Not All Acquisitions Happen: JDA and QRS Part One: Event and Market Impact

Event Summary

In mid-July, JDA Software Group Inc. (NASDAQ: JDAS), a prominent global provider of integrated software and professional services for the retail demand chain with over 4,500 customers, and QRS Corporation (NASDAQ: QRSI), a leading provider of collaborative commerce and trading community building solutions, with nearly 10,000 retail and manufacturing customers, announced a definitive agreement for JDA to acquire QRS as the all-stock transaction for an estimated value of $100 million (USD). Under the agreement, QRS was to be merged with a wholly owned subsidiary of JDA, and QRS stockholders were to own approximately 20 percent of the outstanding capital stock of the combined company. Based on the closing price of JDA stock at the time, the transaction was valued at approximately $100 million(USD) and was expected to be accretive to JDA's fiscal 2005 earnings. Direct costs of the acquisition and the costs of the ensuing integration of the two organizations were expected to total $15 to $17 million (USD).

Yet, the seemingly well-planned acquisition was never completed, since, with little more than a month left for JDA to close the acquisition, QRS broke off the "engagement" in favor of a better priced acquisition by another suitor. Namely, on September 3, Inovis International, Inc. (www.inovis.com), QRS' fellow electronic data interchange (EDI) and value-added network (VAN) specialist (and sometimes a competitor too) and a leader in providing business commerce automation solutions that facilitate the effective management of retail, supply and manufacturing partnerships, and QRS announced a definitive agreement to merge. Under the terms of the transaction, QRS shareholders will now receive $7.00 (USD) in cash for each share of QRS common stock, whereby the transaction is valued at approximately $116 million (USD). Under the agreement, a wholly-owned subsidiary of Inovis will merge with and into QRS, and all directors and executive officers of QRS have reportedly agreed to vote in favor of the transaction. Completion of the merger, which is expected to close in the fourth quarter of calendar year 2004, is still subject to the approval of QRS stockholders; the expiration or termination of the applicable Hart-Scott-Rodino waiting period, and other customary conditions.

Following the earlier announcement of its merger with JDA, QRS reportedly received unsolicited proposals from five bidders to acquire the outstanding shares of QRS. After the receipt of each of these acquisition proposals, the QRS board of directors determined that QRS could engage in discussions with and furnish information to each potential acquirer in compliance with the JDA merger agreement. Thereafter, QRS engaged in extensive negotiations and due diligence with each potential acquirer prior to determining that the merger with Inovis was more favorable to QRS' stockholders than the merger with JDA from a financial point of view. This was after taking into account all of the terms and conditions of the merger with Inovis, the likelihood of completion of the merger, and the financial, regulatory, legal and other aspects of the merger. Wachovia Capital Markets, LLC was acting as financial advisor to QRS with regard to the merger.

Consequently, on the same day, QRS announced that effective as of September 2, 2004 it had terminated the Agreement and Plan of Merger, dated as of June 17, 2004, by and among JDA, CVP2 Corp. and QRS (the "JDA Merger Agreement") to enable it to enter into a new merger agreement with a new, better paying acquirer, Inovis. In connection with the termination of the JDA Merger Agreement, QRS will be paying JDA a termination fee of $3,750,000 (USD). With more than 20 years of experience and over 17,000 customers, a privately held, Atlanta, Georgia-based (US) Inovis provides a broad line of business-to-business (B2B) software and managed services, which aim at enabling companies to optimize profitability through timely and efficient communications with their trading partner communities. Inovis is a portfolio company of Golden Gate Capital and Cerberus Capital Management.

With the occurrence of events such as the one above the enterprise applications market might begin to resemble the script of the Runaway Bride movie. These announcements followed the relatively recent multi-way bid for former beleaguered Pivotal Corporation (see CDC Software Wins at the Pivotal's Auction. Now What?).

The merits and challenges of Inovis' merger with QRS, whereby Inovis apparently enters the PIM and GDS markets, will be a topic of a separate news analysis.

This is Part One of a two-part note.

Part Two continues the market impact and makes user recommendations.

What JDA Had Planned

By combining the two companies, JDA hoped to significantly enhance its position in the global field of the retail demand chain solutions providers, and to be almost uniquely positioned to deliver "data rich" software, best practice processes, trading community enablement and industry expertise. Based on the twelve month period ending March 31, 2004, the combined company would have had annual revenues in excess of $340 million (USD). The combined company would have also supposedly benefited from improved revenue and earnings visibility, since approximately 50 percent of its revenues were expected to be recurring, thereby granting improved future revenue and earnings visibility and predictability.

Further, the synergies in selling, general and administrative (G&A) infrastructure between the combined organizations were expected to produce annual cost savings ranging from $20 to $25 million (USD)dollars within the first eighteen months after closing. With thirty-three offices spanning every major global market to service customers in over sixty nations, JDA believed its global sales and delivery infrastructure was perfectly positioned for another successful acquisition—also by far the largest amid the slew of previous JDA acquisitions. The vendor markets its products and services almost exclusively through its direct sales force, which, for the Americas is based in Scottsdale, Arizona(US), with fifteen regional sales and support offices across the US, Canada, and Latin America. JDA also has international sales representatives located in nearly twenty sales and support offices in major cities throughout Europe, Asia, Australia, and Japan.

JDA's plans for its tenth and the largest acquisition so far, were also motivated by the great success that QRS has achieved driving the North American general merchandise and apparel (GMA) industry to new levels of efficiency as well as the product information management (PIM) and global data synchronization (GDS) opportunities. QRS provides possibly the leading electronic product catalogue in North America with over 100 million unique items, which strives to enable marketers, manufacturers, suppliers and retailers to achieve 100 percent compliance in electronic data exchange by synchronizing the latest product information and automating collaborative processes.

According to JDA and many pundits, with advancements in radio frequency identification (RFID) and other collaborative initiatives, the industry is heeding the call for increased efficiency and accuracy in the exchange and update of item and supply chain information. While QRS might be the de facto standard for data synchronization in the North American GMA industry, JDA saw a huge growth opportunity in other world regions and market segments, in particular food and consumer packaged goods (CPG), and to become the preferred solutions provider for these untapped markets that will soon require interoperability and compliance with shared global standards.

JDA then pledged to pursue emerging supply chain opportunities for more than 14,000 combined customers (including estimated 500 shared existing customers) in all worldwide sectors of retail and manufacturing. With its distinctly new business model, JDA planed to build upon its broad product set called collectively JDA Portfolio and QRS product lines to enable its combined customers to achieve a new level of operational excellence. With the combination of JDA and QRS, a new breed of software application could have been made available over time to their shared customers, since QRS' retail intelligence services could have provided market insights to the combined customers' pricing, competitive activities, and in-store consumer experiences. The aim was to seamlessly combine all the information needed to drive decisions along with the sophisticated software that enables those decisions and calling this phenomenon "data rich". JDA wanted (and still wants) its customers to be able to rely on one company—JDA—to combine external data with internal enterprise and customer data to ensure the most effective, knowledge-based decision-making. The vendor plans to establish this capability as a defining and differentiating characteristic of its next generation PortfolioEnabled solutions over the coming months and years.

Market Impact

However, the termination of the merger agreement has more ramifications on JDA than merely a bruised ego. Namely, JDA and QRS were reportedly well down the road with a combined product development blueprint, including new functionality around GDS and PIM. These have lately been key areas of interest as companies increasingly look outside their four walls and firewalls to conduct electronic business with their trading partners (customers and suppliers). It is particularly essential for retailers and suppliers that must syndicate or receive product and commercial data from multiple data sources, both inside and outside of their firewalls, and JDA is now indisputably left in the lurch by QRS' abandonment.

The ill-fated merger of JDA and QRS might have well emphasized some interesting dynamics within the retail market segment. On one hand, the market has been penetrated less by enterprise applications than most other economic sectors, in part since retailers have largely been remiss in leaving mainframes and other legacy technologies behind. Also, the sector has shown some resilience even during the recent and possibly still ongoing economic malaise, in part because consumers have been stretching their credit card balances and limits. Generating more than $3 trillion (USD) annually in sales, retail is the second largest industry in the US, as reported by the US Census Bureau in April 2003.

However, on the other hand, the sector has been demanding on both the software vendors' and their prospective customers' capabilities. Retail organizations and their suppliers alike are constantly facing intensifying competition, fluctuating demand whether due to seasonality, picky and fickle customers, evolving retail channels or increasing globalization. Consequently, sales are pressured, margins are compressed, and almost all participating companies have to try to achieve improved results with fewer people. Although the retail and wholesale customers have typically invested a low proportion of their total revenues in IT, as the leaders in this industry begin to demonstrate the ability to achieve market advantage by effectively using specialized enterprise applications, the requirement for all retailers to increase their investment in IT and adopt best practices has grown. As mentioned earlier, many of these companies have not yet replaced their customized legacy systems with packaged software solutions, and as a result, there is substantial opportunity in the retail market. In addition, many of the companies in the market do not utilize sophisticated optimization solutions. For a detailed discussion of what software vendors face when addressing the retail market see Retail Market Dynamics For Software Vendors.

This concludes Part One of a two-part note.

Part Two continues the market impact and makes user recommendations.