Does NavisionDamgaard Merger Mark Further Mid-Market Consolidation?

Does NavisionDamgaard Merger Mark Further Mid-Market Consolidation?
P.J. Jakovljevic - January 2, 2001

Event Summary

On November 22, NavisionDamgaard, the merger of Navision Software and Damgaard, fellow Danish providers of business applications for mid-sized enterprises, announced it would continue to market the two current companies' main product lines: Damgaard Axapta, Navision Solutions, Damgaard XAL and Damgaard C5. The boards of directors and the founders of Navision Software a/s and Damgaard a/s recommended a merger under the name of NavisionDamgaard a/s on November 21. The merger should create an international mid-market leader with revenues of more than $140 million.

"Combining Navision Software and Damgaard into one company creates a perfect match. Even though we have been competing in the same market, our main products are positioned differently," says Preben Damgaard, CEO of Damgaard.

"The merger between our companies is natural because we can stop competing against each other and instead focus on creating a strong global company for the mid-market. By merging the two companies, we achieve a size and a market position that enables us to participate actively in the current international consolidation in the industry," says Jesper Balser, CEO of Navision Software.

Navision Solutions is primarily designed for small-to-mid-sized companies. It scales from 5 to 300 users depending on the application setup. Damgaard Axapta is primarily designed for mid-sized and larger companies and can be scaled for up to 1,000 users. The merger might also generate considerable synergy through a strengthening of the sales and marketing efforts.

The current CEOs of Navision Software and Damgaard, Jesper Balser and Preben Damgaard, will be joint CEOs of NavisionDamgaard. Preben Damgaard will primarily focus on the overall operational management, while Jesper Balser will concentrate on the strategic business management, organization and external relations. The management will also consist of Lars Larsen, Chief Financial Officer, Ren Stockner, Executive Vice President, Worldwide Operations, and Niels Bo Theilgaard, Chief Product Officer. Waldemar Schmidt is expected to be appointed Chairman of NavisionDamgaard, and Hans Werdelin is expected to become Deputy Chairman.

The merger proposal was recommended for approval at the extraordinary general meetings, which were expected to be held by the two companies on December 21, 2000, and Navision Software a/s will be the continuing company.

Market Impact

The increased M&A activity in the mid-market is no surprise and, therefore, we regard this merger as a promising, although indisputably challenging, move. The current market trend is towards vendors that can provide complete solutions for the entire spectrum of medium-sized companies. This effervescing market segment has been targeted by a large number of traditional incumbents like Frontstep (formerly Symix), QAD, IFS, Great Plains, MAPICS, and Intentia to name but a few, but also increasingly by Tier 1 vendors that are looking for additional revenue and market share growth (for more information, see SAP Claims Big Gains In The Low-End Battleground).

This is a marriage of convenience, with both companies contributing and benefiting. Navision enters the marriage with a strong international presence, proven execution and a profitable business model. Damgaard, on the other hand, offers a more scalable product, Axapta, that also has a broader functionality footprint (heavy manufacturing, project control, HR, etc.), is Web-enabled and well-suited for multi-site and multi-national companies. The combination of the extensive distributor and subsidiary channels will result in more than 2,000 affiliate partners, more than 120,000 installations, more than 1,000 employees, and local representation in 25 countries. Both product lines are technologically compatible (Microsoft-centric) and will be maintained concurrently while the intact Research and Development (R&D) teams will attempt to gain economies of scale by building application components that can be deployed within the entire product portfolio.

Additional e-business and e-collaboration initiatives are can also be anticipated. The company will develop the concept of Commerce Portals, Commerce Gateways, and enterprise-focused Role Based User Portals to allow users to interoperate with trading communities. The recent Navision partnership with Siebel for a more comprehensive CRM offering (for more information, see Siebel Has Done It Again - This Time with Navision) will also be extended to the entire product suite. Both companies have also entered into ASP partnerships.

Mid-market winners will be the vendors with well-crafted product, technology, and partner strategies underpinned with an efficient cost base. NavisionDamgaard has envisioned significant cost savings (at least $16 million within the next 12 months) because of rationalization of overlapping units, such as physical infrastructure and duplicated field organizations, but has vowed to keep R&D intact for now.

However, the merger will have some inevitable downsides. Despite the complementary nature of the flagship products one should expect growing pains in appropriate positioning of multiple products. The company will have to revise its sales strategy to optimize the sale of four product lines with somewhat overlapping functionality (particularly between Navision Solutions and Damgaard XAL) and avoid internal competition; not to mention the need of showing 'one face' to customers and probable brand recognition/confusion. Moreover, NavisionDamgaard can expect growing pains (and added costs) in merging disparate product lines, and in training and vertically specializing the newly extended affiliate channel. It will be difficult to support existing customers and existing products, while blending those somewhat competitive product lines. Finally, despite the common focus, there is much more organizational and corporate culture fine-tuning to be performed.

User Recommendations

Experience teaches us to be wary of the outcome of mergers' and acquisitions'. While some of them have gone awry in the past (for more information, see Geac Lives By Acquisitions; Will It Die By An Acquisition? and Epicor Delivers On Milestones, But Its Situation Remains Bleak), the moves of NavisionDamgaard's direct competitors, Great Plains and MAPIS, have gone with smaller hiccups only (for more information, see MAPICS, Inc. to Acquire Pivotpoint, Expanding e-business Offerings for Mid-Sized Manufacturing Establishments, and Will Solomon Finally Satisfy Great Plains' Insatiable Appetite?).

While we believe that this merger will by synergistic in the long run, some growing pains, integration issues, and discontinuation of redundant products are to be expected. Consequently, until the merger is consummated, any organization evaluating Navision or Damgaard should exercise moderate caution, keep themselves informed, and consider existing functionality only. Potential clients should conduct preliminary research on the industry expertise and reference accounts of a regional NavisionDamgaard affiliate service provider when the Navision or Damgaard product is selected. They should also familiarize themselves with the products' strengths and weaknesses within certain vertical industries. Navision distributors have generally offered vertical solutions on an opportunity-by-opportunity basis only.

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