Market Impact of Lawson-Intentia Merger
While we do not indulge in speculating who is likely to merge with whom in the highly tectonic enterprise applications market, we have to admit that the merger of Lawson Software, Inc. (NASDAQ: LWSN) with Intentia International AB (XSSE: INT B) had not crossed our mind before it actually happened. (For details on the merger announcement, see "New" Lawson Software's Transatlantic Extended-ERP Intentions).
The move was quite a surprise, since both Lawson and Intentia, which have hardly competed directly, and had undergone major restructurings, put their product technological roadmaps on similar courses, and resisted many attempts to be acquired, and they even repeatedly professed interest in acquiring and assimilating smaller direct competitors. There were rumors of Lawson being acquired by Oracle or merging with its former customer relationship management (CRM) partner Siebel Systems, and of Intentia merging with another struggling Swedish peer, IFS (see IFS Continues Its Reinvention through Pruning). Also there were suggestions of Intentia merging with a recovering Geac or being acquired by SSA Global.
There were other indications that deflected any indication of an Intentia-Lawson merger, such as Intentia's recently lost bid for MAPICS, which instead was awarded to Infor Global Solutions. Moreover, as mentioned in Intentia Prepares for Merger with Lawson, Intentia has been revamping its sales channel strategy, and, prior to the Lawson announcement, Intentia had not been secretive about the fact that it earmarked some of the $85 million (USD) raised from investors for acquisitions. This further obscured any indication of a merger between the two companies.
Yet ironically, the similar, concurrent, and respective moves of the two merging parties to execute a company turnaround are exactly what might produce some method to the madness of Intentia-Lawson merger. Their union somewhat resembles a personal relationship where opposites attract, and while their coupling may not have been love at first sight, it might still become a successful marriage of convenience.
The force-joining deal might bring about a much needed, stronger statement for the market, and reverse Lawson's and Intentia's negative momentum, where both companies struggled in the frenzied and rapidly consolidating enterprise applications market. Intentia is hoping that Lawson's domestic brand recognition, in addition to Intentia's renewed vertical focus, and Java technology, will propel it to a greater success in the US market. Intentia entered the US market in the mid-1990s, but has not really racked up any large scale customer wins . Currently it only has about 200 customers that mostly within the fashion and apparel sector. Intentia's Americas business has, in the past, been an admittedly small investment, accounting for just roughly 5 percent of sales.
The issue, however, for Intentia has thus long been whether prospective multinational user enterprises will buy the idea of its future-proof Java technology, when it remains apparently a niche player with little to offerapart from some referencesoutside Europe and Scandinavia. The "big few", companies of such stature as SAP, Oracle (now with PeopleSoft and J.D. Edwards), SSA Global (now with Baan, Marcam, Ironside, EXE Technologies, Infinium, Arzoon, etc.), Infor (now including MAPICS, Lilly, Mercia, NX Trend, SCT Process, etc.),and Sage are bound to look better. As will Microsoft Business Systems (MBS), which is at the lower-end market, but is working its way up.
This is Part Three of a four-part note. Part One detailed the merger. Part Two discussed Intentia. Part Four will cover challenges and make user recommendations.
Impact on Lawson
The same can be said for Lawson, which has long competed successfully against the likes of SAP, former PeopleSoft, and Oracle, (see Lawson Asserts Itself, Draws a Bead on Bigger Players). Yet lately, it has been an uphill battle, especially since Oracle's protracted attempt to acquire PeopleSoft, resulted in much uncertainty in the market.
Additionally, Lawson's recent financial results were not too impressive. Increases in its profits were due to cost-cutting measures, and could be regarded as mere smokescreen for seriously slumping new license revenues. This possibly indicates that Lawson's vertical focus has not necessarily been an impervious strategy during the economic slowdown and an increasing competition.
Based on the most recent restructuring, which was undertaken in the first quarter 2005, the company managed to show $5.3 million (USD) in profit, due mostly to cost containment, with some additional improvements in services margins and a reduction in days sales outstanding (DSO). Yet, revenue has been stubbornly declining, down to $335 million (USD) in fiscal 2005 from $354 million (USD) a year before. Of this, the biggest concern was the steep drop in license revenue, which was down to $58 million (USD) in 2005 from $92 million (USD) a year earlier. On a more positive note, Lawson has maintained a strong balance sheet and a strong cash position; however, license revenues were still weak prior to the most recent quarter (the first quarter fiscal of 2006, ending August, 2005). However, the new chief executive officer's (CEO) focus on sales, caused license revenues to rise 40 percent. Still, the current quarter has not the best for license revenues, but it beats Lawson's license revenues for each of the quarters in the last fiscal year. In addition, it raised the outlook for the second fiscal quarter of 2006.
Nonetheless, the company had to trim its workforce a few times since going public in 2001, sometimes even by a double-digit percentage, in an effort to cut costs. This, combined with transferring some development work to India, where many peer companies, including Intentia, have found a cheaper labor. Lawson has lost a fifth of its workforce (down to over 1,500 now) since before its first major round of layoffs in June 2002, when it laid off 110 employees or 5 percent of its erstwhile workforce. The worst layoffs, however, took place in September 2002, when the vendor cut over 230 jobs, or 12 percent of its employees (see Lawson Software-IPO and Several Acquisitions After). Still, by reacting to current realities and adjusting its operational plans quickly to support the firm's strategic goals, along with aligning everyone's actions toward those goals, Lawson has at least demonstrated impressive management and financial discipline. One should note, however, that the CEO of Lawson, Harry Debes is investing in a new sales force, as the vendor has been attracting experienced sales expertise to increase its reach.
Somewhat resembling Intentia in some regard, "old" (or still current) Lawson Software could be regarded as an enterprise applications market anomaly. For one, the company, at its peak in fiscal 2002 boasted annual revenues of nearly $430 million (USD), but it has only a slim presence of less than 10 percent of revenues outside of its US domestic market. Further, it remains a major force in enterprise applications software, yet it does not cater the functionality for the manufacturing sectors, and the vastness of its sales are thus derived from just a few service-oriented vertical markets—primarily health care and retail.
Lawson has also made forays into the public sector, including US state and local governments, kindergarten to grade twelve (K-12) education institutions, public authorities, etc. It has also entered the financial service market, which includes banks and insurance providers. It has signed more than 140 public sector customers in the last three years or so. To that end, currently with over 2,000 customers in total, Lawson serves 2 of the 10 largest (by population) US state governments (or five of the top 20), and 4 of the 20 largest city school districts in the US. Lawson's software is in use at more than 1,300 schools with combined enrollments exceeding one million students. New markets that Lawson intends to seriously tackle include transportation and distribution, energy and utilities, gaming and entertainment, and publishing.
The irony might be that Lawson's and Intentia's similarities will bode well for the merger's success. However, a protracted regional/niche nature, focus on the functional and technical prowess of products rather than using a concurrent approach of savvy marketing and brand recognition creation, along with a lack of strategic product and systems integration partnerships due to the negative "not invented here" corporate cultures, will remain impediments unless promptly tackled and solved. For that reason, Lawson's recently espoused a 1,000 Days Customer Manifesto initiative. It is designed to nurture a loyal and happy client base in a market where there is little brand loyalty. Not only is the Manifesto designed to help drive additional revenue from loyal accounts, but it will foster a larger base of reference accounts, which will hopefully help win new clients. However, it has apparently been insufficient to overcome the clout of Lawson's more viable competitors. To make further headway, Lawson has partnered with IBM. Lawson believes this will increase its eco-system. This, combined with its increased size, new Lawson will hopefully attract new partners. Although its too early to tell for sure, the recent quarter might indicate that the value proposition is beginning to win with clients too.
The Lawson/Intentia merger, whether a virtue of necessity or a truly a bold initiative, is their joint proposition to re-energize their fight for market share. Alone, neither would have sufficient clout nor momentum. They have stated that they intend to focus on the enterprise resource planning (ERP) mid-market. As a result, both vendors should, at least on paper, double their individual sizes through this merger, dramatically expand their global reach, and leapfrog, revenue-wise, over revered competitors such as SSA Global, MBS, Infor, and Geac. One should never underestimate how important size and a global presence can be in a boardroom presentation before the selection committees when opponents are giants like SAP or Oracle.
The minimal geographic and industry overlap should present some cross-selling opportunities on a global scale. For example, Lawson should bring analytics, enterprise process management (EPM) and business intelligence (BI) to Intentia's base (although Intentia has been leveraging its partnership with Cognos to address this group). On the other hand, Intentia brings strong enterprise asset management (EAM), product service and manufacturing capabilities to Lawson customers, such as health care (to asset-rich hospitals) to complement Lawson's procurement and material management capabilities. Intentia's EAM and maintenance, repair and overhaul (MRO) capabilities might come in handy for Lawson to finally get a foothold into the utilities segment, where it has been unable to make a dent with only strong financial and human resources (HR) capabilities.
Likewise, there might be a synergy in the retail sector, where Intentia could certainly contribute with its solutions for fashion and consumer packaged goods (CPG) manufacturers and distributors. Lawson could take it from there to cover the retailers' functionality (there might also be some synergies between combining capabilities of the Intentia food and beverage with Lawson's grocery solutions). Also, given that the Symphony Group also owns the GERS Retail product, look for some possible mutual product developments in the future, especially in light of Oracle's intention to enter the retail sector as seen with its recent acquisitions of Retek and ProfitLogic. SAP has also responded in kind by acquiring Triversity.
Surely there is some inevitable overlap in the realms of financials, HR (where Lawson has far stronger capabilities), and procurement (where Intentia excels). However, it is likely that Lawson's upcoming blueprint for Landmark service oriented architecture (SOA), and Intentia's Java code base will eventually enable both companies to mix and match the best of each other's product offerings. In addition, both firms are already committed to IBM's technology stack. They will leverage WebSphere portal server, WebSphere application server, and WebSphere business integrator. For the time being, Intentia and Lawson applications and clients will remain on separate tracks.
Lawson is also staking its claim on the upper mid-market sweet spot, where companies with more than $250 million (USD) and less than $1 billion (USD) in revenues are situated. Lawson cites that over 70 percent of Oracle's and SAP's sales have to companies outside of this range, making more than $1 billion (USD) in annual revenues. Also over 70 percent of MBS' and Sage's sales have been to companies with less than $250 million (USD) in revenues. By contrast, Lawson and Intentia combined, will get 75 percent of their sales from companies in the middle ground; however, SAP and Oracle are trying to reach this market. Additionally, Microsoft and Sage are trying enter this market, as are companies like SSA Global, International Business Systems (IBS), Infor, Geac, QAD, IFS, Epicor, Glovia.
But the combined force of Lawson and Intentia is betting that prospective customers from this market lack the resources required to implement rigid and large enterprise solutions from the likes of SAP or Oracle, but still have complex processes and requirements that do not fit the scope of small enterprise solutions, as provided by MBS. Further, these customers' return on investment (ROI) model requires viable technology than will be effective for 510 years or more, and can service operations across multiple nations or regions, or globally. This will automatically eliminate some aging mid-market solutions and exclude some small local market suppliers.
Subsequently, Intentia and Lawson have determined that a strange algebraic calculation of 1+1=5.8 will ensue from their union. While each vendor alone had an addressable market (based on their separate market segments and geographies) of about $1 billion (USD) each, combining, will give the two companies an addressable market of $5.8 billion (USD).
While we can dispute this projection, both companies will be able to leverage the other's presence in regions as a point of entry. Intentia hasn't been able to establish itself in the North American market, and conversely, few European and Asia-Pacific companies have bought Lawson's software. Their union will also makes sense for prospects located in geographies that are served by one vendor carrying solutions that are limited to one vertical. Lawson, which serves more industrial and regional sectors, should have a greater chance at bidding. Indeed, overall, Lawson has benefited from the general consolidation of the enterprise application market. Now that a lot of its former competitors are out of the way, Lawson has been shortlisted in its market segment more frequently. Ultimately the probability of success for Lawson and Intentia should certainly be better now that they are one large company—however, the question is, how much better will they be together?
This concludes Part Three of a four-part note. Part One detailed the merger. Part Two discussed Intentia. Part Four will cover challenges and make user recommendations.