The Mid-Market Is Consolidating, Lo And Behold

The Mid-Market Is Consolidating, Lo And Behold
P.J. Jakovljevic - May 11, 2001

Event Summary

Microsoft's acquisition of Great Plains (see Microsoft And Great Plains - A Friendship That Turned Into A Marriage) and the merger of Navision Software and Damgaard (see Does NavisionDamgaard Merger Mark Further Mid-Market Consolidation?) at the end of 2000, combined with the anxiety of looming economic slowdown, seem to have triggered the spate of mergers and acquisitions from the beginning of 2001.

The most recent was the April 9 merger agreement between Kana Communications, Inc. (NASDAQ: KANA), a provider of enterprise relationship management (eRM) solutions and Broadbase Software, Inc. (NASDAQ: BBSW) a provider of customer interactions business intelligence solutions. The combined company will be called Kana Software and will have an install base of more than 1300 customers.

Also, in a move to address a market not covered by its BPCS product, on April 2, SSA GT, a reincarnation of once all but deceased ERP vendor System Software Associates (SSA) acquired ICL MAX International Limited (MAX International) and its product, MAX. This strategy attempts to leverage its existing channel to reach the small to medium enterprises (SMEs). See SSA Acquires MAX Hoping To Leap From Its MIN for more information.

On March 27, Interact Commerce Corporation (NASDAQ:IACT), the makers of SalesLogix, possibly the principal product in mid-market CRM, and ACT!, one of the best selling contact manager products, announced a definitive merger agreement with The Sage Group Plc., one of the leading worldwide suppliers of business management solutions and services for small and mid-sized enterprises (SMEs) and a direct competitor to Great Plains and Navision. Interact Commerce will become a wholly owned subsidiary of The Sage Group Plc., which is listed on London Stock Exchange (LSE).

On February 26, AremisSoft Corporation (NASDAQ: AREM) a global supplier of Internet-enabled enterprise solutions for the manufacturing, hospitality, healthcare and construction industries with international headquarters in the UK, announced a definitive agreement to acquire Fourth Shift Corporation (NASDAQ: FSFT), a worldwide supplier of ERP and e-business software for small to medium enterprises. With this acquisition, AremisSoft expands its web-enabled ERP offerings and intends to more aggressively participate in the large Tier 3 market for integrated ERP solutions. In addition, the Company hopes to deliver a more comprehensive web-enabled e-business solution to market more quickly. The acquisition brings to AremisSoft approximately 1600 active customers in North America, Europe, the Mid-East, and Asia, and expands AremisSoft's customer base, market coverage, and sales presence in the US and other key markets, including China. AremisSoft plans to combine its UK based manufacturing software operations with Fourth Shift and expand its resource commitment to supporting both ERP systems and new e-business applications.

Last but not least, on February 8, Macola, a privately held mid-market ERP vendor, announced its growth has reached global proportions, as a result of the signing of a definitive agreement with Exact Holding NV, a Dutch-based provider of e-Business and ERP solutions, listed on the Amsterdam Stock Exchange (AEX). According to Exact Software Vice President Lucas Brentjens, this acquisition sets the stage for Exact's plans to establish an aggressive product presence in the US. Macola and Exact immediately plan to execute a product strategy for full integration of Exact's e-Synergy e-Business suite with Macola's Progression Series to bring these e-business solutions to the U.S. marketplace. According to both company officials, this strategy allows them to build upon their unique product strengths while bringing new e-Commerce and e-CRM capabilities to Macola's product suites and providing a product offering that will be unique to the United States marketplace.

Market Impact

The recent frenzy of enterprise applications software company acquisitions is not exactly a big surprise. After all, consolidation is normal to almost every industry. Over the last two years, the applications market became stratified into growing and profitable vendors on one side, and stagnating and cash burning vendors on the other side. The Y2K-problem caused market slump in 1999 and the recent global economic slowdown have been excruciatingly hard on the smaller vendors. They have the same need to expand their offerings but much scarcer resources at their disposal to do this than their bigger counterparts. We believe that this will become more accentuated owing to the growing demands on the underlying product architecture and functionality, with customers becoming more vendor viability cautious. Customers will also increasingly look for one strategic vendor to fulfill the vast majority of their business application needs, particularly in the lower end of the market. Consequently, consolidation, mergers and acquisitions in the lower end of the applications market are expected to intensify.

While we do not necessarily expect larger vendors to gobble up their direct smaller competitors, more intra mid-market acquisitions and/or mergers such as the above-mentioned are very likely. We also expect companies with related software products (e.g. plant automation or Internet trade exchanges providers) to move into the ERP space through acquisitions. For one, providers of business-to-business (B2B) trade exchange software have been striving to evolve into providers of sourcing solutions for direct materials. Good examples of this trend are FreeMarkets' acquisition of Adexa, a provider of collaborative supply chain planning software (for more information, see FreeMarkets' Surprise Acquisition of Adexa Leaves Many Heads Shaking) and, in part, the above mentioned Exact's acquisition of Macola.

On the other hand, in the ERP market, the major vendors focused on the high-end of the market have virtually evolved into providers of comprehensive e-Business suites. They also compete with a slew of smaller extended ERP vendors for the market for small to medium enterprises (SMEs). While the heyday of the ERP market in the mid 90s have postponed the consolidation in the lower tiers of the market, it is, however, not the case today. The above announcements reflect the morphing enterprise applications landscape as vendors scramble to outrival competition or, more often, survive during the next phase of e-Business.

While at the high end of the market, vendors of enterprise applications suites face fierce competition from CRM, SCM, B2B exchange providers and other niche players, in the mid-market, a more conventional consolidation has been taking place, mainly with an aim of combining the resources to deliver extended enterprise software suites that meet the 'one-stop shop' requirements of smaller companies. Look for more smaller applications vendors to acquire new functionality and/or merge to protect themselves. There is a multitude of players in the market and it is very unlikely that all will survive in the long run. The most likely acquisition candidates are vendors with poor financial performance and depleted market capitalization but with a large customer base and a deep focus and expertise in a certain industry. Fourth Shift, Macola and MAX fitted the description either partly or completely. These acquisitions seem to offer both geographic and products/platforms synergies, with the new owners pledging to let the acquired business run as usual at this stage, with the possible product lines blending down the line.

"Two to one is odds" seems to be the main reason for the Kana/Broadbase merger rather than the product synergy. Both firms were among the many that recently fell prey to pessimistic investors and diminishing global corporations' appetites for technology. There is some functionality complementing fit, though, since Broadbase's analytic system that is devised to analyze customer information to increase sales and customer satisfaction, fits well with Kana's CRM package. On the problem side, however, there appears to be some conflicting overlap. Namely, Broadbase recently acquired ServiceSoft for its knowledge management and e-service systems, two areas already existing in Kana's product portfolio. Furthermore, owing to low resources even after combining them makes Kana/Broadbase vulnerable to further acquisitions once the merger is complete. Nevertheless, the need for providing a full, comprehensive eCRM suite rather than an individual solution or a bundle of point solutions for each distinct CRM area remains firm, and will urge further CRM market consolidation.

Sage's acquisition of Interact is much more justifiable and might give pause to Microsoft Great Plains, Navision, Epicor, as well as to Siebel Systems, Oracle, SAP and PeopleSoft that have been eyeing the mid-market for some time. For more information, refer to the following articles:

Sage has long been considering acquisition of a CRM product, and it might have hit the bull's eye with Interact Commerce. The two vendors may indeed marshal a powerful back-office and front-office systems' combination to the market for SMEs. In fact, Microsoft Great Plains', Epicor's, and/or Navision's officials in discussions with TEC have often flagged Sage as one of their fiercest competitors. Interact's product strategy with ACT! for smaller businesses matches well with Sage's portfolio of low-end operational systems (e.g., MAS90, BusinessWorks, and Peachtree). SalesLogix, on the other hand, should complement well Sage Enterprise products for midsize companies.

The downside, as a rule, is the painstaking integration effort yet to be exerted. The mitigating factor though is the fact that Sage and then SalesLogix had long formed the product alliance, so the integration task may not start from scratch. However, integration is never a simple task despite SalesLogix' Open CRM initiative and a number of mid-market ERP product alliances and subsequent product integration experiences (a deal with Macola being one, as a matter of interest). Sage has a myriad of products in its portfolio that could benefit from integration with ACT! and/or SalesLogix, and the company must clearly articulate its plans and the timeline for integration for each of its products. Otherwise or it may face confusion and/or anxiety among both its current and potential customers. That would be the music to its direct competitors' ears, which have already (or all but) rounded up their CRM offering after daunting integration experiences (for more information, see Epicor Software Corp.: Completing Painstaking "e"Volution).

User Recommendations

Experience teaches us to be wary of the outcome of mergers' and acquisitions' as the market has witnessed both success and disaster stories in the past. Although Sage, AremisSoft and Exact have shown strong financial discipline and/or have successfully acquired other less fiscally sound companies with attractive products in the past, one never knows when bad luck may strike.

While we believe that the above mergers might be synergistic in the long run, some growing pains, integration issues, and discontinuation of redundant products are always to be expected. Consequently, until each merger is consummated, users evaluating the above individual products should exercise moderate caution, keep themselves informed, and consider generally available (GA) functionality only. Potential clients should conduct preliminary research on the industry expertise and reference accounts of regional offices or affiliate service providers of merged companies in case. Existing 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 in case should anticipate significant changes in later versions of the product.

For more recommendations pertinent to SSA GT's acquisition of MAX only, see SSA Acquires MAX Hoping To Leap From Its MIN.

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