Geac Decomposes To Survive




Geac Decomposes To Survive
P.J. Jakovljevic - April 24, 2001

Event Summary

On April 3, Geac Computer Corporation Limited (TSE: GAC), a struggling Canadian supplier of enterprise management software, announced that it has completed the sale of its hotel business to Galaxy Hotel Systems LLC for approximately $ 1 million (US). Galaxy Hotel Systems is a subsidiary of Starwood Hotels & Resorts Worldwide, Inc., the largest client of the hotel business.

"The sale of the hotel business is indicative of our intention to be a more focused company," declared John E. Caldwell, Geac's President and Chief Executive Officer. "We have had a long relationship with Starwood, a client whose needs and expectations our employees know well. This bodes well for the transition." "The sale of the hotel business is indicative of our intention to be a more focused company," declared John E. Caldwell, Geac's President and Chief Executive Officer. "We have had a long relationship with Starwood, a client whose needs and expectations our employees know well. This bodes well for the transition."

The event follows the company's unsuccessful attempt to sell itself as a whole. On March 26, Geac announced the conclusion of the strategic review process regarding the sale of the entire company. Following an extensive process involving several interested parties and facilitated by CIBC World Markets and Lazard Frres, no formal bid for Geac was received.

"Since we initiated the process, stock valuations have fallen markedly, particularly in the enterprise software sector. Combined with a tougher market for acquisition-related financing and the prospect of an economic slowdown, these circumstances had a negative impact on the potential sale of the entire Company," noted Caldwell. "We do not believe that Geac's current stock price accurately reflects the Company's long-term value. Today's announcement will remove customer uncertainty and enable management to implement focused plans to improve performance on a go-forward basis."

"As a matter of policy, the Board continues to examine all ways to maximize shareholder value. Other strategic alternatives continue to be considered, including the potential sale of some businesses. Over the next several weeks, significant additional cost reduction measures, including a substantial reduction of Geac's current staffing level, will be implemented to improve profitability. Our goal of placing customers' requirements first will be the center of our agenda. Our product and geographic diversity provide the platform to drive shareholder value. We will, however, be more focused on the industry sectors where our market presence and portfolio of solutions can most rapidly generate value for our customers and shareholders," concluded Caldwell.

On March 13, Geac announced the results for the three months ended January 31, 2001. Revenues from continuing operations were $218.0 million (Can) during the third quarter, a 21.6% decrease compared with $278.3 (Can) million during the third quarter last year, but a 7% increase compared to $203.8 million in the second quarter of the current fiscal year (See Figure 1).

Figure 1.

"Last quarter, we committed to improve operational and financial performance and to strengthen our cash position," said Caldwell. "The restructuring and cost control initiatives implemented over the past months contributed to measurably improved results. Going forward, further initiatives will be implemented in a number of our businesses to further focus on our customers and to improve our profitability. Operationally, the Company performed well. We successfully completed and launched SmartStream 6.5 as well as a number of new products. It was also a strong quarter for customer renewal of maintenance support contracts."

Following a review of the carrying value of each of its businesses, Geac wrote down the value of acquired software and goodwill associated with certain past acquisitions. A net charge of $211.4 million was recorded in the third quarter for this purpose. This reduction in carrying value relates primarily to the 1999 purchase of JBA Holdings plc. Including this adjustment to carrying value, the net loss for the quarter was a hefty $218.9 million, compared with net income of $0.9 million during the same period last year.

"Geac will increasingly focus on the industry sectors where its market presence and portfolio of solutions can most rapidly generate profits and deliver the best value to our customers," Caldwell continued. "We will apply our efforts to improving our performance, with an emphasis on the higher margin enterprise software marketplace, and to build upon the exciting opportunities in the real estate software sector through our Interealty division."

Market Impact

These are the bleak days in Geac's history, and not many expected the speed and extent of events. From the prospects of fiercely competing with other ERP players, Geac has virtually overnight found itself fighting for a bare survival. Its unbridled acquisition strategy in a number of unrelated, diverse fields and in the face of the overall weakness of the ERP market has resulted in insufficient growth, a disconcerted user base, and dismal results. Executives' departures and numerous staff reduction initiatives have been the final straws in this slew of negative events.

While Geac's difficulties partly originate from the slump of the ERP market and current economic slowdown, the main culprit was poorly executed acquisition of once prominent UK-based ERP vendor JBA in 1999. The acquisition has unfortunately stopped short of producing the great synergy it seemed to have offered initially. Whether the reason for it was the clash of platform-aligned cultures (NT-based Geac products opposed to mainly AS/400-based JBA System 21) and the subsequent (in)voluntary exodus of former JBA management is now less important. The reality is that Geac has not significantly enhanced System 21 since (except for Web-enabling it through Universal Commerce Adapter (UCA) based on Jacada technology and for embedding acquired CRM and SCE products for the apparel industry only). Consequently, Geac has been unable to successfully market its System 21 product. The bottom line - more agile competitors have functionally leapfrogged a once very attractive product and captured the market share, while the existing JBA System 21 users have increasingly been voicing concerns for their investment, as recently reported by VNUnet.com, a leading European IT news portal.

A well-known problem for Geac has been its preference for acquiring new products rather than pursuing in-house product development and/or true strategic alliances. While the strategy might have worked in a number of esoteric industries with a low penetration of competitors like hospitality, real estate and publishing, it is indisputably, a completely different ball game in the global enterprise applications market in the mainstream industries. Modern enterprise applications must be able to support dynamic business requirements, and every vendor is compelled to add much more value to its products and services portfolio to attract and retain customers, rather than mainly investing in the existing bundle of disparate core products and hoping for endless support revenues.

Sticking to this thrifty strategy instead of taking decisive action to breathe fresh air into its arsenal of products, have backfired on Geac and relegated it in the back seat of the enterprise applications market. Therefore, it is positive news that Geac continues development of its flagship SmartStream product, having just recently launched SmartStream v6.5. That is not going to appease the System 21 users though, that are shouting blue murder for not being appropriately informed about the product's future. Realizing the crying need to change its faltering business model, Geac seems to be taking a more vigorous posture in addressing its strategic options. Look for more product strategy announcements in the near future if Geac is serious about appeasing and shoring up its large customer base.

User Recommendations

While Geac's balance sheet was boosted by recent sales of its parts, its cash resources are not infinite. The positive sign is the company's intent to become a true software-developing vendor, not simply a software collector and/or dealer. The "catch 22" for current and potential users is to discern Geac's corporate strategy viability within the product line/industry in question. Users will benefit from approaching Geac and informing themselves about what the company plans for future service & support (or divestiture and/or product stabilization?) of its individual products are and what would be the ramifications of migrating (or not) to its new product offering. Users should vigorously question Geac on its future options and investigate alternative solutions now to fully understand their situation and options. Manufacturing companies considering a new ERP system should be wary of the System 21 offering, until Geac more clearly states its future plans.

In any case, make sure that you are comfortable with Geac's declared product strategy for your industry and keep a close eye on the future developments.

More comprehensive recommendations for both current and potential Geac users can be found in Geac Lives By Acquisitions; Will It Die By An Acquisition?

 
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