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.