Acquisitions Fuel Vendor Growth in the Enterprise Applications Field
Written By: Predrag Jakovljevic
Published On: May 2006
Both SSA Global and Infor continue to grow through the acquisition of companies that extend the scope of their offerings. New Vendor Acquisition Strategies in the Enterprise Applications Field and The Impact of the "Assembler Strategy" in the Enterprise Applications Field began an examination of these acquisitions. We continue by examining Infor's acquisition of Formation Systems and Geac.
This is Part Five of the six-part series The Enterprise Applications "Arms Race" To Be Number Three. Parts One to Four were published April 24 to April 27.
This is part of a comparative analysis of SSA Global and Infor, two contenders in the fierce ongoing competition to be number three (after SAP and Oracle) in the world of enterprise resource planning (ERP) vendors. See The Enterprise Applications "Arms Race" To Be Number Three for background information and a discussion of vendor similarities. Also see Contributing to the Rejuvenation of Legacy Systems in the Enterprise Resource Planning Field. The other leading contender is Lawson Software. For a detailed discussion of Lawson, see 'New' Lawson Software's Transatlantic Extended Enterprise Resource Planning Intentions.
Infor Acquires Formation Systems
Infor cites continued organic growth, license revenue from new customers, and install base cross-selling and up-selling as key growth drivers for the group. The company is also betting on expansion outside the North America and Germany strongholds, into the UK and other key markets such as the Asian Pacific region and China. A potentially expanded footprint in the realms of product lifecycle management (PLM) or enterprise asset management (EAM) should also contribute to the top line. To that end, in August 2005, Infor announced that it had acquired Formation Systems, a privately-held provider of PLM solutions exclusively for process manufacturing companies. This acquisition further strengthens Infor's broad product portfolio for process industries. Formation Systems has since joined the Infor Process Manufacturing Group, which is led by Hermann Stehlik (vice president [VP] and general manager [GM]), and which continues to operate in Southborough, Massachusetts (US).
As a leading provider of PLM solutions for the food and beverage, home and personal care, and specialty chemical industries, Formation Systems should significantly enhance Infor's capability to integrate, streamline, and manage the entire process of product development. For ten years, the company has provided PLM software solutions to high-profile process manufacturers, and has built a highly skilled and dedicated workforce having a deep knowledge of PLM best practices in the vertical markets they serve. Thus, the acquisition of Formation Systems supports Infor's vertical strategy, and should establish the combined company as a global leader in providing solutions with an integrated PLM system to selected process manufacturing industries.
For a more detailed discussion of process manufacturing ERP, see Preparing for Product Development in Process Manufacturing.
Many regulatory bodies have renewed their focus on product compliance, and the Formation Systems acquisition confirms the trend towards PLM functionality becoming an essential element of an enterprise application portfolio. It also confirms that industry-specific functionality is increasingly critical to buyers of enterprise applications. Naturally, regulatory requirements vary according to the industry, as do many other PLM requirements (for more information see PLM is an Industry Affair—Or Is It?).
While product design rules engines may eventually be retrofitted to apply across several vertical industries, the tricky makeup of recipes/formulae and security mandates will require a deep understanding of process manufacturing requirements. Consequently, defining and formulating recipe-based products requires industry-tailored solutions to adequately allow product development. The Optiva product suite from Formation Systems features strong formula management capabilities which might give Infor a differentiating value proposition when selling to prospective customers in process manufacturing, as well as the ability to up-sell and cross-sell to a larger installed customer base. Infor and Formation Systems customers may mutually benefit by gaining the opportunity to standardize on a single broad process solution for all their process ERP, supply chain planning (SCP), supply chain execution (SCE), corporate performance management (CPM), and PLM needs.
The centerpiece of the suite is Optiva Workbench, which accelerates product development by supporting design collaboration with suppliers on formulas and specifications, as well as by providing the visibility needed for fully using existing information to avoid unnecessarily "reinventing the wheel." Other modules in the Optiva product suite, such as Optimization (for constraint-based formulating), Requirements Management, and Specifications Management, are designed to capitalize on the data management features of Workbench (see Formation Systems Pioneers Product Design Collaboration For The Process Industries). Also widely deployed are integrated packaging management (from the primary pack to the pallet), integrated label content management, product performance, safety and efficiency testing, material safety data sheets (MSDS) and hazard label generation, nutritional and nonconformance analysis modeling integrating laboratory information management systems (LIMS) assay results, integrated stage gate, and portfolio management. Capabilities such as parametric searches, visual comparisons, material usage restrictions, best practices feedback, and role-based modeling are used from concept to launch.
In its entirety, the Optiva suite speeds up the product development lifecycle by easing collaboration, facilitating access to supply information, and managing product testing and the other tasks that precede a commercial release. Combining process PLM with process ERP can produce a unified sample management solution that allows product samples to be shipped in the same manner as commercialized products. Furthermore, combining process PLM with process-oriented supply chain solutions can provide unique recipe optimization capabilities that evaluate current inventory to develop least-cost or best-fit formulations, thereby accelerating the new product introduction (NPI) process and achieving globally compliant products with lower development costs and a shorter time to world markets. It is thus no small wonder that Coca-Cola Co., Akzo Nobel, Gillette Co., GE Plastics, Campbell Soups, and over forty other process manufacturing clients (several of them are also Infor customers) are on the vendor's roster of high-profile process manufacturing clients.
The downside, however, is that Optiva, despite deep and broad collaborative product data management (PDM) functionality, is not yet a full-fledged PLM suite, since it is missing important pieces like strategic sourcing, product configuration, portfolio management, shop floor integration, and regulatory compliance for multiple industries (both discrete and process). For more information on what constitutes a full-fledged PLM system, see Critical Components of an E-PLM System and The Many Faces of PLM.
In fairness, Optiva integrates sourcing and extends traditional strategic sourcing, to meet process industries' specific requirements and to drive significant material cost and cost avoidance savings. Strategic sourcing applications are nonetheless limited to total spend analysis, and lack pervasive content management. With Optiva, companies like RPM have a purchasing action component that not only analyzes total spend across more than twenty companies having multiple ERP packages, but also more accurately projects cost, time, and risks involved in material and vendor rationalization. This automated business process thus helps refine the business case, since once a project is approved and resources are apportioned, executive management has insight into trade-off decisions and achieved cost savings.
This business process helps the diverse teams managing materials, formulas, packaging, and vendors to better rationalize their charges. By using the integrated design and compliance applications, more projects should be completed, and more savings should be delivered. Also, since all product development teams have insight into material, vendor, formula, and packaging status, redundant materials or rationalized materials are not re-introduced, and cost savings are sustained. Additionally, as part of new material introduction, the sourcing team should have visibility the instant a new experimental material is entered; alternate approved materials or vendors can then proactively be suggested.
Many companies have cross-functional teams which continually assess material value-add and regulatory risk. In an effort to minimize compliance risks, one customer reportedly turned off over 48 percent of its materials, and achieved significant cost savings. As companies buy, sell, close, or reconfigure plants, they need strategic sourcing suggestions. To that end, Optiva plays a critical role in requalifying, reformulating, and repackaging, in order to ensure regulatory, cost, and quality compliance. Companies are also finding that they are making sourcing decisions based on incomplete information, although the item and vendor item module in traditional ERP systems is well-suited for nascent regulatory requirements. A hypothetical scenario provides a good demonstration of the utility of this kind of module: Once an ERP item (a vitamin, for example) is entered and certified, alternate vendors may be sourced from, and entered as vendor-specific items, with differences in cost also entered. If a new allergen law (let's say) is enacted, it might suddenly be relevant that the first vendor uses peanut oil as a processing aid. But if one or more of the vendors uses vegetable oil as a processing aid instead, then a critical decision needs to be made.
Since sourcing is a numbers-oriented game, factors such as compliance risks and product quality need to be included. Several customers have integrated such sourcing metrics into product development, in order to ensure that products require less post-launch effort when developing alternate sources for single-sourced vendors, or when finding lower cost providers. These customers will focus R&D efforts on having fewer single-source materials, or will calculate the percentage of materials coming from preferred vendors. Integration of Optiva with ERP systems allows product development to leverage high volume (and often in-stock) materials. Rather than simply selecting an approved material, using these higher volume or in-stock materials means that managers can avoid generating new purchase orders, as well as the carrying costs of partial drums (or other bulk packages). If the material has shelf life issues, material write-off can be avoided too. Rather than needlessly duplicating existing strategic sourcing capabilities, Optiva has extended these capabilities to drive cost reduction and cost avoidance.
Optiva can also send recipes compliant with Instrumentation, Systems, and Automation Society (ISA) standard S88 to manufacturing execution systems (MES) used at multiple customer sites. Using integrated business process management (BPM) capability, the system can integrate with one or more ERP and MES systems, which should eliminate time and cost wastage, while optimizing cost performance and compliance. As these platforms are approved for multiple plants and markets, product platforms that are truly global can be relatively quickly adapted to company specificities, and companies can minimize time to global rollout.
With every new release, Optiva's portfolio management capabilities are enhanced. Most customers are using rule-based scoring and prioritization, risk rating, and readiness rankings, which are rolled up with each activity to provide near real-time visibility in Web-based dashboards. Being focused on process manufacturing, Optiva has developed a process-focused product configuration capability which is based on application platforms. Common uses include color matching, flavoring, or scenting of application platforms. Rather than maintaining a separate formula and packaging bill of material (BOM) for every possible combination, customers are building product platforms which are certified for permissible options (by plant, market, brand, use and user, and sometimes customers). This allows new requirements to be matched to the option, and also allows the most cost-effective and compliant intermediate material to be identified. A unique formula and package can be derived and validated for compliance.
Still, this laser-sharp focus is likely the reason why SSA Global was not more aggressively involved in the bidding for Formation Systems, although it would come as no surprise to learn that it was involved in preliminary (at least) merger discussions. Again, lately SSA Global has been considering only the acquisitions that would help in a "bigger picture" manner. In a way which is analogous to its CRM case, the vendor has a decent PDM solution stemming from Baan, but admits that the product's low brand recognition has limited it to only the existing install base (and even there it has to contend with best-of-breed PLM products). Conversely, as mentioned earlier, the vendor has become a feared competitor in the supply chain execution (SCE) space, given the successful assimilation of once well-known products such as EXE or CAPS (indications are that the license revenues from these products have quadrupled under SSA Global, compared to their status under their formerly independent and struggling vendors). Thus, if and when the time comes, SSA Global will most likely acquire a well-rounded and well-known PLM product (or a strategic sourcing and supply chain planning [SCP] product), although it recognizes that specialty process PLM vendors such as Selerant, Prodika, Sequencia, and IMS would be a good fit for its process-manufacturing-oriented products, which stem from both BPCS and the former Marcam's Protean and PRISM products (see The Name and Ownership Change Roulette Wheel for Marcam Stops at SSA Global). For the same reason, Infor will also likely remain in the hunt for more solutions, in order to round out its PLM, EAM, and product configurator capabilities.
The Optiva strategy is to develop tier one applications in modeling, vendor collaboration, compliance, and portfolio management, and also to increase its open integration capabilities. This will likely be used to integrate with applications from Infor or other vendors; as these tier one capabilities are developed, Infor pledges to develop best practices offerings that can be deployed by smaller process manufacturing customers.
This brings us to Infor's latest acquisition, which again highlights a differing strategy compared to SSA Global. In early November 2005, Infor's parent company, Golden Gate Capital (a San Francisco, California [US]-based private equity firm focused on investing in high-growth businesses in change-intensive industries), and Canadian company Geac Computer Corporation Limited (TSX: GAC and NASDAQ: GEAC) reached a firm agreement that Golden Gate Capital would acquire Geac in an all-cash transaction valued at approximately $1 billion (USD), which represented a 27 percent premium over the trading price at the time. Geac thereby capitalized on its diverse industry-specific focus and expertise in the manufacturing, government, financial services, health care, and retail sectors. The company claims that its vertical market success will be enhanced by the current initiatives and momentum within the Golden Gate portfolio.
With more than $2.5 billion (USD) under management, the technology businesses acquired by Golden Gate are carefully selected based on their growth potential and ability to deliver vertically-specific enterprise software offerings and deep market expertise. Golden Gate views Geac as a natural addition to a successful strategy of looking at acquisitions with a different perspective compared to most private equity firms. Namely, as witnessed with Infor, the parent firm seeks to integrate companies that can grow significantly faster together than they could on their own. This strategy has been implemented successfully with respect to Concerto/Aspect Software, AttachmateWRQ, Inovis, and Infor; the firm pledges to aggressively support the Geac business units with its "assembler" acquisition strategy. Consequently, upon completion of the acquisition, Geac will be reorganized into two separate Golden Gate Capital portfolio companies.
As part of the reorganization, Infor will acquire Geac's ERP software products, including System21, RunTime, Ratioplan, StreamLine, and Management Data; the employees who support them will move to Infor. By bringing together the resources, talent, and expertise of Geac and Infor, customers should benefit from the combined entity's solutions and services. On one hand, Infor customers will have access to additional domain expertise, while on the other hand, Geac's ERP customers should benefit from increased product diversity, additional product investments, and improved global reach. In addition to the immediate product and service portfolio enhancements, customers should also benefit from Infor's strong financial backing and proven deep focus on developing enterprise solutions for manufacturers and distributors.
Geac's financial applications and industry-specific applications (ISA) will become two business groups under a newly formed company, which will be launched under the name Extensity immediately upon finalization of the transaction. In addition, Geac's general and administrative (G&A) staff, including the finance and accounting, legal, information technology (IT), and human resources (HR) teams, will provide a global G&A infrastructure for Extensity. The newly formed financial applications business unit under Extensity will include the products and employees currently involved with Geac's Enterprise Server, Anael, Expense Management, and MPC products. This business unit will target the integrated financial applications software market; the combination of these solutions will become the foundation of a complete offering of financial performance management applications. Geac's ISA businesses (commercial systems division, libraries, local government, public safety, and restaurants) will form a second business unit under Extensity, and will continue to target their current industries; each ISA business will remain independent from the others, similar to the structure existing within Geac today. Ken Walters, president of Infor, has been named chief executive officer (CEO) of Extensity. He has been with Infor through all eighteen acquisitions, and will now leverage his successes there to guide Extensity.
Over the years, Geac has grown considerably via acquisitions, thereby garnering a broad portfolio of diverse applications, including its SmartStream financials system (which it picked up in 1996 from Dun & Bradstreet), and its System21 ERP suite, a well-regarded (at the time) process industry system, which Geac picked up in its acquisition of JBA International in 1999. More recent deals include the company's $52 million (USD) acquisition of business intelligence (BI) and CPM provider Comshare in August 2003, and the $47 million (USD) purchase in September 2002 of former Extensity (whose name will be used for Geac under Golden Gate), which had one million seats worldwide for its automated employee-based finance processes such as time and expense (T&E) management. Previous acquisitions include Interalty; the real estate unit of GTE Enterprise Initiatives; the assets of Princeton Network Systems; Management Data; the midrange software business of EBC Informatique; and many more (see Geac Gets Its Commonsense Share Of Consolidation, With Revolving Door CEOs No Less).
Although since 1990 Geac has acquired over 50 companies (and since 1999 spent over $550 million on acquisitions), it failed to add significant value and synergy to its highly unrelated acquisitions. To make things worse, the market prices for some coveted but unfulfilled recent transactions (which Geac attempted to conduct in a bid to revive its business) have been very high, and it has been difficult to find accretive targets.
Size certainly matters in the IT industry, and those which are not big enough (or not focused enough) can hardly hope for new big deals. Thus, these vendors will not be able to finance further business development, which in turn will result in a rapid downward spiral. Geac was such a case; following a losing bid for its acquisition target MAPICS early in 2005 (ironically to none other than to its eventual suitor Infor/Golden Gate), it found itself facing the future as acquisition prey rather than acquisition hunter. Geac CEO Charles Jones simply had to concede that he could no longer find a catalyst acquisition capable of turning around declining revenues and profitability. Some products like System21's Aurora ERP product (see Geac Hopes To See System21 Shine Again Like 'Aurora') and Geac/Comshare's MPC CPM product have apparently been going down well with users, but their impact is not enough to make the difference with respect to the entire awkward congregation of unrelated businesses and products.
Geac became far more attractive as a takeover proposition after it began to turn the company's dwindling sales and spiraling losses into flat (at least) revenues and growing profits (it also maintained a hefty cash position). With a customer base of 18,000, including half of the Fortune 100, Geac would have been a tempting prospect for serial acquirers like SSA Global or CDC Software, the China-based enterprise application vendor which would have used Geac as a beachhead to move beyond its Asia-Pacific stronghold. Geac might even have been an attractive target for Intentia for several reasons: it has a substantial installed base in North America, which Intentia needs (even with the impending Lawson merger); and a good part of Geac's installed base runs the IBM iSeries, which matches Intentia's installed base. Also, Geac's System21 installed base is largely in the food and beverage and apparel industries, which matches two key verticals targeted by Intentia. And of course, the Geac connection with Intentia's new leader, Bertrand Sciard, could only be helpful (although the same would hold for some SSA Global executives).
Geac would even have been remotely attractive to Microsoft and Oracle, which have both been building their applications divisions; or to SAP, which always wants to add even more weight to its mid-market presence, so as to keep the heat on and to maintain a distance from a growing Oracle and its PeopleSoft/J.D. Edwards units. Finally, even if unwanted by the enterprise applications vendors, Geac would have been of interest to members of the BI society, such as Cognos, Business Objects, MicroStrategy, or Hyperion, since they would have liked the composition of Geac's customer base as well as its increasing recent focus on software for the chief financial officer (CFO) (see Business Intelligence Vendors).
But while all the above publicly traded companies had an advantage in terms of visibility and public fundraising mechanisms, Infor's private nature, along with the backing of a wealthy parent, came in handy. SSA Global and others might have wished to cherry-pick only a few good Geac ERP products, instead of buying the entire company with all its "baggage" (a low ratio of license revenue to service and maintenance revenues, several legacy-status products in unrelated industries, and so on) and thus affecting future earnings per share or similar financial metrics for its investors. Again, it is commendable that SSA Global exercised restraint and forethought in this respect, given that only a few years ago the vendor would not have thought twice before jumping at the market share growth opportunity (and also given its 2003 acquisition of mainframe-based cash-cow financial management product Elevon, which now sticks out like a sore thumb within the vendor's aforementioned service-oriented architecture [SOA] forays).
Thus, Golden Gate (and indirectly Infor), not having the burden of quarterly reporting, has been able to leverage returns to its equity investors by using debt financing for a portion of the purchase. With about $440 million (USD) in revenues, $70 million (USD) in profits, $100 million (USD) in generated cash, and $186 million (USD) in cash on Geac's current balance sheet, this appears to be a good deal.
Moreover, Infor will now add the IBM iSeries-based System21 to its growing discrete manufacturing ERP (and associated software) portfolio, along with its much-vaunted Geac Style version, mostly aimed at the textile sector and fashion or apparel industries. This shows Infor's continued assembler focus, and its recognition of another vertical segment opportunity; if Infor had wanted mere market share growth, it could have gone for the whole Geac package, albeit with consequent diluted focus. Conversely (similarly to the Adage and Blending ERP combinations with Optiva PLM in the process group), the addition of System21 as its ERP provider and RunTime as its PLM offering (RunTime was formerly QuestPLM, which former JBA International acquired prior to being acquired itself by Geac) should provide Infor with a strong offering in apparel manufacturing. With the end of apparel import quotas, this sector is growing rapidly in India and the Far East, while the passage of the Central America Free Trade Agreement (CAFTA) promises to bring additional activity into Central America as well. Infor thereby joins SAP, Intentia (see SAP Learns The Ropes Of Fashion/Outfitting and Intentia: Stepping Out With Fashion and Style), 3i-Infotech, Jesta IS, STYLEman, New Generation Computing, Gerber, and several other niche players in attending to this quite underserved and less contested (yet seemingly lucrative) market segment.
System21, with some 2,000 customers (primarily in the UK), has lately experienced limited functional extensions and enhancements under Geac (most prominently with the new Web-enabled user interface [UI]). This is fertile ground for Infor, which will gains about $120 million in additional revenue, become one of the largest iSeries ERP suppliers, and also have the largest installed mid-market base in the UK. The deal for the product, as with its other siblings within the Infor discrete manufacturing group (VISUAL, SyteLine, and so on) implies absolutely no sun-setting of existing systems, but rather the promise of support and advancement incrementally, at any time, with new technology modules such as the warehouse management system (WMS) and SCP elements being reversed into the existing systems.
Furthermore, process industry users of System21 will have access to Formation's Optiva PLM system, whereas automotive users will have access to SupplyWeb, if they so desire. RunTime, a solution focused on rapid design-to-production of clothing, will obtain additional channels in Asia and Latin America. This PDM product may gain the expertise necessary for sales to seating and interior suppliers in the automotive industry, which is another stronghold of Infor.
Certainly, the downside is a somewhat dubious future for Geac's StreamLine, Ratioplan, and Management Data suites, which, as niche products, will likely have backburner status within the Corestone migration. The same holds true for about 600 System21 Aurora customers within the process industries; these customers will be supported in the future, but the bulk of focused process manufacturing R&D will certainly be within the native Infor Process Group, to which this product is not going to belong (it has been added to the discrete manufacturing group). Also, there have been different code bases within System21 (for example, Geac Style versus Geac Beverage) for different industries, which was an additional acquisition deterrent for the likes of SSA Global.
But this is really the best that anyone could have done with Geac's unfocused business in the first place. Golden Gate has shown shrewdness in not mixing apples with oranges (by not mixing, for example, Infor's manufacturing and distribution businesses with solutions to libraries, realtors, and many other esoteric vertical areas for which Golden Gate will likely find other appropriate "assembler" portfolios). The new company will adopt a similar strategy to Infor's, which is to build one business unit focused on financial applications (for example, former Comshare CPM solutions, Extensity expense management products, and Dun & Bradstreet financials). The other business unit will acquire other software companies in particular verticals, such as libraries and public safety.