SSA GT To EXE-cute (Yet) Another Acquisition

Event Summary

SSA Global Technologies (SSA GT), a privately-held enterprise solutions provider for process manufacturing, discrete manufacturing, consumer, services, and public companies worldwide, which has lately turned into a famished enterprise applications market consolidator, seems to still be far from satisfying its predatory urge. The vendor, which was once a laughing stock of the ERP market during the late 1990s (see Another One Bites the Dust - SSA Gored to Death), has recently experienced nine consecutive quarters of growth and profitability that is possibly unique in the industry today, but it has also done it while concurrently orchestrating several successful acquisitions including Baan, Elevon, and Ironside Technologies (albeit these very recent three are yet to be fully consummated, see Baan And SSA GT Merge To Form A Mid-Market Empire With An ''Iron Side''), Infinium Software (see Is SSA GT Betting Infini(um)tely On Acquisitions?) and interBiz, the former eBusiness division of Computer Associates (see CA Unloads interBiz Collection Into SSA GT's Sanctuary).

While the market has been aware of SSA GT still tirelessly eyeing multiple more acquisitions of ailing competitors with notable products/technologies and install bases, former supply chain management (SCM) leaders i2 Technologies and Manugistics being speculatively mentioned, another acquisition happened on August 18, when SSA GT and EXE Technologies, Inc. (NASDAQ: EXEE) announced the signing of a definitive agreement under which SSA GT will acquire the embattled global supply chain execution (SCE) provider. Under the agreement, a subsidiary of SSA GT will merge into EXE Technologies and all holders of EXE Technologies outstanding common stock will receive $7.10 per share in cash, which represents an 18 percent premium over EXE Technologies' closing market price on August 15, 2003.

The acquisition is subject to the approval of a majority of EXE Technologies shareholders as well as regulatory and certain other customary conditions. It is anticipated that the acquisition will close within 75 to 100 days. Upon closing, EXE Technologies will be a wholly-owned subsidiary of SSA GT. Ray Hood, the Chairman of the Board of EXE and the holder of 5.9 percent of EXE Technologies outstanding shares, has reportedly agreed to vote in favor of the merger. Stephens Inc. served as the financial advisor to EXE Technologies and has rendered a fairness opinion for a deal valued at $47.3 million.

SSA GT Financial Results

A couple weeks later, on September 3, SSA GT announced financial results for the company's fourth quarter and fiscal year ended July 31, 2003. These results are subject to audit and do not include the recent Baan acquisition. For Q4 2003 the company reported total revenue of $85.2 million, an increase of 19 percent over Q4 2002, while software license revenues were $29.9 million, up 41 percent over the prior year quarter and represent 35 percent of total revenue in the quarter. Fourth quarter earnings before interest, taxes, amortization (EBITA) were $22.1 million, or 26 percent of total revenue. Cash-on-hand as of quarter's end was $65 million.

Total revenues for the year were $285.4 million, an increase of 50 percent from 2002, while EBITA were $65.5 million, which represents 23 percent of total revenue. For the year, software license fees represented 33 percent of total revenues with the remaining 67 percent coming from maintenance and services. Geographic representation was maintained with revenues of 47 percent generated from North America, 31 percent from Europe, Middle East and Africa (EMEA) and 22 percent from the Latin America and Asia/Pacific/Japan regions.

As mentioned earlier, during fiscal year 2003, SSA GT closed several strategic acquisitions of notable companies that further established SSA GT as the largest provider of enterprise software to the manufacturing sector, given the company now has more than 16,000 customers worldwide. Attempting to dispel the perception of being the vendor that thrives mainly on service and maintenance revenue, Mike Greenough, President, Chairman, and CEO, pointed out that as a percentage of total revenue, SSA GT's software license fees are among the highest in the industry.

This is Part One of a four-part note.

Part Two will cover EXE.

Part Three will discuss the impact on SSA GT.

Part Four will present the challenges and make user recommendations.

Market Impact

While some may dismiss SSA GT's recently invented modus operandi of growth by acquisition and of subsequent secured installed base service and maintenance revenue as opportunistic (or even scavenging), this has lately been proven as an effective business model. In a market with a limited few new deals but with low interest rates for borrowing money and financing, the companies with strong financial backing like SSA GT (being a portfolio of New York's Cerberus Partners LP and General Atlantic Partners (GAP) of Greenwich, CT, after Los Angeles-based Gores Technology Group, which was former SSA's savior in 2000 together with Cerberus, exited its investment in May 2002) are not to be blamed for opting to introduce many new products through bargain acquisitions rather than through grueling in-house developments and repeated software testing from scratch.

To give the devil its due, while SSA GT remains relentless in its pursuit of profitability, and while perhaps putting the architectural or cultural compatibility of acquired companies in the back seat, its solid financial viability and performance continued even while an industry average research and development spend was maintained (i.e., at 14 percent of the total revenues), allowing the vendor to continue to reinvest in its own product offerings. Indeed, the vendor has also been committed to ongoing product enhancements in-house, which should allow SSA GT customers to extend the life of their existing technology investments. Recently, SSA GT released version 8.2 of BPCS, and version 9.2 of PRMS, its two major ERP products and version 6.2 of Warehouse BOSS, its warehouse management system (WMS) for mid-market companies.

Also, the very recent array of acquisitions such as Baan, Ironside, and EXE Technologies would not exactly indicate acquisition of outdated technologies—although the vendors in this case have experienced financial difficulties, their ability to deliver innovative products has not been much impaired, if at all. Further, much has been said lately about the SCE market thriving and its supply chain planning (SCP) counterpart being one of the worst performing enterprise applications segments during the still ongoing economic downturn. While core back-office ERP and possibly even more cumbersome SCP systems might have traditionally excelled at planning, conceptual optimization, and financial integration functions, they have not addressed warehousing, yard management, distribution network planning, or transportation/logistics management. Yet, increasingly, every company's success is contingent upon its ability to make almost immediate, finished-product or service delivery to customers.

The demand for near real time supply chain collaboration will, in turn, place an increasing emphasis on any company's ability to immediately commit itself to promising orders' delivery dates on a global basis and to consistently meet those commitments ever after. This available-to-promise (ATP)/capable-to-promise (CTP) aptitude will be made more complex as companies rely on an increasing number of business partners and suppliers to procure raw materials, assemble, and deliver finished goods. SCE is therefore gaining increasing awareness among companies that realize that planning can do only so much without the ability to make the right and timely decisions and execute on the shop floor, in the warehouses, or within the entire distribution chain.

Thus, given the attractiveness of the SCE market, SSA GT has quickly and cheaply added a strong SCE functionality including warehouse management, fulfillment, adaptive inventory management, process measurement, and supply network execution capabilities. We believe that EXE, which is still one of the largest pure-SCE players in terms of revenues, has a potential of enhancing the existing supply chain management and execution functionality within SSA GT's portfolio of solutions, given immaculate execution of the merger, which is not guaranteed of course. EXE also brings a solid cash position of over $30 million, which is not negligible in these times of cash scarcity, and given the modest price tag of the deal.

This concludes Part One of a four-part note.

Part Two will cover EXE.

Part Three will discuss the impact on SSA GT.

Part Four will present the challenges and make user recommendations.

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