chinadotcom In The "Process" of Acquiring Ross Systems




Event Summary

On September 4, Ross Systems, Inc. (NASDAQ: ROSS), a global provider of enterprise software primarily for midsized process manufacturers, and CDC Software Holdings Inc, a wholly owned subsidiary of chinadotcom corporation (NASDAQ: CHINA), an integrated enterprise solution and software company, announced that they have signed a definitive agreement whereby CDC Software will acquire Ross Systems in a merger valued at approximately US$68.9 million. Following the merger, it was announced, Ross Systems would operate under chinadotcom's CDC Software unit. The transaction is expected to close no later than the first quarter of calendar year 2004 subject to approval by Ross Systems' stockholders, certain regulatory approvals and customary closing conditions.

CDC Software has been a master distributor of Ross Systems' enterprise business solution, iRenaissance ERP suite, in the greater China region (including China, Taiwan, Hong Kong, and the territories of ASEAN, Korea, Australia, and New Zealand) since May 2003, when the two companies signed an agreement. One peculiarity of the acquisition is that the relationship between the two companies started nearly a year ago in a competitive situation for a process manufacturing customer in China. Ross won at the time due to its superior functional fit. Ever since the above distribution agreement, CDC had been looking to make more of an investment in the recent partner, eventually resorting to the complete acquisition. The acquisition comes at a time when many in the manufacturing software community see China as a significant growth opportunity due to China's increased role in the global economy as an outsourced manufacturer. CDC Software's presence in Asia should be a nice complement to Ross' historic strength in North America and in Europe.

The acquisition also comes at a time when many companies are acquiring distressed software vendors in order to acquire their customer base. These so called "roll-up" acquisitions are typically characterized by subsequent large cuts in product investment in order to rapidly increase profitability. CDC Software claims the exact opposite intention in Ross' case. Instead of reducing the investment in Ross products, it intends to increase the level of investment through complementary acquisitions and access to Chinese systems development resources at lower, offshore rates.

To that end, the company has been busy of late making several acquisitions. The last one happened on September 9, when CDC Software announced the acquisition of a majority stake of Industri-Matematik International Corporation (IMI), a provider of supply chain management (SCM) solutions in the US and Europe. IMI's proprietary software is comprised of comprehensive SCM solutions that serve a wide range of businesses including complex retail, wholesale, consumer packaged goods (CPG), and distribution operations. chinadotcom's stake in IMI resulted from CDC Software's purchase of a 51percent interest of the holding company which owns 100 percent of IMI. The remaining 49 percent is held by Symphony Technology Group (Symphony), a Palo Alto, CA-based private equity firm focused on enterprise software and services, which previously owned 100 percent of IMI. In consideration for the 51 percent stake, CDC software has agreed to invest $25 million into the holding company, and has also agreed to finance a loan facility for the holding company of up to a further $25 million. The analysis of the IMI acquisition may come up in a separate research article some time in the future.

This is Part One of a two-part note.

Part Two will discuss the challenges and make user recommendations.

Ross Year 2003 Highlights

In any case, chinadotcom believes that the acquisition of Ross Systems, a profitable company with solid margins and recurring revenue streams, represents an attractive and earnings-accretive transaction. Indeed, on September 5, Ross announced financial results for the fiscal year ended June 30, 2003, during which, the total revenue of $48.1 million increased 4 percent as compared to $46.1 million in fiscal 2002. Net profit of $4.1 million improved from a net loss of $9.6 million in the prior year, in which the net loss included a non-cash charge of $10.9 million, related to discontinued sale of certain products as a result of the company's release of its next generation of process manufacturing software. Also in fiscal 2003, software license revenue at $14.6 million increased 12 percent over the prior year (see Figure 1). Total revenues for the quarter were $13.0 million as compared to $11.4 million in Q4 2002, which is an increase of 14 percent, while the software license revenue at $4.7 million increased an impressive 30 percent from the previous year's same quarter (see Figure 2). This growth was reportedly fueled by significant wins in the life science and food and beverage markets.

Some of the fiscal year 2003 highlights would be:

  • Ross added three new vertical special interest groups for food and beverage, life sciences, and chemicals, providing a valuable forum for customer interaction and exchange of ideas, and a place where Ross can aggregate valuable product feedback and use it to influence technology direction and enhancements.

  • Ross introduced its Internet Application Framework, a Microsoft.NET-based platform that promises to simplify deployment, software maintenance, and integration of applications inside the company and across the supply chain.

  • Ross announced iRenaissance Validator for pharmaceutical and biotechnology companies in manufacturing or clinical trials. Validator is designed to clearly define and thoroughly document each step in a proven process to predictably achieve and maintain validation to meet FDA regulations on a timely basis. Ross also introduced the Validation Partner Program, designed to provide life sciences clients with a mission ready stable of qualified resources to help them achieve their validation requirements and optimize their business operations while complying with FDA regulations. CimQuest and CSSC Inc. were certified as fully qualified partners.

  • In addition to its entry into the Asia/Pacific arena via the above partnership with CDC Software, Ross has added to its worldwide distribution with new distributors in South Africa, Poland, Argentina, Venezuela, Chile, Brazil, and Hungary.

A final note on the acquisition is that while many acquisitions may suffer from impending integration issues, CDC software has very little software that overlaps with the iRenaissance products, which should result in a smoother transition because there are no competing architectures. With operations in ten markets and over 1,000 employees, the companies under the chinadotcom group have extensive experience in several industry groups including finance, travel, and manufacturing, and in key business areas, including e-business strategy, packaged software implementation and development, precision marketing and supply chain management. Headquartered in Hong Kong, chinadotcom has three main businesses units—CDC Software, Mobile and Portals, and CDC Outsourcing.

CDC Software integrates a series of chinadotcom's self-developed products engineered in two software development centers in China, which include PowerBooks, PowerHRP (Human Resources and Payroll), PowerATS (Attendance Tracking System), Power-eHR, PowerPay+, PowerCRM, and Power eDM (a double-byte e-mail marketing technology). In addition, the company also broadens its offerings in software arenas by establishing strategic partnerships with leading international software vendors to localize and resell their software products throughout the Asia Pacific region. The software arm of chinadotcom currently has over 1,000 customer site installations and 600 enterprise customers located throughout the Asia Pacific region.

chinadotcom also established CDC Outsourcing, which allows for elements of workflow such as client and project management to be provided in the contracted country (i.e. UK, US, or Australia), with technology and applications sourced from either of the company's low-cost, Capability Maturity Model (CMM)—certified outsourcing centers in China or India. In its Mobile and Portals unit, the company operates popular news, e-mail, and consumer service portal websites in China, Hong Kong, and Taiwan. Through the recent acquisition of Newpalm (China) Information Technology Co., Ltd. (Newpalm), the company now offers consumer-based and enterprise-based short message service (SMS) and mobile application software development services.

Hence, the low product overlap, along with complementary geographical focus, should result in a low level of disruption to current operations. The company reports to have no plans for changes in Ross Systems' management team, which also points to a "business as usual and even more of it" approach from a daily operations viewpoint.

Figure 1

NOTE: Net income for 2002 reflects $10.9 million, non-cash, non-recurring charge due to the release of its next generation of process manufacturing software and related discontinued sale of certain earlier vintage products. The revenue dip between 2000 and 2001 is in great part due to the divestiture of certain non-core product lines.

Figure 2

NOTE: Net income for 4Q02 reflects $10.9 million, non-cash, non-recurring charge due to the release of its next generation of process manufacturing software and related discontinued sale of certain earlier vintage products.

Market Impact

Ross Systems is one of the few mid-market ERP players left that focuses on the process industries. The strength of the iRenaissance suite has been its tight focus on the needs of chemical, food and beverage, life sciences, metals and natural products companies (see Ross Systems' Focus Yields More Value For Process Manufacturers). The process industries are notorious for having very different needs than those provided by traditional, discrete manufacturing applications. Ross has been successful in these markets, with over 1,000 companies using iRenaissance worldwide.

Ross Systems' biggest challenge has been keeping up with the expanding footprint required for ERP applications. In order to maintain solid financial performance, Ross has not been able to acquire or build applications for supply chain planning (SCP) or customer relationship management (CRM). The addition of capital resources from chinadotcom should provide the needed resources to increase the size of the available suite of solutions. To its credit, Ross has been able to satisfy its customers' demands for additional solutions by developing some very successful partnerships, such as the SCP relationship with Prescient Systems (see Two Highly Focused Vendors Team For Their Markets' Good) and with Selligent for an equivalent CRM offering.

In the tough process manufacturing market, and in a challenging economy, Ross has had another successful year. In its recently ended fiscal 2003, Ross Systems added customers such as Schenectady International, The Nut Company, Achilles USA, and Hanson Brick & Tile, and increased its presence with existing customers such as GEO Specialty Chemicals, Boar's Head, Boston Biomedica and NaPro BioTherapeutics. Ross has taken a very pragmatic approach over the past several years, which has resulted in a strong return to profitability (see Ross Systems A Bright Spot On A Difficult Enterprise Application Landscape and Ross Systems Shows Poise in 'Big Easy'). With the access to capital and lower-cost development resources from chinadotcom, Ross should be able to capitalize on its current vertical market expertise and further its footprint.

Prior to the acquisition, Ross was forced to prove its viability to prospective and existing customers in order to alleviate worries that the products would be left unsupported. Although consistent profitability over the past two years had softened many concerns, recent software industry failures and uncertainty has made proof of viability a much more important part of due diligence during any software selection. The acquisition by chinadotcom, a stable company with over $300 million in cash, should provide comfort to current and prospective iRenaissance customers. Despite impressive results and certain localization due to its product's support for Unicode, a relatively small vendor like Ross was not going to grow fast on its own without penetrating a large emerging and still not penetrated market, like China. A renowned domestic parent should certainly help Ross gain a larger foothold in the market.

This concludes Part One of a two-part note.

Part Two will discuss the challenges and make user recommendations.

 
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