How Much Wisdom Will BRAIN Bring To Agilisys?

Event Summary

Almost unnoticed or tersely reported by market observers was a recent merger of two seemingly unlikely enterprise software providing matrimony candidates. On December 2, Agilisys International, a provider of business software solutions almost exclusively to the process manufacturing industries (and the recently spun off former Process Manufacturing and Distribution division of SCT Corporation, see Agilisys Continues Agilely Post-SCT), announced the acquisition of BRAIN AG, a German provider of specialized ERP and Supply Chain Execution (SCE) software primarily to automotive suppliers and other selected industries worldwide. Jim Schaper, Agilisys Chairman and CEO, has appointed Ernst Gemmasmer to the post of Senior Vice President (SVP) to lead the European operations of BRAIN Automotive. Post-transaction, the BRAIN Automotive and the BRAIN Industries subsidiaries will reportedly operate as separate business units of Agilisys International. The acquisition was financed through funds managed by Golden Gate Capital and Parallax Capital Partners.

For over 20 years, BRAIN has been enhancing the productivity and competitiveness of automotive suppliers by providing them industry-specific software and consulting services tailored to meeting the demanding requirements of the automotive industry. Agilisys' acquisition of BRAIN brings closure to a difficult insolvency period of one of the most widespread used plant-centric ERP systems in Europe and North America, and a consequent relief to its disconcerted users. With over 1,600 referenceable customers in nearly 19 countries, BRAIN has been aiming its best-of-breed-like solutions at keeping automotive suppliers current, compliant and on the leading edge. As a result, although with HQ in Germany, BRAIN has been well known worldwide as the ERP system for mid-market automotive supplier plants.

On December 9, Agilisys further announced that Kenneth (Ken) Walters has assumed the position of President and COO of Agilisys, and he will also report to Jim Schaper. With over 25 years of experience in the Information Technology (IT) and Software Application market, especially in enterprise software, services, global operations and acquisition integration, Walters reportedly brings a wealth of global leadership and management expertise to a company that is rapidly expanding. In his most recent position, Walters led HiddenMind Technologies, Inc., a mobile application platform provider, as President and CEO, responsible for the company's overall solutions strategy as well as day-to-day operations including sales, consulting, client services, product engineering, and marketing. Prior to HiddenMind, Walters served as COO for Internet Security Systems (ISS), president of Impact Innovations Group, managing partner with Coopers & Lybrand and SVP at Dun and Bradstreet Software. Walters was also the COO at Emerald Systems, a leader in data storage management.

Agilisys believes the addition of the above two experienced executives will insure it can manage a much larger and globally oriented combined software company. Likewise recently acquisitions-famished privately held competitor SSA GT, because of the large financial backing of its investors, Agilisys believes it can grow faster and without the typical legal intricacies associated with its publicly traded competitors. There are therefore indications of another acquisition being lined up for not so distant future, as Agilisys is actively looking to acquire companies that either create depth or breadth in the verticals it is currently in, or to expand into other verticals like in the case of BRAIN.

This is Part One of a two-part analysis of the acquisition of BRAIN by Agilisys.

Part Two will discuss the Challenges and make User Recommendations.

Market Impact

In a time when acquisitions are the order of the day, little seems to be surprising. Yet, this acquisition will either be perceived as very perplexing on one side or crystal clear without much ulterior mode on the other side. Perplexing and confusing would be due to the fact that Agilisys' and BRAIN's products and target markets have hardly anything in common. It is very likely that most of the staffs of the two entities will have never heard about the other party, let alone have ever competed against each other in the field. Therefore, any possibility of synergy between the two parties is seemingly very slim. That, on the other hand might lead us to the crystal clear rationale that this was strictly an opportunistic move and a financial play of seasoned investors with a good nose. BRAIN, which filed for bankruptcy in July (see The Automotive OEMs Might Soon Contract 'BRAIN' Damage), has been looking for a white knight ever since. Having been not particularly successful, and likely desperate by the day, it has created an opportunity for a financial savvy group, such as Golden Gate Capital and Parallax Capital Partners, to jump in and snatch it for a fraction of its fair price from happier days.

There might not necessarily be anything flawed with merging the two companies and with the resulting entity being mere a sum of two parts. The market had already witnessed the anguish of former Baan Co. and SSA customers, which have both eventually been resolved quite favorably with subsequent buyouts. To that end, BRAIN's numerous high-profile customers should feel a sigh of relief. Until its bankruptcy last summer, BRAIN has been a publicly traded company on the German stock exchange with annual revenues of over $90 million. The vendor has over 670 employees located in 24 offices in 17 countries including numerous locations in Europe, US, Mexico and South America. BRAIN is regarded as the No. 2 ERP/SCE software solutions provider in most of the automotive supplier markets in Europe and the No. 3 in the US, and it also serves some other vertical markets. With over 800 customers and 1,600 installations globally, this acquisition should create a notable combined entity with annual profitable revenues exceeding $130million, an employee population of almost 900 and customer installations approaching 2,000.

Background on BRAIN

As a result of its own earlier acquisitions, BRAIN competes with its two automotive-focused ERP packages, which are Xpert Manufacturing System, which runs on IBM's iServer (formerly AS/400) platform, and TRANS4M, which runs on UNIX and Microsoft Windows server platforms. The two products differ in their fit to different types of automotive suppliers, in addition to platform support. Xpert is better suited to mixed-mode manufacturing requirements, whereas TRANS4M should appeal to manufacturers with a lean/repetitive production environment (with its work-in-progress (WIP) visibility, pay-point operations, multiple backflush methods, and other automotive industry endemic functionality). Recent lingering BRAIN's difficulties can be largely attributed to the fact that the company has never produced a cogent strategy to bring the two dissimilar product lines together, finally resigning to having a two-pronged product strategy. Moreover, hefty R&D expenditures in German HQ to unify the products and spread into other vertical industries will have also been the likely reasons that left the company financially vulnerable for the revenue slump.

Contrary to its German parent's forays into different industries and management of dissimilar product lines, the BRAIN North America subsidiary has long been focused on Web-based software capabilities and domain expertise in automotive supply chain communication/execution, as opposed to traditional ERP systems in various industries. The automotive industry has unique characteristics that make it highly conducive to Internet-based supply chain optimization and collaboration. A car's or an engine's intricate bill of materials (BOM) results in many entities being involved in its making.

Information transparency and supply chain integration are, therefore, the name of the game, and e-business technology, while not causing these requirements, is at least providing for their enablement. To that end, BRAIN has long been offering a suite of automotive-focused supply chain communication applications that integrate with multiple ERP systems. The platform agnosticism stems both from the need for stronger market competitiveness and from the homogenous back-office population within the customer base. While many existing customers may run on one of BRAIN's ERP solutions, many others have legacy systems or systems from another vendor that they are not planning to replace any time soon.

As a result BRAIN NA has developed its e-Automotive Suite of B2B communication and collaboration applications, which also includes SupplyWEB Enterprise, a Web-based system for communicating procurement, shipment, payment, supplier performance, and many other types of information, catering thereby for almost every type of communication an automotive company has with its suppliers. Moreover, with the latest SupplyWEB version 6.0, BRAIN has expanded the Internet-based product's appeal by merging European and US/Canadian functionality to better support manufacturers with plants on both sides of the Atlantic.

Other global, multiple languages ERP independent solutions would include ACmanager, an Automotive Customer Manager portal application, and BRAIN-eX, a TCP/IP Message Broker. In fact, BRAIN NA had achieved a notable traction with its SupplyWEB replenishment system, with a recent large wins and momentum with other prospects, giving thereby a pause to archrivals like QAD (with its eQ and collaborative offerings, in addition to the flagship MFG/PRO ERP product) and to the likes SupplySolution and Future Three.

Consequently, in November, BRAIN NA closed Q3 2002 as its seventh straight profitable quarter amid a marketplace where losses and revenue shrinkage have been prevalent. The recent wins include automotive heavyweights such as TRW, ArvinMeritor and Meridian. Owing to the functional attractiveness of the SupplyWEB product, some notable automotive suppliers have earlier committed to using BRAIN (e.g., Volkswagen (VW), both in European and US plants), despite the current diminished spending pattern, and even immediately after the insolvency announcement. The vendor's cash position has lately been strengthening also due to good teamwork in terms of both cost management and debt collections. It is therefore a small wonder to see BRAIN being acquired by the likes of astute capital providers. Although, a more plausible scenario would have been to see a direct competitor, e.g., SSA GT, stepping into the picture and acquiring at least the more attractive parts of BRAIN offering.

Having concluded the benefits of financial backing for both embattled BRAIN and its anxious customers, there is also a chance of the acquisition rationale being somewhere in the middle, meaning that some synergy could be generated between the future domestic partners, Agilisys and BRAIN. Agilisys' small client base (below 500) has also predominantly been North American, resulting in insignificant brand awareness and an undeveloped channel outside of the North American market, despite a strong focused offering. Since the process manufacturing market is highly global, Agilisys had to expand its global coverage to address the needs of its current and intended customers. To that end, BRAIN may provide Agilisys with additional distribution and range on a global basis especially outside North America. With the deal, Agilisys will grow from a $50 million company to a $130m company almost overnight, and will now have a solid support infrastructure and customer base internationally.

This concludes Part One of a two-part note.

Part Two will discuss the Challenges and make User Recommendations.

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