As a partner, I felt a bit betrayed. I could only imagine the way the employees felt listening in on the conference call. For those who want a more detailed explanation of stock option back dating, click here. Let’s be fair though. It’s not like this was isolated to one company. A quick search in Google will yield names of other companies that you would recognize. This article states there are probably over 100.  Mercury just took the biggest public relations hit and were made an example of.

Zingale was immediately moved into place as the CEO as Amnon’s position went vacant. Lazard Capital Markets downgraded the stock from $40 to $20. This raised questions of a buy out almost immediately. Zingale said he did not know if that would happen – or could not share any information on the subject. The main concern at the time was the company’s reputation was tarnished, and it was most important to gain back credibility with customers.

Less than one year later we have HP buying Mercury. Hmm… Did everyone just give in to the pressure at the time and sell out in less than a year? Were things really that bad? Or did we really know the truth? According to Globes (an Israeli-based publication), a year earlier (in 2005) there were big companies very interested in buying Mercury, but Amnon Landan was in no hurry to sell. His dream was to lead the company to the top by fighting it out alone (thus Zingale’s March 2005 statement as to why he was brought on board in the first place).  With Amnon gone, real negotiations for a sale started as early as May 2006. Plans for the sale went all the way back to that fateful day in November! Globes claims when “…Mercury’s board promoted Anthony Zingale to president and CEO and appointed Giora Ron as chairman – the two were assigned one task only: to sell the company. According to a source close to the negotiations, HP did not approach Mercury. Rather it was Mercury with its new management that went out looking for a buyer.” Yet in June 2006, Chris Lochhead stated publicly about the Systinet purchase that Mercury had just made, “It’s further evidence that we want to be the acquiring company as opposed to the acquired company.”  Mixed messages?

Becoming one of the top five software companies in the world was apparently Amnon’s dream alone. Keeping with the theme that this is a theory (and that the Globes story is correct), perhaps there were some who thought it was better to profit from the sale of Mercury now, than to struggle to make it to the top and cash out later. Perhaps there were people who did not have enough faith in Amnon to make it to the next level. Did Amnon get thrown under the bus? Did someone want to get Amnon out of the way so that they could sell? Mercury had over $1 billion cash in the bank. The $28 million dollar fine imposed by the SEC would have been easy enough to pay. The company’s reputation could have been rebuilt, although that would have been a bit more difficult, but not impossible. Most likely time would have healed the wounds the back dating problems caused.

How Will Mercury Be Remembered?

Whether this theory is correct, the deed is done. HP has the reins now. All we can do now is take one last look over our shoulder at the past and glean a lesson out of it all. Three main areas stick out in my mind about Mercury as a company: the people, the products they brought to the market, and the business reputation left behind.

People

Who will the general public remember most out of all the people that were part of Mercury? Will it be all of those individuals who regularly worked 80 hour weeks to meet product deadlines? Professional services consultants who stayed on the road 48 weeks a year to implement the products properly at high profile clients? Probably not. We’ll remember Amnon Landan, who at first looked like a hero on the cover of Forbes as CEO of the year in 2003, now known as the CEO who let petty greed pave the way for losing his billion dollar company. Will we remember Tony Zingale, who outwardly appeared as though he was trying to rebuild the company’s reputation, while he might have been acting as more of a “Chief Executive Realtor”? With regards to the people of Mercury, who will be remembered for their integrity 10 years from now? If you think I am being harsh, just look at what Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, said:

“The array of fraudulent conduct at Mercury Interactive over an eight year period, including backdating dozens of stock option grants, backdating senior executive stock option exercises, structuring of overseas option exercises to conceal expenses and concealing the true nature of its earnings, deprived Mercury Interactive’s shareholders and the market of accurate information regarding executive compensation and the company’s accounting for stock options. The widespread and pernicious misconduct — including lying to shareholders, intentionally false accounting, and fraudulent stock options backdating — in this case warrants the significant sanctions imposed on the company and sought from the former executives.”

Back in the day of the “dot com” era until about 2001, everyone I met who worked for Mercury (and also for solutions partners) had a passion about what they were doing. I have not seen it lately. There was an excitement at Mercury’s growth and vision. Yeah, we sort of figured 50% of the hype was just that – hype, but we felt like we were doing something special with Mercury. We thought we were making something [software] better [through testing]. And we were.

Over the past six months I have observed as countless people originally from Mercury have left HP since the acquisition. Key players who were with Mercury for 5 or 10 years (or longer in some cases). All areas (marketing, sales, professional services) have been affected. Why aren’t these people staying on board? No one is really talking about this, but I think it’s pretty obvious. People don’t leave when they see a bright future and great opportunities ahead. I don’t mean that HP is a bad company to work for. Perhaps these people are disenfranchised now. I am sure there are many who thought the company should have continued on despite the problems. Maybe they feel like their future was sold when the company was sold. They did bet their career on the company’s potential at becoming great – on Amnon’s vision, not selling out.

What will the fallout be from losing so many valuable players on the new HP team? Will those people simply leave and go into totally new fields? Will they use the things they have learned at Mercury to bring better products to market? Could we see “real” competition to a product like LoadRunner at prices the small and medium sized businesses can afford? As professional services resources leave, how will mindshare be retained to implement complex products like Performance Center and Application Mapping? Who is going to do all the hard work?

Products

The products of Mercury have risen above the executive level to shine a bright light in all of this. This is good for customers because all they really want is a product that works and meets their needs. HP bought a company with products that can actually do much of what the marketing department claimed, if implemented properly. LoadRunner IS the enterprise performance testing solution, period! It has been given over to HP on a silver platter (literally, if you consider how much money has been made from this one product). They now have more market share in application performance testing space than all of their competitors combined. They have been entrusted with a product that has always been at least two years ahead of everyone else. This is HP’s opportunity to step up. If they continue with the product’s original vision, and keep pace with IT, they should be fine. Will HP’s people continue to mature the products and keep the bar high? Will they try to integrate non-Mercury HP apps in? Will LoadRunner become just another point solution in their portfolio of stuff?

Business Reputation

Until November 2005, I always thought of Mercury as the “little engine that could”, that made its way up the hill and over into one of the top software companies in Silicon Valley. There was nothing to stop BTO. At the partner sessions during Mercury World, when Chris Lochhead said, “BTO! This is it! This will be bigger than ERP!”, I think all of the partners cheered inside because we wanted it to be true. We wanted BTO to be our own cool acronym. We believed Mercury was a company that was being led by people who had somewhere to go.  Now I will remember Mercury as the company that used to want to be something great, but never quite got there. I know many others who feel the same way.

No matter how many good things were started in the beginning stages, Mercury’s business reputation will be defined in their exit from the IT landscape, not their entrance in the early 90’s. Ex-employees of Mercury will cringe every time they get that comment from a potential employer interviewing them – “Oh yeah, you worked for that company with the options scandal…”. The lasting impression of Mercury from a business perspective won’t be for the most important contributions they made to the industry.

The Future

My hope is that HP will take the good things Mercury offered the market in the early days and expand upon them. Mercury knew how to sell software and was not afraid to get a “proof of concept” started to demonstrate what the products could really do. Their products worked well. They never set their prices or priorities around competition, and they consistently stayed ahead of the market. As Lochhead always said, they were skating to where the puck was going to be, not where it is right now. If HP will continue to do this with the Mercury product line, they can continue to be successful and dominate in the areas of Quality and Performance testing. Indications right now is that they are on the right track – except for the fact that they are BLEEDING the initial talent that made Mercury strong to begin with.

HP’s size from a financial and “man power” perspective could make them a force to be reckoned with, if they put the effort into keeping the Mercury products at the forefront of their software business. They have a great story to tell, with all of the products that fit into nicely into every aspect of the software lifecycle that could integrate together. From a solutions partner view point, HP opens up a whole new world of customers to the partner ecosystem. Traditionally hardware-only HP partners are now asking about “that new Mercury stuff”, and the interest level is very high. There are a lot of reasons to be upbeat about the future. It’s just very difficult for some of us to think of the Mercury name in the past-tense.

The Lesson

Mercury’s story teaches us thatit takes more than a strong leader and a great vision to become a great company. Personal integrity surpasses public achievement. Had Amnon done the right thing instead of the most profitable thing, there would have been no ammunition to have him removed. He might very well be the leader of one of the top software companies today.

Taking it to a personal level – what will your legacy be when you leave the IT world? You might think you will be defined by the great intentions, actions, or inventions in your early career which made you a valuable employee. Others may see you for the small compromises over the years that bring into question your personal integrity. You might be valuable to the company, but no one may trust you.  Will people remember you for your great contributions as you changed the face of the software industry? Or will you be remembered more for what you did outside your career that affected people in a positive or negative way, and does that even matter to you?  For Mercury, it mattered….