Microsoft And Great Plains – A Friendship That Turned Into A Marriage

Event Summary

On December 21, Microsoft Corporation (NASDAQ: MSFT), the world's largest software provider, announced it reached an agreement to acquire Great Plains Software Incorporated (NASDAQ: GPSI), a leading supplier of mid-market business applications. The acquisition should create new opportunities for Microsoft and Great Plains partners to grow their businesses by delivering and integrating next generation solutions that take advantage of the .NET foundation of small and medium business applications that Microsoft and Great Plains will provide. The acquisition is structured as a stock purchase and is valued at approximately $1.1 billion. Each share of Great Plains common stock will be exchanged for 1.1 shares of Microsoft common stock. The transaction is subject to regulatory review.

"In 19 years of operations Great Plains has proved to be one of Microsoft's most innovative partners," said Steve Ballmer, President and CEO, Microsoft Corp. "Microsoft and Great Plains see the future of business applications for small and medium sized companies in the same way."

"This combination of Great Plains and Microsoft allows us to dramatically accelerate our vision of being the leader in providing interconnected business management solutions to small and mid-sized customers, while staying true to our mission of improving the lives and business success of our partners and customers," said Great Plains Chairman and CEO Doug Burgum.

Once the acquisition has been completed, Great Plains will become the Great Plains Division, reporting jointly to Jeff Raikes, Microsoft Group Vice President, Productivity and Business Services group, and David Vaskevitch, Senior Vice President, Business Application Division. The Great Plains Division will continue to develop, market and support its award-winning business management solutions.

Down the road, the division is envisioned to provide new capabilities that complement Microsoft's online service for small companies, bCentral. Additionally, the integration of technologies from both companies will create a fully interconnected generation of business applications built on the .NET platform, accessed via a wide range of devices (such as PCs, terminals, handheld and wireless devices) and deployed either as web-based services (hosted applications) or as on-premise, locally managed solutions according to the customers business need, support requirements and customization requirements.

Earlier, on December 18, Great Plains Software announced financial results for the fiscal quarter ended November 30, 2000. Great Plains' second quarter revenues increased 59% over the same period last fiscal year and increased 13% sequentially over the first quarter of fiscal year 2001. Revenues for the second quarter of fiscal 2001 were a record $75.5 million, compared to $47.4 million for the second quarter of fiscal 2000. Revenues from services, up 100% over the same period last fiscal year, contributed significantly to the company's growth this quarter. However, for Q2 2001, net loss, including the effect of amortization of acquired intangibles, was $10.5 million, compared to net income of $4.4 million for Q2 2000 (See Figure 1).

Figure 1.

"In our second quarter, we continued our solid growth and performance, fueling our leadership position in the growing and strategic business applications market," said Doug Burgum. "We delivered sequential revenue growth, improved operating margins and significant sequential EPS growth, while at the same time launching into our strongest product cycle ever, Release 6.0."

Recent TEC Reporting On Great Plains

The following are the major highlights that were announced or occurred during Great Plains' last fiscal quarter and were accordingly covered by TEC:

• Great Plains delivered eEnterprise and Dynamics Release 6.0, the most comprehensive release in the company's history. eEnterprise Release 6.0 showcases significant, customer-driven enhancements in the areas of e-business, sales and purchasing, major product series enhancements, and multinational and international features, as well as a new user interface and reporting functionality (for more information, see Great Plains' Latest Product Offering - Ready to Stampede the SME Market?).
  
  
• Great Plains released a new, hosted e-commerce solution, Great Plains eSell, for companies needing a fast, easy and economical way to bring their businesses to the Internet. Integrated to Great Plains' business management systems, eSell enables both business-to-business (B2B) and business-to-consumer (B2C) sales via the Web. The resulting web site delivers a level of integration and sophistication commonly found in much more expensive solutions (for more information, see Great Plains Unveils New E-Commerce Solution).
  
  
• Great Plains announced the availability of Great Plains eSupport, its next-generation electronic support system for customers and partners. Available through a dedicated support web site, eSupport provides automated self-support solutions and efficient assisted-support solutions to Great Plains customers (for more information, see Great Plains Taps The Web To Deliver Product Support).
  
  
• Great Plains announced the expansion of its Application Service Provider (ASP) initiative. Because of growing segmentation in the ASP market, Great Plains has evolved its ASP partner program to better meet the diverse needs of its ASP partners and their customers. The three ASP partner relationships include strategic ASP partners, approved ASP partners and approved data centers (for more information, see Great Plains ASP - Evolution, Revolution, Innovation).

Market Impact

Microsoft had long been eyeing the business application market, with more or less candidness. We did mark Microsoft as a potential Baan buyer, back at the time when that was a very real possibility (for more information, see Q: Who Wants to Marry a Multi-Billionaire? A: Baan - Foster Care for Its Orphans Needed As Well). Some may even recall rumors of Microsoft's interest in PeopleSoft, also a while back, when the company was in the doldrums.

The 64,000 question is why has Microsoft finally made the move now and why with Great Plains. The answer to the first part of the question is diversification and, possibly, envy of recent stellar results of applications providers, particularly Microsoft's nemesis Oracle (for more information, see Oracle Sails Despite Market's Low Tide: How Far Will It Go?). The desktop technology has gone past its prime, to say the least, and the time has come for Microsoft to venture into more lucrative areas, Web-based business applications being one.

The answer to the second part of the question is a no-brainer; we could not think of a better back-office acquisition candidate at this stage (although the fact remains that Microsoft could have bought Great Plains for almost half the price a few months ago, see Has Market Been Too Harsh On Great Plains?). Great Plains has established itself as a leader in the mid-market business application market in the past few years. The company, which sells its products completely through an indirect channel of 2,000 resellers, has more than 130,000 customers using its portfolio of products. Great Plains, on the other hand, has also been on an acquisition spree during the last year. It acquired Solomon Software, its main competitor in the smaller end of the market; FRx Software, a financial analytics and reporting application provider for the mid-market; PWA Group, a U.K.-based human resources and payroll system maker; and BTK Software, the developer of Apertum, a low- to mid-market front-office application for the German, Swiss, and Austrian markets (for more information, see Great Plains on a Shopping Spree and Will Solomon Finally Satisfy Great Plains' Insatiable Appetite?).

In a nutshell, Microsoft has struck a bargain for a slew of solid business applications. Back-office systems are becoming more and more the infrastructure, which has traditionally been Microsoft's dream game play. Moreover, Microsoft also gains access to the lucrative Customer Relationship Management (CRM) and Supply Chain Planning (SCP) markets since Great Plains has partnership deals with the CRM leader Siebel Systems and SCP vendor Logility (for more information, see Siebel: Great Plans for Great Plains and Great Plains Supply Chain Series To Be Powered By Logility).

What also helps is the Great Plains' monogamous relationship with Microsoft; Great Plains solely uses Microsoft technology in all of its products. The two have also been partnering in the development of Microsoft's .NET platform for the deployment of applications via the Web (for more information, see Great Plains' eEnterprise Solution 'N Sync with Microsoft's New Platforms).

The acquisition portends even more for Great Plains, which has been suffering financial indigestion from its recent acquisitions. Microsoft's thick wallet should alleviate this problem and allow Great Plains to focus on reaching its revenue target of $300 million for fiscal year 2001, (for more information, see Great Plains - An SME Market Leader, But At What Cost?). Possibly more beneficial could be the Great Plains' leverage of immense Microsoft sales resources to expand its global presence, particularly in the Asia-Pacific region where the market for enterprise applications is still not largely penetrated and where Great Plains' presence has been quite insignificant.

Caveats

Nonetheless, the acquisition is not without caveats; it may have more implications than meets the eye. Until the acquisition, Microsoft's strategy was to encourage applications software providers, both mighty and smaller, to develop software that runs on the Windows platform. In exchange for this collaboration, the software giant has pledged that it would not compete with them.

Now, Microsoft could run into the same problems as Oracle has on the database side - i.e., it could find itself in direct competition with major technology development partners like Siebel, SAP and PeopleSoft, to name but a few. While Microsoft may try to stay at the low end of the market and, therefore, also out of the way of its big applications developing partners, it will not be that easy as many Tier 1 applications vendors have increasingly been targeting the same market segment (for more information, see SAP Claims Big Gains In The Low-End Battleground).

And what about a plethora of smaller vendors that are direct Great Plains' competitors and whose products are also Microsoft-centric (e.g., NavisionDamgaard, Epicor, Sage, Made2Manage, etc.)? These vendors will inevitably see Microsoft's move as predatory. While most of them will not likely make any radical move away from Microsoft, figuring they can continue to compete with Great Plains based on product superiority and other order winners, some may decide to explore other avenues (e.g., porting the product to Linux or IBM AS/400 and DB/2 platforms). In the long run, this could benefit IBM.

Microsoft also signed a deal with another CRM vendor Pivotal Software not so long ago. Although Pivotal may be targeting larger companies, and Great Plains only has a deal to sell Siebel's mid-market product release for smaller companies, contesting CRM products could inevitably pose a problem for Microsoft's sales team and complicate these partnerships. These ramifications may become irrelevant though, if Microsoft actually splits into several companies as ordered by the final federal judge's ruling that Microsoft violated the anti-monopoly laws.

The market should also watch how autonomous and independent from Redmond HQ will Great Plains' division run. Despite the long-term partnership, the companies' cultures are very different, particularly in terms of service & support and product release quality. While there are some indications that the business will continue to be as usual, Microsoft may eventually decide to streamline Great Plains' diverse, possibly redundant, product mix. Further, like in Oracle's case, while some customers will buy into the "one-stop-shop" mantra, others may be wary of a vendor that tends to be "all things to all people" (or jack of all trades and master of none) and of a potential proprietary technology lock up.

User Recommendations

Although experience teaches us to be wary of the outcome of mergers' and acquisitions', current Great Plains' customers can be assured of their software provider's viability. It may be somewhat different situation regarding product development and service & support strategy. While we believe that this merger will be successful in the long run, some growing pains and discontinuation of redundant products are quite likely. Consequently, until the merger is consummated, any organization evaluating Great Plains should keep itself informed, and consider existing functionality only. Users are advised to follow the company's new product introductions and keep a close eye on its future strategy.

Further recommendations for both current and potential Great Plains' users can be found in Great Plains: Strong Channel and Microsoft focus for Dynamic(s) Growth and Solomon Software: Breaking Away from Perception as "Best-of-Breed-Accounting" Vendor, as well as in all the above mentioned TEC articles on Great Plains.