Doing it right Featured

8:00pm EDT October 26, 2007

The term “organic growth” means different things to different people.

But to Daniel P. Son, president and co-founder of Dallas-based Penson Worldwide Inc., it’s a term that deftly describes Penson’s growth strategy.

In Penson’s case, organic growth means the company has successfully taken market share from competitors and helped its own customers grow their business, and therefore, do more business with Penson. That organic growth has been responsible for much of the security services firm’s growth from its founding in 1995 until today.

The company provides technology-based processing solutions for the execution, clearing, custody and settlement of securities transactions. It also provides brokerage services to hedge funds and other institutional investors.

Since Penson went public in May 2006, the company now has an additional tool in its arsenal of growth weapons: acquisitions. With ready capital and stock at its disposal, acquisitions have helped lift the company to the next level. In 2006, the company had $287 million in revenue and now has 900 employees — a long way from the nine people who started the company more than 10 years ago.

Son’s secret: “Stay focused and do what’s right, even if, at times, you forego some immediate profit in the business enterprise,” he says. “Whatever you do, do it the right way.”

Here’s how Son has led Penson from its humble beginnings to its high-profile status in just over a decade.

Customer service and technology

Son says most of the company’s success can be traced to two key things: great customer service and strong technology.

“We just recently hired two key sales and marketing executives ... to head up our entire U.S. sales effort,” Son says. “One of those gentlemen was with a competitor in the early days of Penson. After we had come to terms and he had agreed to work for us, he told us that in the early days of Penson, he would call on our clients. ‘Those guys love you,’ he told us. ‘We couldn’t get them to leave and come with us.’ When you drill down into why that is, we have a group of team members who really care about what they do and provide exemplary service, and we provide very good technology.”

Luring new customers is about providing great customer service. It doesn’t have as much to do with price as being responsive to customer questions and concerns, particularly solving problems.

Son says the best way to provide great customer service is to keep it in-house so the company can train the customer service representatives appropriately and keep close tabs on how customer service issues are being handled. Penson pays its employees more than the industry average and hires the very best people it can find to help the company manage customer concerns.

Son says the list of what the company expects from its customer service representatives is simple.

“Answer the phone professionally,” Son says.

“Listen carefully. Understand the problem, and resolve it quickly. Communicate with the customer what you’re doing every step of the way.”

Also, customer service representatives do not have voice mail.

“A real, live person answers the phone,” Son says.

Flexibility has also helped his company grab market share from competitors. Penson doesn’t dictate to customers how information must be submitted to them. Penson also makes sure the company has the latest and best technology to help its clients.

“Regulation dictates how you do certain things,” Son says. “But other than that, it ought to be free form. We need to help our customer and find out what they need and adapt our system to their needs. We’ve done that, and by having a flexible offering, it empowers our customers and makes it a better situation for everyone.”

Penson employs a professional training director who operates its “University of Penson,” which offers a variety of training options to continue to educate its employees. Classes are offered almost every day.

“Some aspects are industry-specific,” Son says. “... But a lot of it is how do you answer the phone, how do you be professional, how do you answer the question quickly, how do you answer the question right? It’s a procedure that eliminates a problem from reoccurring.”

Providing strong technology keeps Penson’s clients happy. From Penson’s inception, the company has always had technology staff in-house to create and support applications that ease the flow of information between Penson and its clients. Today, those applications are Web-based. About 40 percent of the company’s employees work in technology. Much like keeping customer service employees in-house, having technology-related employees under its roof keeps Penson in control of projects and helps solve any technology-related problems quicker than an outsourced firm could.

Son says the company does outsource an occasional project, but it’s selective and tightly managed.

“I believe it’s important to have people who take ownership of a project or an issue,” he says. “That’s impossible to achieve with outsourcing.”

Going public

Every growing company will eventually reach a point where it needs outside help to keep the momentum going.

“We reached the point when we said we couldn’t grow any more without outside capital,” Son says.

The management team decided that going public was the best way to raise capital to continue to fuel the company’s growth.

When Penson went public in May 2006, it was able to raise $110 million from its initial public offering of stock on the NASDAQ. It also gave the company another tool in its box when it was approaching an acquisition. The company could use both cash and stock to help leverage a buyout.

The public offering also made the company better known. “When people think about needing the kind of service we provide, whether it’s in Asia, Europe, Canada or the U.S., the fact that we are a known quantity, they would tend to think of us more than they would have in the early days,” Son says.

The only drawback is the regulations imposed by being public. Complying with the requirements of Sarbanes-Oxley is time-consuming, but Son says the benefits of being public outweigh the burdens. Hiring the right staff to handle the paperwork requirements is key.

“We have more lawyers on staff than we did in the early days,” Son says. “We pay more in accounting fees than we used to. But other than that, it’s just a little more of what was already required.”

Going public enabled the company to ramp up its growth, as it now had the cash to buy out other companies. It also gave the company a chance to celebrate its success and reward its employees for their hard work. Employees were given stock and options at the time of the public offering.

“We certainly believe that was the right thing to do,” Son says. “The feedback I get from employees is that it is really appreciated, and they feel like they are owners.”

Making acquisitions

In the past two years, Penson has had the ready cash to buy out companies within its industry to help bolster the company’s growth. Son says his company is also fortunate to have companies that are looking to sell approach Penson themselves. Bankers and investment managers also call with offers.

One of the best deals for Penson came from networking. A friend of Son’s wanted Son to have lunch with a friend of his who owned a similar company, suggesting that the two might work together. Merger discussions went on for two years before Penson ended up buying one part of the other company’s business, nearly doubling Penson’s volume.

“We did not know the people at all,” Son says. “We got to know them. We spent a good deal of time in their facility, and they spent a good deal of time in ours. At a very senior level, we had very many meetings, including semisocial meetings to get a feel for who they were.”

After Son and other company leaders got a feel for the other company’s executives, they sent a team of experts from their own staff into the company to dig through its records. Then, they negotiated, and that’s what took awhile. Son says Penson had to evaluate whether or not it wanted to give in on the sticking points, and eventually, both sides compromised to make the deal happen.

Son looks for several qualifications for a potential acquisition. Ethical concerns are a deal-killer for Penson. Since his industry is highly regulated, it’s easy to see if the company Penson is looking at has run afoul of any of the various regulating bodies that govern the industry. Son and others on the company’s staff also pay careful attention to what others in their industry say about the company. Reputation is very important as that’s part of what you buy when you purchase a company.

“I’ve been in this industry for over 30 years,” Son says. “You know people. You know their reputation. If you hear something negative about their reputation, you check it out. If there are a lot of negatives involved in their reputation, we don’t even pursue the next step.”

Son pays careful attention to whom the people who run the company truly are because Penson typically keeps them.

“This is a relationship business — and the relationships that managers or owners have with their employees and with their customers are very important to us,” Son says. “We aren’t just buying a book of business to fold into ours.”

The company also has to be profitable. “We will not buy a company that does not have a demonstrated ability to earn a fair return for our investment,” Son says. “There may be some circumstances in which we would acquire a company that has struggled a bit, perhaps because of inadequate capitalization or inefficiencies because they don’t have scale. We analyze those situations, and we have a very disciplined approach to that analysis.”

Son particularly likes companies that offer a service that Penson does not but is something that’s related to what Penson does and might be a service to its clients. Those opportunities help Penson retain clients and bring in new ones.

As Son sees it, Penson is positioned to continue to grow — and rapidly at that. The company has operations around the world, and Son says the opportunities are boundless.

“We are a successful worldwide organization,” Son says. “We are on the verge of some exciting things. Our goal is to become the best execution and clearing company in the world. ... It’s ambitious, but we can do it.”

HOW TO REACH: Penson Worldwide Inc., (214) 765-1100,