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Frantic Merger-Mania Spiced Up With Vendettas Leaves Customers Anxious Part Two: Analysis Continued

Written By: Predrag Jakovljevic
Published On: June 19 2003

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SAP Benefits

SAP might therefore benefit the most by the saga described in Part One, although it has neither seen nor heard the devil its shares have soared significantly since Oracle's move. Well, it has recently announced its intentions to target PeopleSoft and J.D. Edwards' users with marketing campaigns that should likely feature sweetened' migration deals to its fairly unified and tightly integrated suite running on possibly the widest choice of platforms and technologies. SAP remains the undisputed leader (see Figures 7 & 8) regardless of whether Oracle eats PeopleSoft or PeopleSoft merges with J.D. Edwards, given its nearly Euro7.5 billion (~$8.5 billion and likely more in the future given the expected further drop of $ vs. Euro) in revenues vs. a combined ~$5.2 billion applications revenues of the other three combined. SAP also has the advantage of having the broadest cohesive offering, without a need for any disruptive acquisitions, and no major poor market sentiments like Oracle has repeatedly caused upon itself.

Figure 7


Figure 8

Given a likely percentage of PeopleSoft customers' defection from Oracle, SAP's leadership might even be bolstered in the future. Also, SAP will much easier compete against only Oracle, than it would do when the selection would include PeopleSoft, J.D. Edwards and some other Tier 2 vendors. If the market share was the major order winner, then SAP or Oracle would have never had their noses bloodied by the likes of QAD or IFS, something that is happening more and more often. Thus, it might not be inconceivable to see SAP acquire a Tier 2 vendor that has been deeply embedded within divisions of its larger customers, and thereby create its mid-market solution for certain industries in place of its native mySAP All-in-One still developing industry solutions for larger mid-market enterprises.

It has even been interesting to notice a transformation SAP has undergone during last few years from a prickly, arrogant leader to a leader that has been carefully listening (without necessarily feeling slighted) to the critical voices of the market and adjusting its moves accordingly. It is too bad that Oracle has not followed up on the more humble nature it professed during its recent Oracle AppsWorld user conference the vendor will have to work much more on its image facelift. Although Oracle seems to be on top of things and acting from a position of strength, it might even be betting its entire business on this acquisition. Namely, its huge cash reserves will be quite depleted should the acquisition go through, but the vendor hopes it will be replenished through profitable future quarters and the bigger opportunity the larger install base should bring.

Oracle is hoping to assimilate current PeopleSoft's base and create more application (and also indirectly database and server ) revenues, but what if they decide to go to SAP instead? Also, at the same time, because of IBM and Microsoft's fierce competition in the database market, and because of IBM, Microsoft, BEA, Sun, and many other guys in the EAI and middleware/application server markets, bundled with continued depressed economy (and possibly poor market sentiments towards Oracle), Oracle might not post excellent results in its other business either. The point is that with drained cash, and possibly disappointing results in the future, Oracle might end up being vulnerable (if not even a takeover target itself).

This is Part Two of a two-part note.

Part One detailed recent ERP merger events.

Expanding the Big Five

In any case, the recent seismic moves have confirmed our belief in the possibility of a Big Five wild card or two. What if IBM wants to join the Big Five? Like Microsoft, IBM has the wherewithal to buy almost any enterprise applications vendor, but does it have the desire to deal with many other implications such as strained partnerships with many application vendor partners turned competitors and the inevitable competitions within its own global services consulting division? On the other hand, can it sit still and watch its large DB2/WebSphere/Lotus Domino/iSeries and so on install base within PeopleSoft and J.D. Edwards gets converted into Oracle's equivalent offerings? While maybe not rescuing PeopleSoft and J.D. Edwards (or even Siebel) through an apparent acquisition, the giant might come up with some significant equity investments making Oracle's deal much less attractive or even non-feasible. At the end of the day, there will still be plenty of integration opportunity for IBM and for its multi-partnered consulting group pervasively throughout the consolidating market acquisitions only increase the need for middleware and integration patchwork, where IBM will gladly oblige.

A similar situation holds for Microsoft, whose sizable SQL Server/BizWorks/Windows OS/Exchange and so on base within PeopleSoft and J.D. Edwards' bases might also disappear before its eyes. Still, it is not likely Microsoft will do much about PeopleSoft or J.D. Edwards, given they are far above the competence of its Microsoft Business Solutions (MBS) division, whose focus is still the lower-end of the mid-market (i.e., Douglas Burghum's team's experience is still not there, at the upper enterprise level). As a matter of fact, Sage/Best Software would be the more nagging thorn in MBS' flesh, given it still has a bigger channel and market share in almost all small to medium enterprises (SME) categories (e.g., entry level accounting, small business solutions, contact management/CRM, non-profit businesses, etc.) via its well-crafted strategy to both develop and acquire a very complementary slew of best-of-breed products and to develop interoperability and smooth upward migration path within its portfolio (see Best Software To Hold Competition At Bay).

This "customer for life" and "to lose customer to ourselves" mantra seem to be resulting with a rare organic growth these days. Thus, one would expect Microsoft to rather settle the score on that level first, possibly through a takeover bid. Yet, that would not be that likely to happen, given it would not have much chance to pass the European Trade Commission's antitrust approval (Sage is the UK-based vendor), particularly with Microsoft's history and still ongoing antitrust scrutiny in Europe and in two remaining US states. Thus, Microsoft might gladly let Oracle take some much needed heat for possibly unethical practices towards acquired customers, potential antitrust issue and so on (the vendor is also taking a see no evil, hear no evil' in the impending lawsuit between SCO and IBM and possibly all Linux users). On the other hand, even Sage's $800 million in revenues would only be a little step in Microsoft's journey towards its $10 billion earmark. Thus, no one can dismiss Microsoft's involvement for sure, since at least abandoned J.D. Edwards could seem as a plausible acquisition. Additionally, the likes of Sun Microsystems and Hewlett-Packard might have similar agendas, concerns and desires. Still, all the above belongs to the land of what if' simulations and only time will tell what will really happen.

One is to wonder what to read from the fact that a vendor of J.D. Edwards' stature, with a broad functional footprint, almost $1 billion in revenues and with nearly $400 million cash, has cited skepticism in surviving long-term as an independent vendor globally. Although the follow up explanations of its merger intent with PeopleSoft have revealed a long-term strategic move to secure the prominent position in the global market, rather than an act of despair, the timing of the announcement will have not been the best. Namely, one could feel compassion for the vendor who will have delivered more than 400 new products and product enhancements for the J.D. Edwards 5 suite, and which went almost unnoticed and overshadowed by the Oracle/PeopleSoft controversy during its Quest Global user conference on June 9 - 12.

At last year's event, J.D. Edwards' Chairman and CEO Bob Dutkowsky pledged to deliver more functionality in the next 24 months than in any previous two-year period in the company's history (see J.D. Edwards Finds Its Inner-Self Within Its 5th Incarnation). However, he even claimed this year that the company surpassed the 24-month goal in just 12 months with more than 400 enhancements, many of them being a result of the vendor's work with the special interest groups (SIGs) for its industries of focus. While last year's enhancements across ERP, SCM, CRM, supplier relationship management (SRM), Business Intelligence (BI) and so on have catered more for service industries, this year manufacturing & distribution industries took the main stage, with enhancements like pricing & promotions, demand forecasting, engineering project management (EPM), work breakdown structure (WBS), cross-docking, dual unit of measure (UOM), configuration management, product variants, to name only some.

Even a vendor like PeopleSoft, which had seemed all but invincible until a few days ago (see PeopleSoft Building Muscles To Overcome The Rough Patch), might end up in a predicament literally overnight. What chances do a number of smaller players then have? One exit strategy would be Made2Manage Systems' move to be acquired by the private investor Battery Ventures VI, L.P. on June 5, and to de-list from NASDAQ and from the close scrutiny of skeptical analysts and fastidious shareholders. Not to mention protection from any unwanted acquisition. From hindsight, Deltek Systems seems to have been quite visionary to de-list even at the beginning of 2002. Given its good performance due to a sharp focus on project-based industries, government contactors and professional services, solid financial situation at the time (and nowadays too, with over $100 million in revenues), and the fact that its founders (i.e., the father and son deLaski) still co-own the majority share of the company, it did not even need investment backing.

Smaller Vendors Respond

Most recently, on June 10, Agilisys International, a provider of SCM and ERP solutions for the automotive industry and for process industries which was formed as a spin-off of former division of SCT Corporation (see Agilisys Continues Agilely Post-SCT), announced the acquisition of Future Three Software, Inc., another SCM provider for automotive suppliers. The acquisition, which is the second for Agilisys this year (see How Much Wisdom Will BRAIN Bring To Agilisys?), was again financed through funds managed by Golden Gate Capital and Parallax Capital Partners in conjunction with Future Three's investor Summit Partners. The Future Three acquisition is consistent with Agilisys' growth strategy of acquiring niche vendors with deep vertical expertise and long-term direction. Therefore, Agilisys seem to be a smaller counterpart of SSA GT.

Thus, there seems to be hope for the smaller vendors' business model, which will be focusing on a relatively small, tightly defined market with specific requirements that cannot be met with more generic products. Usually, these markets will be too small for the Big Five to want to compete and will also have unique requirements which cannot easily be built into the more generic monolithic products offered by the Big Fives. These boutique vendors will compete by having in-depth product functions and intimate knowledge of their market place or by offering services (content or location) not available from the Big Five or independent service providers. Examples of these markets can be industrial (e.g., fresh meats, jewelry retailers, dentist offices, law offices, etc.) or regional (e.g., Albuquerque, Boise, New Orleans, etc.) focus. Some of the Boutique Vendors will actually be conglomerates of smaller divisions or vendors with a common owner. These might be a current mid-range vendor who specializes in a series of smaller markets or even a sub-segment of a Big Five vendor.

Recommendations

Vendors - Vendors need to make a painstaking strategic decision, and then pick where they want to be and execute on it. To be part of the Big Five, they must either grow their client base at a rate faster than the market and their competitors, or find the capital, in these difficult economic times, to grow through acquisitions. Also, they should target anxious customers of their competitors that are financially struggling or are undergoing troubled acquisition migrations.

To be a boutique vendor, focus on one or a very limited number of verticals and/or regions, and do excel at serving those customers. If a vendor does not pick between these two strategies, it will either end up as a collected company, owned by one of the Big Five (only, if lucky or if having a solid value proposition like a large customer base) or will face oblivion. If you are a publicly traded vendor and do not want to be acquired, think of some defensive moves you could do to prevent it, such as going private (possibly with an infusion of private funding), repurchasing your outstanding shares as to ensure the majority voting power, maintaining only a necessary level of cash, merging with a peer as to make any future acquisition of you too awkward for the predator, and so on. Conversely, if you wish to be acquired, do try to get your house in order, by keeping your expenses in line if not by growing the top line.

End-Users The recent turn of events, whatever outcome it might have, will have a deep impact on how customers will evaluate vendors in the future and what kind of relationships they will create. We suspect that most end-users organizations will weather this storm, despite the ominously looking skies, particularly hovering above PeopleSoft and J.D. Edwards' users. If you are in the middle of implementation, you should by all means proceed. However, if you are only at early stages of evaluating these two products, particularly the existing PeopleSoft 7 customers contemplating upgrade to PeopleSoft 8, you might want to postpone it until the completely certain closure of the recent events.

For those that cannot wait forever, as thereby they might lose competitive edge, evaluating all alternatives should start now. For those considering the upgrade, possibly the current users of Oracle database, please bear in mind that free' upgrade of enterprise applications is not free at all, given that license fees can amount to even less than 10% of the entire upgrade price tag (i.e., beside users' training, change management, data migration, customization/modification migration (preservation), fit/gap analysis of new software, implementation, etc.).

On a more general note, the larger the install base for the products you are using, the safer you should be. If not the new owner, then at least some implementation partners will have heavily invested in the software, and they will likely gladly oblige you with an ongoing support, possibly with an outsourcing arrangement. An installed base of even modest size should generate enough recurring revenue to support a development group that will enhance the product at least enough to keep it viable at least in the current technological environment.

Although end-user companies should continue to track the financial health of their vendors to possibly discern if the vendor will be a collector or one of the collected, the latest affair involving Oracle, PeopleSoft and J.D. Edwards may prove that even a stable vendor can involuntarily end up being acquired. Thus, even a fairly solid balance sheet cannot guarantee that the vendor will remain intact a few years down the track. Neither should you perfunctorily cross out a vendor just because it is not as big, and seemingly not financially viable, as some usual suspect behemoths on your list, given many recent success stories of nimble, highly focused vendors in certain markets, whose ROI has been much more tangible and faster than those of large generalist providers. Ignoring these would only defeat the purpose of a due diligence, and would only nurture creation of a few complacent, large vendors' oligopolies.

Yet, even if you are comfortable with your vendor's merger, you may want to take an aggressive negotiating stance, given the vendor will likely be more amenable to steeper discounts during any transitional period. If your provider is a highly focused boutique vendor, think of that vendor's health and help it become even better in your type of business.

If your vendor is acquired, be sure to meet the new owners. Talk with management and make certain they know your expectations and plans. Measure their commitment to support your technology for a specified time. Keep a close eye on their actions, given that product enhancement and service & support strategy can sometimes change as early as three to six months after the acquisition. Also try to understand their product strategy and look for opportunities in their product portfolio.

The new owners' motivation in buying your product and vendor was the install base and that's you. Showing interest (and keeping both eyes and ears open) is your part in keeping the relationship the way you want it. However, should your vendor be acquired in a hostile manner, and the new owner is trying to force you to migrate to its platform, do evaluate all the alternatives and do not accept the new vendor' seemingly sweet deal at face value, since it might not necessarily be much different to migrate to another more congenial provider than to your new heavy-handed provider.

About the Authors:

Olin Thompson is a principal of Process ERP Partners. He has over 25 years experience as an executive in the software industry. Olin has been called "the Father of Process ERP." He is a frequent author and an award-winning speaker on topics of gaining value from ERP, SCP, e-commerce and the impact of technology on industry.

He can be reached at Olin@ProcessERP.com

Predrag Jakovljevic is a research director with TechnologyEvaluation.com (TEC), with a focus on the enterprise applications market. He has over 15 years of manufacturing industry experience, including several years as a power user of IT/ERP, as well as being a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade, Yugoslavia, and he has also been certified in production and inventory management (CPIM) and in integrated resources management (CIRM) by APICS.

 
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