Will Sage Group Cement Its SME Leadership with ACCPAC and Softline Acquisitions? Part One: Event Summary

Event Summary

The tremors, earthquakes, and similar tectonic activities in the lower-end of the enterprise applications market will not seemingly end soon, but some massive mountainous regions la Andes or the Alps seem to be forming. One would inevitably be Microsoft Business Solutions (MBS), following two major, well-publicized acquisitions in the early 2000s (see Microsoft Keeps on Rounding up Its Business Solutions), while the Sage Group has been rounding out, also by annexation, its currently largest geographic coverage.

To that end, in March, Best Software, Inc., one of the leading current providers of integrated accounting, business management, human resources (HR)/payroll, and fixed asset solutions for small and medium enterprises (SME) in North America, announced that its parent company, the UK-based The Sage Group plc (LSE: SGE.L), had completed the acquisition of ACCPAC International, Inc. (www.accpac.com ). The Sage Group plc is a leading provider of business management software for mid-sized companies worldwide, with annual sales of nearly $900 million and 3.6 million customers and ACCAPAC was, until recently, an independent subsidiary of the software powerhouse Computer Associates International, Inc. (NYSE: CA).

ACCPAC is one of the leading accounting, customer relationship management (CRM), and Internet-hosted solutions vendors. It offers a comprehensive suite of enterprise business solutions for SME, which also continues to independently expand its products footprint and operations worldwide. To that end, its latest product offering now ranges from accounting to include CRM, human resource management system (HRMS), manufacturing, warehouse management system (WMS), point of sale (POS) solutions and many other aspects of e-commerce (see ACCPAC—Being Much More than Meets the Eye). Respective product lines would hence include ACCPAC CRM, ACCPAC CRM SalesTeam, ACCPAC Advantage Series, ACCPAC Pro Series, ACCPAC HR Series, ACCPAC Business Analysis Suite, ACCPAC eTransact, ACCPAC Exchange, ACCPAC Warehouse Management System, ACCPAC ePOS, ACCPAC Insight, Simply Accounting, Simply Accounting Payroll, FAXserve, and ACCPAC Messenger.

Originally founded in Vancouver, Canada, and subsequently based in Pleasanton, California (US), ACCPAC has offices in Australia, Canada, India, Ireland, the Middle East, the Netherlands, South Africa, Southeast Asia, and the UK. It also has more than 500,000 customers in more than 130 countries worldwide. Of those, over 140,000 are larger small and medium enterprises (SME) customers, notably in the US, Canada, South Africa, Australia, and Singapore, while ACCPAC also serves 400,000 smaller SMEs predominantly in Canada. It serves these markets through a network of over 7,000 channel partners.

Under the terms of the acquisition agreement, which was previously announced at the very end of 2003, the acquisition had an equity value of $110 million (USD), whereby ACCPAC contributed a $4 million (USD) cash balance, giving an enterprise value of $106 million (USD). The acquisition was paid for in cash and ended the Computer Associates' (CA's) effort of the last few years to exit the enterprise applications market and focus on marketing enterprise management software including security, storage, business intelligence (BI), application development, portals, and system-integration software. After transaction and other costs of the sale of its 90 percent ownership of the ACCPAC subsidiary, CA will have received approximately $90 million (USD) in cash. The sale follows on the April 2002 sale of its former interBiz e-business applications division to SSA Global (see CA Unloads interBiz Collection Into SSA GT's Sanctuary) and its former line of banking applications. It is interesting to note that in late 2002, ACCPAC filed a registration statement with the U.S. Securities and Exchange Commission (SEC) relating to a proposed initial public offering (IPO) of common stock; however, it has meanwhile changed its mind, in part owing to unfavorable trading conditions. ACCPAC has instead decided to part ways with the parent (CA) whose heart was not really in the enterprise applications market, particularly not for smaller companies.

In contrast to CA, since 1998, Best Software has made fifteen acquisitions in the North American market worth more than $1.4 billion. Globally, ACCPAC is expected to add more than 540,000 business customers to Best Software's nearly 1.8 million SME customers in the US. As mentioned earlier, ACCPAC customers are served through a channel of more than 7,000 business partners worldwide, which complements with some overlap, Best Software's channel program of more than 6,600 partners in North America.

Best particularly hopes the acquisition of ACCPAC will establish it with a market-leading position in Canada, while it will also strengthen its position in the important US market for larger SMEs. According to ACCPAC, its revenue for the year ending March 31, 2003 was $88.7 million (USD), and its operating profit was $10.3 million (USD after adding back charges for the amortization of purchased goodwill). Its net assets in March 31, 2003 were $8.2 million (USD). Its results for fiscal 2004 were not released by CA, but we estimate the revenue figure to be above $100 million (USD), with estimated profit of approximately $1 million.

On the other hand, formed in 1981, the parent Sage Group was floated on the London Stock Exchange (LSE) in 1989 and the Group now employs over 8,000 people worldwide. For Sage too, this acquisition brings a number of strategic benefits worldwide. The addition of ACCPAC is envisioned to strengthen Sage's business in Australia and South Africa, complementing Sage's existing operations, and will provide an entry into Asia with a strong position in Singapore. In addition, ACCPAC Online, which offers hosted accounting, CRM, and other business applications, might provide an attractive alternative to Sage's desktop-based solutions.

This is Part One of an eight-part note.

Parts Two and Three will continue the event summary.

Parts Four, Five, and Six will discuss the market impact.

Part Seven will cover challenges and Part Eight will make user recommendations.

Softline Acquisition Complete

Earlier in November, Sage announced the completion of Softline (www.softline.co.za), a leading South Africa-based supplier of business management software and related products to SME, following South African Competition Commission and Exchange Control approval. Previously, on September 23, shareholders voted to accept an offer of ZAR2.00 per share by Sage. The ZAR785 million (66.0 million) cash purchase by the Sage Group plc, made this transaction one of the largest inward foreign IT investments into South Africa in the past year. The electronic transfer of funds to shareholders took place on November 24 and Softline was subsequently de-listed from the Johannesburg Securities Exchange (JSE) on November 25, 2003.

Softline was founded in 1988 by Ivan Epstein, Steven Cohen, and Alan Osrin, and has grown from a ZAR5,000 startup to its above value. During the past fifteen years, Softline has reportedly continually been profitable and recorded positive cash positions and growth in operational earnings. Founded and headquartered in South Africa, Softline established a global position extending into the Australian and North American markets. Softline came into the North American market in 2002 by buying two SME accounting products—AccountMate and BusinessVision—and a specialty product for the entertainment industry and high net worth individuals, Datafaction. In 2003, the North American operations broke even, which was a notable feat for a newcomer vendor building channel and retooling products in a soft market. Before closing the fiscal 2003, Softline's management decided that the company was worth more than the stock market valued it and planned to take it private, but they were eventually swayed by Sage's aggressive bid, which beat the bid of another fierce SME competitor, Exact Software.

All operational activities of the Softline Group will supposedly continue as usual, according to Sage and Softline. All leading product brands belonging to the Softline portfolio including the local South African Pastel, Brilliant, and VIP software, will supposedly continue to operate as their respective brands. In addition, the existing Softline management team of Ivan Epstein, CEO, and Steven Cohen, together with the entire management team will continue to drive and run the group's operations. This acquisition should provide Sage with a strong market position, leading product brands, and accessibility to a sizeable customer and reseller base in the Southern hemisphere, which would mirror its strong position in the Northern hemisphere. Like the ACCPAC acquisition, the purchase of Softline extends Sage's geographical presence to the Southern Hemisphere, specifically South Africa and Australia.

Sage Also Acquires Grupo SP, S.A.

Last but not least, and consistent with its strategy of expanding geographically into attractive markets, in October, Sage announced that it has acquired Grupo SP, S.A. (SP), a leading provider of entry-level accounting software in Spain, for an enterprise value of 49.1 milion, to be paid in cash. SP had net cash of 6.6 million upon acquisition, giving an equity value of 55.7 million for the transaction. SP's revenue for the year ended 31 December 2002 was 22.8 million, with an operating profit of 4.4 million. SP brings over 200,000 customers into the Sage customer base, establishing a leading position for Sage in a market featuring one of the largest populations of small businesses in Europe.

As a result, on May 11, Best Software announced that its UK-based parent company, the Sage Group, had reported revenues of $594.1 million (USD) for the half-year ended March 31, 2004, an increase of 23 percent over the same prior year period (at constant exchange rates). At this run rate, the Sage Group would be over a $1 billion (USD) business for fiscal 2004. Operating income for the period was $160.9 million (USD), an increase of 21 percent over the prior year period. Worldwide, the company attracted 146,000 new customers and added 903,000 customers through its acquisitions, bringing its global total to 4.3 million customers. Total revenue for Best Software for the half-year ended March 31, 2004 was $243.5 million (USD), and operating income was $55.1 million (USD), an increase of 21 percent and 15 percent respectively, over the prior year period.

Other Best Software Announcements

Coming back to North America, for more than twenty-five years, Best Software has delivered relatively easy-to-use, scalable, and customizable applications through its portfolio of leading brands, including Abra, ACT!, CPASoftware, FAS, MAS 90, MIP, Peachtree, Timberline and SalesLogix, among many others. The company continues to execute against its core strategic objectives of growth and profitability, acquiring "customers for life" and bolstering competitive strength, which were espoused back in 2002 (see Best Software to Hold Competition at Bay). To refresh our memory, at that time Best Software announced its strategy to enhance customer interaction and partner programs across its diverse, ever-expanding albeit well-crafted portfolio of business-management solutions for SMEs.

Since the announcement of the merger agreement on 23 December 2003, both Best and ACCPAC have continued with business as usual, which means continued enhancements of their respective product lines, possibly via further cross-integration. To that end, as recent as on April 7, Best Software announced general availability of the Abra Payroll MAS 90/MAS 200 Interface, an add-on module for Abra Payroll that allows MAS 90 and MAS 200 users to import general ledger (GL) information resulting from payrolls processed with Abra Payroll.

The introduction of this interface supports the company's strategy of providing easy integration of its accounting, HR and CRM product offerings. MAS 90 and MAS 200 are two major mid-market accounting packages offered by Best Software, and Abra Payroll is part of Abra Suite, the company's premier mid-market HRMS application. The Abra Payroll MAS 90/MAS 200 Interface eliminates duplicate data entry and streamlines workflow, allowing users of both products to take advantage of a truly integrated accounting and payroll solution. The module is compatible with MAS 90 and MAS 200 versions 4.0 or higher, and Abra Payroll version 7.3 or higher, and it is available immediately from Best Software business partners.

Then, on March 16, Best Software announced the integration between another two of its products, TimeSheet Professional and MAS 500, to create a strong project accounting and time management solution for professional services organizations. TimeSheet Professional enhances the project accounting capabilities already available in MAS 500 by streamlining and improving processes for project managers, such as improving the deployment of project and task schedules to team members for better time management. Aimed at professional services firms and IT organizations, the integration of MAS 500 and TimeSheet Professional provides a package for efficiently tracking cost, time, and materials for large-scale projects and improves project management operations across the board.

In addition, MAS 500 will now be able to leverage the integration between TimeSheet Professional and Abra to bring together a more complete project accounting and employee time management solution for organizations. Other key features available in the MAS 500 and TimeSheet Professional integration include automated billing and expense reimbursement; streamlined workflow approval process with e-mail notification; improved reporting; and palm devices integration for employees in the field.

Further, on March 1, Best Software announced the general availability of MAS 90 and MAS 200 Version 4.0 accounting and business management software. The culmination of over twelve months of development effort and extensive usability tests, MAS 90 Version 4.0 represents the most significant release of MAS 90 since the introduction of its Microsoft Windows-based product in 1996. These new versions of MAS 90 and MAS 200 are packed with major enhancements designed to streamline accounting operations, make management reporting more responsive, and reduce the learning curve for new users.

As part of this milestone release, Best Software introduced the Business Insights Reporter, a wizard-based reporting tool now provided as part of the standard MAS 90 system. Many customers have reportedly expressed a desire to simplify the process of getting at their data, and a key goal for MAS 90 version 4.0 was to address this issue. Namely, with the Reporter, a user can easily and intuitively identify the information they need from any part of the MAS 90 system, and quickly get that data into a printable form or into Microsoft Excel spreadsheets to facilitate additional analysis.

Version 4.0 also includes a free limited edition of the Business Alerts module, which further allows managers to identify problems and trends real time. Business Alerts generate an e-mail communication when specified circumstances occur, providing an additional way for MAS 90 customers to get business insights real time. To that end, the limited edition provides five free alerts and can be upgraded to provide unlimited alert capacity.

Also new with 4.0 is the Business Object Interface, which enables developers and partners to easily integrate and customize MAS 90 for business-specific scenarios without modifying the underlying source code of the application. This new flexibility frees third parties to focus on delivering custom solutions in whichever development environment they find most appropriate for the situation.

The above announcement is just another example of the continued expansion of the MAS 90 family, since in February Best Software announced the acquisition from Macabe Associates of the entire family of hundreds of EASY Solutions. The EASY Solutions family, now called MAS 90 and MAS 200 Extended Solutions, brings mid-market customers the benefits of a highly customized business management application at a fraction of the cost and time of developing a typical customized solution.

This concludes Part One of an eight-part note.

Parts Two and Three will continue the event summary.

Parts Four, Five, and Six will discuss the market impact.

Part Seven will cover challenges and Part Eight will make user recommendations.