Is Enterprise Market Consolidating? Exactly!

Is Enterprise Market Consolidating? Exactly!
P.J. Jakovljevic - June 14, 2002

Event Summary

On May 29, Exact Software (AEX: EXACT), a Dutch-based provider of accounting, payroll, CRM, ERP and e-Business software solutions, continues its aggressive growth and expansion in North America by announcing its intention to acquire Kewill ERP Inc., a manufacturing and distribution software division of Kewill Systems PLC (LSE: KWL). Kewill Systems is a UK-based provider of supply chain management (SCM) software for small-to-medium enterprises (SMEs). This, only 15 months since it acquired Macola Software, formerly a privately held mid-market ERP vendor based in Marion, OH, adds to an ongoing enterprise applications market consolidation.

Exact will pay $19 million cash for the division, according to Bert Groenewegen, Exact's CFO and president of Exact Software's North American division. The sale is contingent on approval of such at a June shareholders meeting of Kewill Systems PLC. In the year ending March 31, 2002, Kewill ERP reportedly generated revenues of approximately $28 million and a profit before interest and tax (EBITA) of $1.2 million, but Exact expects that this acquisition will have a neutral effect on profitability for 2002.

The Kewill ERP Division has long has been recognized as one of the leading providers of ERP software for small to mid-size manufacturers. Based in Minneapolis with smaller operations in San Francisco and Santa Barbara, the division also has an operation in the UK. The Kewill ERP Division provides a scaleable suite of Microsoft Windows-based manufacturing software solutions under the JobBOSS, MAX and Alliance/MFG product names. JobBOSS, a make-to-order (MTO) ERP solution, is one of the leading Job Shop software solutions in the small to mid-size marketplace. MAX and Alliance/MFG are solutions that cater to the needs of discrete manufacturers and should therefore complement Exact's Macola ES manufacturing and distribution offerings.

Kewill ERP will operate as a separate business unit of Exact Software North America selling, supporting and maintaining JobBOSS, Max and AllianceMFG product lines. As a result of this acquisition, Kewill ERP should reportedly leverage the resources of Exact, a larger, more global organization, thus strengthening the marketing and product strategies of Kewill ERP. Exact's research and development effort will reportedly include the realignment of the product lines and integration with Exact's e-Business product, e-Synergy. As a result, R&D resources will be shared and integrated with the entire Exact Group, thus increasing the total product development budgets and expanding Exact's support and services to existing JobBOSS, MAX and Alliance/MFG customers. Such support services will be provided through regional offices Exact already has opened in North America as well as others it plans to open throughout the US.

This latest acquisition announcement comes on the heels of Exact Software North America's announcement several weeks ago that it is opening regional offices in the San Francisco Bay area, Greater Los Angeles area and Boston area. In addition to these new facilities, Exact Software North America has offices in Central Ohio, Orlando, FL, Fort Lauderdale, FL; Toronto, Canada and Vancouver, Canada.

Market Impact

As the latest quarterly reports have largely seen disappointments even from many leaders and market darlings, one is to wonder about the sustainability of many of the smaller players. The renewed flurry of mergers and/or acquisitions could be one way for the cash-depleted smaller vendors, which have admirably survived both the Y2K conundrum, dotcom's en mass demise, and protracted economic slowdown crunches, to keep themselves abreast of the growing demands on the underlying collaborative product architecture and functionality breadth, with customers remaining vendor viability cautious. Attaining these goals under its own steam will likely be a tall order since many vendors have also lately been reducing staffing levels in order to cut costs, whilst at the same time introducing heavy product discounting and competitive sales practices.

Once one goes beyond the top ten in the ERP market, the next biggest players have a market share less than 5%, and although even 1% of the market estimated at ~$20 billion still represents significant value, this is only valid from a business perspective when there are many new sales opportunities available. Therefore, for the vast majority of smaller vendors, apart from a few niche specialists in some vertical segments, it really becomes a case of fighting for the crumbs. Although during a blossoming market this is less of a problem, and therefore high levels of consistent growth throughout the 90s has seen many of these vendors grow to a significant size, it is no longer the case. Therefore, growth and market expansion through acquisition has lately been the most viable option.

In the case of Exact and Kewill, it is a logical move to counteract recent Microsoft expansion in the applications market (see Microsoft 'The Great' Poised To Conquer Mid-Market, Once and Again) and to remain in the game at least in terms of the company size and infrastructure. Consequently, the parent Exact Holding N.V., which has over 50 subsidiaries and 20 distributors in over 50 countries worldwide, has customers in 100 countries, and potentially with close to $250 million in revenues and over 2,000 employees worldwide should still be placed among the leaders in the SME market segment. Its experience with Macola has so far been a case of a successful merger effort. While many competitors have recently reported declining revenues and scaled-back R&D efforts, Macola has gone in the opposite direction. Despite the tough economic climate, the company has closed a number of deals partly because of being a bigger organization with a broader geographic sales and support coverage. The company marked its complete integration with its parent organization earlier this year when it adopted the name Exact Software North America.

Moreover, the combined organizations offer an expanded solution footprint with the recently unveiled extended-ERP suite renamed Macola ES (formerly Progression Series ERP). The Exact's contribution to the partnership was the above-mentioned e-Synergy, a suite of Web-based customer relationship management (CRM) solutions, human resources (HR) management functions, project management, and extensive workflow management functionality. Although it may not be as deep as some of the best-of-breed CRM products in the market, it offers most of the functionality a small and/or medium enterprise may need without the superfluous integration headaches. Owing to its inherent workflow, e-Synergy furthermore often becomes bigger than the sum of its parts, since by being able to manage the customer's Web site and by including the buy side and the sell side of e-business, document management, and logistics functionality, it borders on the capabilities of knowledge management (KM) and business process management (BPM) systems. The successful and quick integration of e-Synergy with former Macola's back-office solution to get Macola ES was impressive, resulting with delivering more information to the desktop and across the enterprise, and with catering for better management of customer service for an organization.

Similarity in the parties' corporate cultures and product development philosophies has certainly played its part. Even before the acquisition, Macola was striving for an expanded global presence, and to that end, its product featured the multi-currency and multi-language capabilities of a global product. Both companies' products' open architecture, flexibility and adoption of Microsoft technology have also made it easier for products to be blended and for customers or consultants to localize the product further. Furthermore, in 2000, well before being purchased, Macola introduced Web.Orders, a module that provides on-line product configuration capabilities and order management, and it also rolled out its new, higher-performance Microsoft SQL Server-based product.

Impact on Kewill

The acquisition should have a great meaning for smaller and not very vocal Kewill too, which should gain access to Exact's sizable resources and avail itself with large investments in e-business, product technology/architecture, globalization and verticalization. One should expect Exact to apply its practice of using a common object repository to simplify development across all the products in this acquisition too. The merger should also boost Kewill's sales and marketing capabilities, as it has so far conducted a lot of business only over the phone and over the Internet. The Minneapolis-based division has long offered two flagship ERP solutions aimed at SME manufacturers: MAX and JobBOSS. Additionally, Kewill recently bolstered its product portfolio with its recent acquisition of Alliance Manufacturing Software, a provider of ERP solutions to fledgling manufacturers with annual revenues of $1 million to $15 million.

Kewill's ERP products exhibit different strengths. While JobBOSS is a suite of shop management applications for job shops and make-to-order (MTO) manufacturers that place high priority on the ability to track actual cost and labor, MAX and Alliance/MFG are ERP product suites tailored for repetitive and mixed-mode manufacturers. MAX has a broader-based appeal, by offering integrated applications that include material requirements planning (MRP), advanced planning & scheduling (APS), product configuration, and customer relationship management (CRM).

From the above it appears that Kewill has some material management functionality overlap with Macola ES product, but the products' respective strongholds in manufacturing (Kewill) and services, distribution, and financials (Exact Software) could bode well for the merger. Also, both companies' reliance on the Microsoft's technology, and Kewill's stability and profitability owing to a lean operating business model, must have also played the part in Exact opting for this acquisition. Still, in addition to always-inevitable integration effort, and despite the complementary nature and somewhat different target markets of the product lines, the pain in appropriate positioning of these cannot be discounted. It is always quite likely that the direct sales forces and/or channel partners will face conflict in terms of market overlaps, as well as traditional association with a certain product line regardless whether it is the best fit for a certain opportunity. Not to mention the effort of cross-training in case of VARs willing to forsake their attachments to certain product lines. In addition to Microsoft Great Plains/Navision and Best Software archrivals, an array of peer competitors like, e.g., Frontstep, Epicor, Syspro, Made2Manage, Lilly Software Associates, Scala, or ACCPAC will cite their more unified products that cover many bases natively as well.

User Recommendations

While we believe that the above merger should be synergistic in the long run, some growing pains, integration issues, and positioning of possibly redundant products are always to be expected. Still, Kewill ERP customers should consider this event as a move toward a more viable position for their IT investment, given a likely growth in Kewill's R&D and sustained support for the ongoing development of its products, likely by integrating it with e-Synergy. Enterprises should nevertheless monitor the consistency between the announced strategy and Exact's actions in continuing to support Kewill ERP strategically.

Consequently, until the merger is consummated, users evaluating the above individual products should exercise moderate caution, keep themselves informed, and consider generally available (GA) functionality only. Existing Kewill ERP users should urgently clarify their support status and the long-term product development and migration strategy with the new management. Customers adopting the first integrated product should anticipate significant changes in later versions of the product after first users' experiences and product refinement requirements. Current Kewill users should also query the partnership with Microsoft Great Plains' Dynamics modules as it functionally overlaps and competes with Macola ES.

More generally, Exact Software North America should be attractive to small to midsize growth-oriented businesses in various industries with a need to integrate Back-Office ERP (manufacturing, distribution, HR/Payroll and accounting), CRM and e-Commerce applications. If a manufacturing organization, your operations should be quick-turn, material and operation intensive, with heavy work-in-process management needs and strict control of both material and labor contribution to the bottom line.

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