Unlikely Acquisition Has Insiders Scratching Their Heads
Written By: Predrag Jakovljevic
Published On: November 17 2006
The announcement in September 2006 that Illinois Tool Works Inc. (ITW) (NYSE: ITW) had made a cash tender offer to acquire all of the common stock of Click Commerce. (NASDAQ: CKCM) made many market insiders scratch their heads. ITW is a diversified manufacturer of highly engineered components and industrial systems and consumables, consisting of approximately 700 business units in 48 countries, with some 50,000 employees, and $12.8 billion (USD) in revenues. Click Commerce, for its part, has been a thriving provider of on-demand supply chain management (SCM) solutions for a variety of worldwide industries.
Part Five of the series Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony?
For background information, see Will a Tool Manufacturer and a Supply Chain Software Vendor "Click" in Matrimony?, A Supply Chain Applications Vendor Expands Beyond Its Roots, Method to the (Expansion) Madness: Some Common Threads, and Challenges for an Expanding Supply Chain Solutions Vendor.
The Good, the Bad, and the Ugly of Similar Acquisitions
The deal calls to mind other software vendors that were acquired by large diversified manufacturing groups, with both good and bad outcomes. A positive example is the early-2004 3M acquisition of HighJump Software (see 3M Wraps Up HighJump, While Retalix Shops OMI International). ITW might want to follow 3M's way of handling HighJump—HighJump was organized as a separate limited liability company (LLC); 3M has maintained HighJump Software as a brand name (HighJump Software, a 3M company), and at a separate location; and 3M placed only two resources into the company (a controller and a person who was supposed to keep the rest of 3M at bay).
Moreover, after the merger was consummated, 3M did not skimp, but rather wisely infused a needed sales and marketing (S&M) spend, and encouraged acquisitions by HighJump to fill the gaps in its supply chain execution (SCE) product portfolio. This was exemplified by the recent acquisitions of Pinnacle Distribution Concepts, a transportation management system (TMS) provider specializing in the delivery of web-based, on-demand solutions, and of Global Beverage Group Inc. (GBG), a provider of delivery management solutions for the direct-store-delivery of consumer packaged goods. Also, the 3M giant has since shared some best practices from manufacturing operations that are applicable to HighJump, so as to help drive further software innovation, including the recent in-house delivery of a labor management system (LMS).
Like HighJump, Click Commerce is seemingly not one of the so-called "roll-up" acquisitions typically characterized by subsequent large cuts in product investment in order to rapidly increase profitability. In fact, ITW claims the exact opposite intention in its purchase. Instead of reducing investment in Click Commerce products, for example, ITW views Click as a natural platform and springboard for envisioned ITW services and software forays. Indeed, the acquisition does not have the appearance of an opportunistic bargain buy of technologies. Neither has Click Commerce demonstrated any desperation, as indicated by its decent price tag, which was a multiple of its revenue levels. ITW's complete lack of experience in software development should not prove to be too serious, provided that ITW lets Click operate largely as an independent business unit making smart moves as it did prior to this acquisition.
Thus, customers of both ITW and Click Commerce should be pleased, because this acquisition should center their IT investments inside a larger suite of complementary offerings, and increase their vendor's financial viability and market visibility. Furthermore, Click Commerce's management team is (for now) reportedly going to remain in place, as will most of its employees, which should preserve the autonomy, focus, and culture of the vendor. The new subsidiary should retain its own profit and loss (P&L) responsibility, maintain control over its product development roadmap, and continue to manage a separate sales force and partners.
ITW claims it wants to run Click Commerce as a business unit with the sole objective of continuing to sell collaborative commerce software; in the long run, ITW may thus become one of the significant SCM software vendors globally. While the cross-selling opportunities exist and are tempting ( la General Electric's approach of selling software to industrial clients during Jack Welch's tenure), ITW has to quickly set and clarify requirements for Click Commerce to cross-sell with other business units and their trading partners. At least the master data management (MDM), radio frequency identification (RFID), and demand channel management (DCM) products seem to be low-hanging fruits, in addition to the warehousing products that have reportedly already been used by many ITW divisions.
Challenges To Beware of
These potential synergies will have to be handled carefully though, given that the imposition of over-demanding requirements has traditionally disrupted many acquisitions of enterprise applications vendors by large industrial organizations (the look-alikes of 3M and ITW). Namely, there are unfortunate examples of many other non-technology companies that have tried to diversify into the enterprise software business, and that have subsequently struggled with cultural differences (due to the different nature of a software business as compared to an industrial manufacturing business). In other words, they have not been able to create the right atmosphere to replicate the success that 3M is achieving with HighJump. In many cases, the acquired software vendors have experienced slower growth, thwarted sales and marketing efforts, and falling corporate support for the risk-taking and innovation required to maintain a full-fledged enterprise application suite. The software industry requires a more innately adventuresome approach with regards to delivering new products, from concept and ideas, to commercial implementation. Outside desktop office productivity applications, at least, the notion of a "cash cow" product has not pervaded the enterprise application space.
A good example of such a poorly handled acquisition (and subsequent divestiture) is provided by Viastore Systems, a large supplier of automated material handling and storage retrieval systems, which acquired former SCE vendor Provia Software (now part of Infor, after being previously sold to SSA Global). This was relatively surprising, given the seemingly synergistic nature of Viastore and Provia (see Provia Tackles RFID in a Twofold Manner; Part Three: Provia and Viastore Systems Alignment. Possibly the ugliest example involves former Marcam Corporation and Baan, which were both acquired by the automation, controls, and process solutions giant Invensys, in 1999 and 2000 respectively. Invensys abandoned the mission a few years later and sold both companies (along with most of its other software acquisitions), again to SSA Global, and for a fraction of the original price. See Invensys Production Solutions—Can Historic Strengths And The "Protean Boost" Overcome Its Liabilities?.
Coming back to ITW and Click Commerce: while product overlap and redundancies are no issue here, there is still the challenge of integrating the companies. At this stage, ITW maintains that its key strategy is to integrate only those elements that are absolutely necessary, and to instead try to preserve the culture and autonomy that has made Click Commerce special. Still, the two companies' differing cultures and work styles may come into play, and experience teaches us that following a seemingly promising acquisition, a major difference in philosophy often emerges between the acquired and acquiring management teams. This may have to do with questions of how to execute strategies for growing the company while "increasing operational efficiency," which inevitably results in the exodus of the acquired management team. It is important for ITW to avoid any major difficulties in assimilating Click Commerce personnel, operations, technology, and software, and to retain the key personnel.
ITW, a large and established industrial company, has never sold complex SCM software, which has particular sales cycles and product life cycles (with higher investments and risks of innovation). It might expect Click Commerce to even more quickly grow to match new (possibly too optimistic) growth and profitability targets set by ITW, which could deteriorate customer service levels if ITW pushes the vendor to expand uncontrollably. It is questionable whether ITW's well-known "80/20 rule" (meaning that 80 percent of a company's sales are generated from the most important 20 percent of its products and customers, with appropriate options to support the lower volume and lower profitability product lines and customers) can be applied to Click Commerce's industry "Who's Who" customer list.
Given the market opportunity for cross- and up-sell, and possibly differing end user markets for the two merging companies, ITW will also have to resist the temptation to expand Click's software suite to new, unsupported verticals, while possibly neglecting some existing verticals. For instance, it is not clear how many ITW businesses would care for the spare parts planning and optimization software, which might prompt the likes of Servigistics or MCA Solutions (which has lately become quite cozy with SAP) to prey on possibly disconcerted existing Click Commerce (Xelus) customers. The esoteric health care research and financial institutions areas might be even more suspect in that regard. ITW will have to be careful not to lose the deep collaborative commerce domain knowledge present in Click Commerce today. Vertical industry depth and expertise is critical to ongoing success, and should be encouraged and nurtured. However, some sectors may easily be neglected amid a slew of acquisitions of complementary but diverse technologies (and subsequent attempts to intertwining them).
Furthermore, in the long term, if ITW finds the SCM market too difficult to compete within, or if Click Commerce falls short of expectations for whatever reasons, the eventual ensuing divestiture would likely disrupt customer support and implementations in progress. Thus, Click Commerce might be pressed to maintain profitability and revenue growth levels on its own until sales, service, and consulting groups from both companies align their different products and services. Click Commerce's growth expectations under ITW should be manageable, and possibly even slower than for the past several years. While ITW does very few divestures in general, the "devil" will still be in the details of execution going forward.
Current Click Commerce customers should not feel any increased sense of urgency with respect to the acquisition. If anything, existing customers should be comforted by the backing of a financially stable Fortune 200 parent company with money and eagerness to invest. However, although this acquisition sounds like a positive event, and although ITW and Click Commerce appear to have strategic growth intentions, look for future proof in the actions they take in the coming months. Additional acquisitions that provide strategic value and synergy with Click Commerce should be welcomed, while significant cost-cutting and management turnover at the new ITW division should be looked at cautiously. Typically, successful software acquisitions have been those where the acquirer valued the acquisition of "brains" rather than simply a code base.
All existing customers should find out whether they belong to the privileged "20 percent" customer group, and clarify what the benefits are (or what the ramifications are, if they are not). They should closely monitor any changes to determine whether they will continue to receive acceptable support and service from their provider within new arrangements. If service and support declines notably, or if sound and plausible product road maps are not articulated reasonably soon, existing users should develop an exit strategy scenario or demand the right to source code for their own support. They might want to watch whether ITW does add funding and resources for Click Commerce, although Click has never stated that customers should expect an injection of money from ITW. The vendor anticipates being able to reinvest the formerly public company's costs in the business—serving customers, growing the business, and furthering product strategies.
Until the recently released unified and plausible architectural framework is mature and proven in full force at many reference sites, prospective customers should treat each application as a stand-alone, possibly best-of-breed product within the Click Commerce portfolio, and ensure that return on investment (ROI) can be achieved within a year or so. Otherwise, inquiring about alternative solution providers might be a viable option, especially in light of the competitive offerings available in each segment.