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Observation of Recent Events
The
recent flurry of acquisitions, some of them involving a great part of drama,
emotions, and personal recriminations due to their hostile nature, would be
the crown evidence that the business application software space is consolidating,
a process which started a few years ago primarily in the mid-market space (see
The
Mid-Market Is Consolidating, Lo And Behold), but is now spreading across
the range.
Indeed,
the month of June started with earth shattering merger activity and a strange
algebraic calculus (i.e., 3+5=2) that should fundamentally reshape the enterprise
applications landscape. Namely, on June 2, PeopleSoft, currently
the No. 3 leading business applications provider and J.D. Edwards,
currently the No. 5 business applications provider (if one is to include the
customer relationship management (CRM) specialist Siebel Systems),
announced a definitive agreement for PeopleSoft to acquire J.D. Edwards, creating
thereby the world's No. 2 enterprise applications software company and toppling
Oracle's applications business current position in the market
share hierarchy. Combined, the merged companies would have approximately $2.8
billion in annual revenues (which includes a substantial amount from maintenance
and service revenue), 13,000 employees and more than 11,000 customers in 150
countries. With this acquisition, PeopleSoft hoped to expand its presence in
more than 20 industries including a broad range of services, manufacturing,
distribution and asset- intensive industries.
Retaliating or not, Oracle then announced on June 6 its intention to acquire PeopleSoft (likely without J.D. Edwards in the equation) for $5.1 billion in cash (i.e., valuing each PeopleSoft's share $16, which was ~5% premium over the actual price at the time), as to expedite both its and PeopleSoft's shareholders approval process. Contrary to the above PeopleSoft/J.D. Edwards move, which was a diligently (and clandestinely, like in a plausible spy thriller movie) thought-out friendly merger and with many merits of complementary nature and of taking customer bases' concerns into consideration (albeit no one can dispute certain inevitable challenges of merging the two large software organizations), Oracle's move seems as a mere attempt of the customer base hijack and of a candid elimination of the competitor (i.e., 1+1<2) it has grown to like to hate over a long recent period of neck-to-neck competition for almost every new enterprise applications deal.
After the initial dismissal of the offer from PeopleSoft's CEO, and even a threat of a legal action for damages caused by Oracle sowing seeds of fear within PeopleSoft's prospects, the targeted vendor eventually backed off from threats and decided to go through the offer consideration steps required by the law. Thus, surprising to hardly anyone, on June 12, PeopleSoft's board of directors unanimously rejected the offer citing undervaluation and disruptive intent as main factors, as well as potential antitrust ramifications in the US and Europe. The final say is therefore in hands of PeopleSoft's shareholders, while the industry is also waiting to see PeopleSoft's forthcoming quarterly results and whether Oracle will counter bid with a follow up offer that might be difficult to reject.
Not to allow Oracle to be too relaxed during its pondering, on June 12, J.D. Edwards announced that it has filed suit in Colorado state court claiming that Oracle has tortuously interfered with its proposed merger with PeopleSoft announced earlier. The suit seeks $1.7 billion in compensatory damages and an unspecified amount in punitive damages. J.D. Edwards is also filing suit in California state court against Oracle and two of its executives. The California suit alleges that Oracle, Larry Ellison, Oracle chairman and CEO, and Chuck Phillips, Oracle executive vice president, have engaged in wrongful conduct and unfair business practices. It seeks an injunction that enjoins Oracle from proceeding with its tender offer for PeopleSoft.
Further, Oracle exceeded expectations in Q4 2003, which it reported on June 12, and which gave boost to its share price and its takeover aspirations. Given this has put PeopleSoft additionally under pressure, as seen in its share price dangerously approaching the bid level (after soaring to above $18 level immediately after the offer), on June 13 PeopleSoft announced that it has sued Oracle Corporation to put an end to what it characterizes as a sham tender offer aimed at destroying PeopleSoft's business. The complaint, filed in Alameda County Superior Court, alleges that Oracle has engaged in unfair business practices, trade libel and tortuous interference with PeopleSoft's customer relationships. According to the suit, Oracle's true intent in making the tender offer was to undercut PeopleSoft's business operations by disparaging PeopleSoft's products, services, and future prospects, undermine PeopleSoft's viability by creating uncertainty and doubt in the minds of PeopleSoft's customers and prospective customers, and interfere with PeopleSoft's plan to merge with J. D. Edwards and Company. On June 16, PeopleSoft also amended its original bid by offering to pay up to half of its friendly bid for J.D. Edwards in cash, in order to fend off a hostile bid from Oracle. The chain of events is far from being finished
Meanwhile,
on June 3, in the shadow of the above higher-profile mergers and spared from
any controversy, ailing Invensys eventually sold Baan
to private investors General Atlantic Partners and Cerberus
Capital Management, which plan to merge it with SSA GT and create a
sort of a manufacturing mid-market ERP empire backed up with a $14 billion capital
fortune. SSA GT not that long ago also purchased interBiz
and Infinium (see CA
Unloads interBiz Collection Into SSA GT's Sanctuary and Is
SSA GT Betting Infini(um)tely On Acquisitions?), and is still reportedly
eyeing multiple more acquisitions of ailing competitors with notable products
and install bases, former supply chain management (SCM) leaders i2 Technologies
and Manugistics being speculatively mentioned.
Some
claim that the recent effervescent spate of acquisitions could be traced back
to Microsoft's acquisition of Great Plains
and Navision (see Microsoft
'The Great' Poised To Conquer Mid-Market, Once and Again) in its unveiled
quest to create a $10 billion application business empire by 2010. Given that
its current applications revenue is only' at about $500 million, and given
modest to dismal prospects of organic growth in this economy, it is a no brainer
that the remaining $9 billion-and-the-"small change" in desired applications
revenues will be supplemented through acquisitions, and given Microsoft's almost
infinite buying power to entertain its (also almost infinite) aspirations.
This
is Part One of a two-part note.
Part
Two will continue the Analysis and make User Recommendations.
Analysis of These Events
Why such a frenzied consolidation? For years, application vendors have fueled their success through mushrooming new accounts but things have drastically changed during past few years. Most application software markets are mature and highly penetrated nowadays, with only a few new accounts available. To continue to be healthy, an enterprise software vendor either needs a defendable niche or a large market share. For the latter, acquisitions are often required to grow and prosper. With revenue streams shifting from new accounts to up- and cross-sales to existing customers, software support and services, a large customer base is the key to continued health.
Alternatively, smaller vendors are developing defendable niches where the bigger vendors cannot afford to have a solution. By definition, these vendors, often referred to as boutique, niche and/or best-of-breed vendors, are serving smaller, specialized markets and therefore will not grow into a larger company but will remain smaller but highly profitable. Thus, we expect the market for application software to break into two tiers. The first group will be a limited number of very large vendors, while the second group will be a large number of small, highly focused vendors. This migration has long started and will continue in earnest.
The Big Five (or perhaps it will be Four, Six or Seven) will thus have a business model that focuses on the customer base. They will depend upon support and maintenance revenues as a primary stream and on operational efficiency. They will also try to sell additional software and services to the base. A large customer base also gives the surviving vendors the economy of scale for support, services, and technology investments. How large of a customer base will prove large enough? The still undisputed leader, SAP, now claims nearly 20,000 customers, many of which are large and mid-size global enterprises. SSA GT/Baan combination currently claims 16,500 primarily mid-size global customers, which number is to likely grow via many more desired acquisitions. To be a Big Five player, vendors need to get into this range or even larger.
In
the past, some vendors have justified acquisitions with a plan to replace the
new customer's software products with the vendor's existing products. Except
for Oracle's yet another outmoded, wayward "back to the future" ploy against
the current market trend (remember its still ongoing attempt to persuade customers
to obtain everything from Oracle, even if that means several years of waiting
for the functionality to happen?), that is not necessarily the case any more
since it is very expensive, in terms of both money and disruption, for a customer
to change application software. Therefore, most customers want to keep the software
they have, increase the value received and grow with it. A case in point would
be Solomon IV, which continues to thrive and to be enhanced
within Microsoft Business Solutions (i.e., its recently released
5.5 version features integration with Microsoft Project and
many well-attuned features for project-based professional service businesses),
despite some pundits' predications of its demise even when it was acquired by
former Great Plains in 2000. Even the venerable MANMAN product
has had notable enhancements under SSA GT's roof within its version 12, although
this product faces the impending predicament of the HP e3000
hardware platform discontinuation in 2003, which goes beyond SSA GT's control.
Meanwhile, every other vendor that grows through acquisitions must continually simplify its development systems so that it can profitably support disparate businesses, allowing them to invest and grow. Successful vendors must be able to meet both goals simultaneously — doing what is right for the customer and while doing what is right for their business. We nonetheless see the challenge for every vendor who acquires its way into the Big Five to manage too many different products it has acquired to concurrently reach these two objectives.
New Accounts and the Big Five
Of
course the Big Five will continue to sell new accounts, particularly in still
non-penetrated and/or emerging markets. In Asia-Pacific, East and Central Europe,
Africa, and South America, new accounts will represent significant license growth.
This is important for the future health of these companies, driving them to
innovate and replacing natural installed-base attrition. In our recent note
that has predicted vendors consolidation, albeit not with such a rampant and
controversial turn of events in one single week (see What
Does Vendor Consolidation Mean To The End User?), we foresaw the Big Five
coming from several sources. We had to concede that SAP was already there and
will remain there, as it has the base and momentum already, and is inconceivably
an acquisition target. Of the other large vendors (i.e., J.D. Edwards, Oracle,
and PeopleSoft) we saw one or two making it into the Big Five but which one(s)?
While PeopleSoft had all but answered our question with its recent merger intent,
Oracle, having the other ideas in that regard, has definitely put a spanner
in the works.
We
expect Microsoft Business Solutions and Sage/Best Software,
now with several hundred thousand and even millions customers respectively (albeit
most of them being small businesses, and not including small offices/home offices
(SOHOs)) to be one or both within the Big Five. We also envision room for a
company to acquire its way into the Big Five, the stampeding SSA GT being one.
Maybe these recent events will finally force Siebel Systems off its high horse
to realize that remaining a CRM specialist will not suffice in the long run
and to start looking for targets (and also over its shoulders the vendor has
over $2 billion in cash, which is more than SAP's cash reserves, although SAP
has approximately five times Siebel's revenue).
The
enterprise applications entail quite a bit more then to e.g., know when your
most profitable customers' important life events are, as to blast them with
a promotional marketing campaign. How about making sure these offers can be
seamlessly delivered and invoiced, which goes hardly at all without integration
with ERP and/or SCM systems? The plummeting license revenues (i.e., over 90%
year over year in its most recent quarter) should have long enticed Siebel in
acquiring a notable ERP vendor (e.g., Lawson Software, which
has long been its partner focusing on similar service industries, and which
has also been subdued of late), rather than venturing into more minute CRM point
solution acquisitions, like the recent acquisition of messaging vendor BoldFish.
Analysis of the PeopleSoft-J.D.Edwards-Oracle Situation
Thus,
the PeopleSoft-J.D. Edwards merger and Oracle's hostile takeover bid for PeopleSoft
are quite about retaining a Big Five seat and about the need to be bigger within
shrinking market opportunities. Frankly, it was possibly more logical to have
expected a smaller manufacturing ERP or SCM vendor to be the next PeopleSoft
prey. Indeed, PeopleSoft could have achieved most of its objectives by acquiring,
e.g., Baan, QAD, Epicor, IFS,
Intentia, Geac, or i2 Technologies, and for
only a fraction of J.D. Edwards' price tag.
Why
then this quite pricey acquisition, which has likely tempted fate by inviting
Oracle to act in a knee-jerk fashion? In addition to the joy of finally vaulting
over formidable foes Siebel and Oracle, there were lots of business approach
similarity between the two vendors' CEOs, at least in their similar financial
discipline and their ways of turning their respective companies around, at about
the same timeframe (see Figures 1 & 2).
Figures
1
Figures 2
Even the recent drop in license revenues of both vendors has had a similar pattern
(see Figures 3 & 4), although Oracle's claim of PeopleSoft and J.D. Edwards'
distressed performance could be attributed in part to a psychological war',
given both vendors' more than solid cash reserves.
Figures
3
Figures 4
While
PeopleSoft did not want to inherit any excessive baggage with the acquisition
of a struggling smaller vendor, it will have now gotten much more than it has
bargained for (and possibly, much more than it might be able to handle) with
Oracle's intervention. Regardless of whether Oracle was serious about the acquisition
(i.e., the bid price is regarded by many as too low, but, on the other hand,
Oracle might know something we don't know yet, given its improved Q4 2003 results,
and the amounting pressure on PeopleSoft that is soon to report Q2 2003 results,
and given the fact that PeopleSoft's shareholders may not have the same concerns
and desires as PeopleSoft's customers, i.e., the money talks') or its only
intention was to derail PeopleSoft's merger plans, in addition to putting PeopleSoft's
future in question, the entire market has embarked on a trip with no return.
Yes, Oracle seems the winner and PeopleSoft (and J.D. Edwards to a degree) the
loser whatever the bid's outcome might be, at least due to disconcerting the
existing customer base and likely stalling new customer sales, till the matter
is duly solved.
To
give devil its due, one might acknowledge Oracle's rationale to acquire the
archrival given its protractedly sagging applications license revenues that
have been riding on the coattails of also shrinking database revenues, with
the exception of the most recent quarter that the vendor reported on May 12
(see Figures 5 & 6, and Stalled
Oracle Fumbling For A Jump-Start Kit). Also, the bid is about many more
adjacent markets beyond business applications, such as database, application
server, email/collaboration server and middleware, all of which Oracle competes
in, and is hoping to use as fertile ground for excellent up- and cross-selling
to PeopleSoft's customers.
Figures 5
Figures
6
However,
Oracle should not gloat much over its possibly shrewd move to instill FUD (fear,
uncertainty and doubt), given it has yet again drawn the market consternation
and has likely proven to be a less customer-friendly vendor (if not necessarily
a product). Just when we thought we were over Oracle's controversial one-stop-shop'
and no multi-vendor interconnectivity' mantras, given it has recently shown
some amenability to admitting the multi-vendor world out there (see Oracle
Makes A U-Turn At The 'All Things To All People' Exit), and given it has
largely bridged the chasm with its independent user group, Oracle Applications
User Group (OAUG), comes up with another attempt to tell the customer
what is best for them (let us guess, Oracle's wall-to-wall technology stack),
rather than to listen more closely to their concerns.
While
it is not likely that PeopleSoft's customers will ebulliently jump to Oracle's
proposed migration in droves (except for perhaps some truly Oracle technology
shops), even current Oracle's customers that have still not been the happiest
bunch on earth when it comes to Oracle E-Business 11i quality
issues, might be wary of the future products' quality when Oracle becomes distracted
by the immense PeopleSoft's assimilation. Again, all on condition the bid goes
through.
About
the Authors
Olin
Thompson is a principal of Process ERP Partners. He has over 25 years
experience as an executive in the software industry. Olin has been called "the
Father of Process ERP." He is a frequent author and an award-winning speaker
on topics of gaining value from ERP, SCP, e-commerce and the impact of technology
on industry.
He can be reached
at Olin@ProcessERP.com
Predrag
Jakovljevic is a research director with TechnologyEvaluation.com (TEC),
with a focus on the enterprise applications market. He has over 15 years of
manufacturing industry experience, including several years as a power user of
IT/ERP, as well as being a consultant/implementer and market analyst. He holds
a bachelor's degree in mechanical engineering from the University of Belgrade,
Yugoslavia, and he has also been certified in production and inventory management
(CPIM) and in integrated resources management (CIRM) by APICS.
This
concludes Part One of a two-part note.
The
analysis continues in Part Two.