Geac Lives By Acquisitions; Will It Die By An Acquisition?

Geac Lives By Acquisitions; Will It Die By An Acquisition?
P.J. Jakovljevic - November 20, 2000

Event Summary

On November 3, the Board of Directors of Geac Computer Corporation Limited (TSE: GAC), a Canadian supplier of enterprise management software, announced the appointment of. Charles S. Jones as non-executive Chairman of the Board and. John E. Caldwell as interim President and Chief Executive Officer. These appointments were made following the decision of William Nelson to step down as Chairman and interim Chief Executive Officer of the Company for personal reasons, only one month after his appointment on October 2. Mr. Nelson remains a director of Geac.

The announcement comes only a few weeks after Geac's "profit improvement initiative" announcement. On October 16, Geac announced that it had taken steps to improve future profitability through a comprehensive restructuring program. The Company expects this initiative will reduce annual costs by approximately $60 million, commencing in the third quarter of the current fiscal year. Staff reductions, achieved through a combination of layoffs and attrition, as well as infrastructure cutbacks, will result in a one-time pretax charge of up to $20 million, the majority of which is expected to be taken in the second quarter. In addition, a pre-tax provision of approximately $8 million will be taken in the second quarter for certain claims and legal matters related to contract disputes involving a subsidiary of the former JBA Holdings plc.

William Nelson, Chairman and Chief Executive Officer of Geac at the time, said, "This restructuring initiative was necessary to enhance our competitive position and to restore ongoing profitability. We are experiencing lengthening sales cycles in certain markets, as customers defer software acquisition and related integration and implementation services. The cost reductions coupled with the anticipated seasonal revenue increases should result in improved operating profits and cash flow for the second half of the fiscal year. We also will increase support for our e-commerce businesses. Specifically, we will add resources to our Pyramaz division and e-purchase business of up to $4 million annually to capitalize on its growing pipeline of opportunities. In addition,, AMSI (our property management business) and other e-focused divisions will be maintained at current staffing levels to support ongoing business and product development initiatives."

On September 11, Geac announced results for Q1 2001, which ended July 31, 2000. The revenues for the first quarter from continuing operations were $212.5 million compared to $192.7 million for the same period last year. (Revenues in both periods exclude sales made by the Banking Systems business that was sold on July 13, 2000.) Excluding the gain on the sale of discontinued operations noted above, but including the increase in amortization, the fully diluted loss per share from continuing operations was $0.70 during the quarter compared to earnings per share of $0.56 in the first quarter of the prior year (See Figure 1). However, as a result of the sale of the Banking Systems business Geac's balance sheet was significantly strengthened compared to the year-end at April 30, 2000. Bank indebtedness has also been substantially reduced.

Figure 1.

Douglas Bergeron, President and CEO at the time commented: "Our revenues in the quarter were significantly affected by the industry-wide softness in license sales and professional services consulting in addition to the normal seasonal slowdown in our now substantial European business. However, our customer base remains largely intact. We remain confident that revenue will improve during the second half of the year. We have taken steps during the quarter to reduce our costs going forward and are continuing our efforts to manage our costs to reflect properly our anticipated level of business activity."

Market Impact

While one could have long sensed some forthcoming turbulent times at Geac, not many expected the speed and the magnitude of the events. It is a no-brainer that the company has irretrievably missed the opportunity to seriously compete with other ERP giants like SAP, Oracle, PeopleSoft and J.D. Edwards. Although Geac has proven itself an adept and disciplined acquirer of application software businesses in the past, its rampant acquisition strategy in the face of the overall weakness of the ERP market has resulted in insufficient growth and dismal results. Consequently, the investors' diminished confidence has crippled its market valuation. The loss in the last quarter and the resignation of Douglas Bergeron have been the final straws in this basket of negative events. Moreover, there are some indications that the company has recently received a few takeover inquiries.

We only partly agree with management that Geac's difficulties coincided with the slump of the ERP market. However, the greater part of Geac's difficulties lies in poorly executed acquisition of struggling UK-based ERP vendor JBA in 1999. The acquisition has unfortunately stopped short of producing the great synergy it seemed to have offered initially. In spite of the fact that Geac, being a large software company with a track record for profitability and growth, has significantly enhanced System 21 by embedding acquired CRM and SCE products for the apparel industry, Geac has been unable to be successful in marketing its System 21 business. The revenue from the product in the last year was only $67 million compared to the level attained in 1998, when JBA reported $487 million in sales.

Another problem for Geac has been its preference for acquiring new products rather than investing generously in in-house product development. The strategy has apparently worked in a number of esoteric industries with a low penetration of competitors like hotels and publishing. It is however, a completely different ball game in the global enterprise applications market in the mainstream industries. Contemporary enterprise applications must be able to support dynamic business requirements, which are nowadays directly related to customers' e-business strategies. Therefore, 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 disparate, possibly outdated, 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, based on diverse technologies and serving different, fragmented markets (e.g., System 21, SmartStream, E- and M-Series mainframe packages, etc.) appears to have backfired on Geac and put it in the back seat of the enterprise applications market.

User Recommendations

One thing must be clear - Geac is cry far from being in a dire situation like Baan and SSA were a year ago. Its balance sheet, although somewhat deteriorated, is still very sound. However, we believe that Geac will not be regarded as an enterprise applications leader in the new economy as long as it remains perceived only as a company that acquires, fixes, and often divests other under performing software products. The company will have 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 the ramifications of migrating (or not) to its new product offering be.

Geac customers should certainly consider the company's latest value proposition within the above-mentioned product lines where it will supposedly continue to invest, but avoid selecting it without looking at what the other vendors have to offer. As for potential customers, we generally recommend including Geac in a long list of an enterprise application selection to mid-market and low end tier 1 companies (with $100M-$1B in revenue), within the following industries: Library Systems; Construction Systems; Property Management Systems; Hospitality Systems; Public Safety Systems; Publishing Systems; Manufacturing & Distribution Systems; Real Estate Systems; Cash & Securities Reconciliation Solutions.

We also generally recommend including JBA System 21 in a long list of an enterprise application selection to mid-market and low-end Tier 1 companies (with $50M-$1B in revenue), within the following industries: Automotive Components, Apparel & Footwear, Beverage, Food, and Electronics.

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

Customers are also advised to request the Company's written commitment to promised functionality, general availability date, price, length of implementation, and seamless future upgrades. Each component should be put through its paces using a well-documented set of requirements, scripted scenarios demonstrations and rigorous reference checking. If a complementary product beyond core ERP (e.g., CRM, e-Commerce, SCM, etc.) is of a critical importance, users should think carefully about the possible integration and/or product discontinuation implications and may benefit from considering competitors' value propositions too.

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