The Northland Gives Rise To An IT Sector
For a while, it looked as though Duluth IT company 50 Below might end up 6 feet under.
One of the Northland’s largest information technology firms, with around 240 employees, filed for bankruptcy protection Aug. 29, 2012. If it had folded, it would have been a big blow not only to Duluth but also to the region’s IT sector.
But the company is enjoying happier days. True, it’s actually two businesses now—its two main practices are split between two buyers with headquarters outside of Minnesota. Yet even in its new bicameral form, it was able to keep most of its local jobs. In January, the Upper Midwest chapter of the Turnaround Management Association awarded Eden Prairie-based Platinum Group, the firm that oversaw 50 Below’s resurrection from bankruptcy, with its Transaction of the Year award.
It’s a turnaround story, but it also points to the fact that IT has a sizable footprint in a region better known for natural resources. It might not have as big an impact as area economic development boosters would like. But the fact is that there is some real tech heat here.
Here’s the 50 Below story, in a nutshell: At the time of its bankruptcy filing, the company had built up a large customer base for web development and hosting. Broadly speaking, it was divided into two parts: website development for auto, tire and power sports businesses nationwide, and a financial services business, which included site design for hundreds of Morgan Stanley Smith Barney offices.
But by 2012, the company was in trouble. Yes, there’d been some slowdown in work due to the recession. But over the years, 50 Below had had other problems. In 2008, for instance, the company pleaded guilty to embezzlement and theft charges stemming from 401(k) money used for other purposes. In late 2011, the company missed payroll at least once. By the time it filed for bankruptcy protection, 50 Below owed $8.9 million to the Internal Revenue Service and $1 million to the Minnesota Department of Revenue, among other debts. The court named Minneapolis attorney Nauni Manty trustee. She in turn hired the Platinum Group to get the company ready for sale.
Faith in the business
“It was a business very much worth saving,” says Platinum Group Partner Bob Stewart. “They had a blue-chip list of customers, and they’d done a good job of serving and keeping those customers.” Stewart also points to the high caliber of sales and technical talent at the company.
Despite little access to cash and revenue, Stewart and Manty wanted to sell the business as a going concern, rather than liquidating it. A debtor-in-possession loan from St. Louis Park-based White Springs Capital Management kept 50 Below going until its constituent parts could be sold.
Their faith in 50 Below’s attractiveness was rewarded in just a few months. The power sports business was purchased by Milwaukee-based ARI Network Services Inc., which was interested in buying it almost as soon as 50 Below was available. San Diego-based Emerald Connect bought 50 Below’s financial business. Though Emerald Connect originally had discussed moving the business out of Duluth, it now resides in digitally up-to-date office space near the Aerial Lift Bridge. While Stewart says that Platinum and Manty expected $2 million for the 50 Below sale, the two parts sold for a total of more than $8 million.
The two businesses combined have fewer employees than 50 Below had when it filed for bankruptcy protection. But the remaining employees have reason to be happier than they were two years ago.
“It was kind of the perfect marriage of two companies,” says Bob Jones, director of dealer sales at what are now ARI’s Duluth operations. Jones, who was with 50 Below before the acquisition, cites the fact that 50 Below’s strength was web development, while ARI’s focus was on content. ARI’s Duluth branch, which now employs 121 (more are expected to be hired in the next few months), moved into new space in February.
Saving most Duluth jobs
ARI did lay off 20 people in Duluth in early February due to job overlaps between 50 Below and ARI. Still, Jones says, “There was just so much human capital here that moving [out of Duluth] did not make much sense.” Emerald Connect’s Duluth office employs 45.
In late February, Emerald Connect was acquired by New York-based Broadridge Financial Solutions. 50 Below had assets that were attractive to outside buyers. So did Duluth-based Sansio, a health IT firm acquired in late January by Redmond, Wash.-based Physio-Control. And that reflects the rise of a highly promising industry sector in northern Minnesota.
That sector also includes talented developers. Arshia Khan, chair of undergraduate programs in the School of Business and Technology at the College of St. Scholastica in Duluth, recently wrote the first college textbook on app development for Apple’s iOS mobile-device operating system. At St. Scholastica, Khan is directing her students to develop apps primarily for health care. These have included apps that help patients manage pain and conduct physical therapy at home.
Given the worldwide boom in tablets and smartphones, “the app market is only going to grow,” Khan says. As a result, her graduates are in demand, locally and elsewhere. Khan sees health care IT becoming a particularly strong market. And not all companies targeting that market need to be in large cities, she notes.
Case in point: About 45 miles southwest of Duluth, in the small town of Bruno, is Nemadji Research Corp., which develops money-saving reimbursement systems for hospitals throughout the country. Becky Lourey, a former state legislator, chairs the company that she and her late husband, Gene, founded in 1985. She says that finding talent for Nemadji Research can be challenging, but Nemadji, which employs 45, can tap Pine Technical College in Pine City for trained graduates.
Lourey points to another challenge—one that might be the major issue slowing northland IT development, at least outside of the region’s larger cities and towns: broadband access throughout the state.
Even with better broadband, the northland probably won’t become the next Silicon Valley on the tundra. For one thing, Canada’s trying to lock up that claim. But the region does support an IT sector and techie training ground that provide partners and talent to other parts of the state and beyond.
Gene Rebeck is TCB’s northern Minnesota correspondent.