News
6/13/2003
02:13 PM

Enterprise-Apps Market Squeeze

It's becoming a buy or be-bought market, giving rise to speculation on how it will all shake out



One way or another, the recent acquisition mania will take out at least two of the top players in the enterprise-applications market. Hundreds of other vendors may buy or be bought as the software industry's consolidation continues.

The market squeeze shifted into high gear two weeks ago when PeopleSoft said it would buy J.D. Edwards for $1.7 billion, creating a company with $2.8 billion in annual revenue and slipping into the No. 2 spot behind SAP AG. The next day, Baan was picked up for $135 million by an investment group, consisting of Cerberus Capital Management LP and General Atlantic Partners LLC, that plans to merge it with SSA Global Technologies, another enterprise resource planning vendor it owns. Then, Oracle made an unsolicited bid to buy PeopleSoft--but not necessarily J.D. Edwards--for $5.1 billion.

All the activity is a sign of the times. There are too many enterprise-application vendors in a market that's maturing and being squeezed by a downtrodden economy. "Consolidation is going to happen," says John Moore, VP and general manager of enterprise services with ARC Advisory Group. "These companies are unsustainable in a market where there simply aren't that many customers."

So the question is: Who's next to be bought--or has perhaps missed an opportunity to be acquired? Speculation is rampant, but there are several companies that seem to fit one of these bills.

Not long ago, many analysts said leading supply-chain management vendors i2 Technologies Inc. and Manugistics Group Inc. were targets for acquisition because the two vendors had advanced supply-chain planning technologies that the big ERP players lacked. But now, those vendors with enough money to buy i2 or Manugistics have built the planning tools themselves or bought the technology elsewhere. "I think [their acquisition] is less likely now," says Jim Shepherd, an analyst with AMR Research.

Moreover, i2 and Manugistics are suffering financially, making their fates even less certain. Last month, i2 was removed from the Nasdaq stock exchange because the company was more than a month late in filing its 2002 annual report with the Securities and Exchange Commission, a violation of Nasdaq listing requirements. At the time, i2 said it expected to file the report in June and will then appeal Nasdaq's decision to delist the shares; as of press time, i2 hadn't filed its annual report.

The delisting came amid an SEC investigation for possible accounting improprieties. In March, i2 said Deloitte & Touche LLP will reaudit its financial statements for 2000 and 2001. At that time, i2 released what it called preliminary results for its fourth quarter, reporting a net loss of $8 million on revenue of $120 million; its third-quarter net loss was $199.1 million. A year ago, i2 reported a loss of $589.9 million for its fourth quarter.

Manugistics' year-end results also were weak. It had a net loss of $212.2 million on revenue of $272.4 million for the fiscal year ended Feb. 28, compared with a net loss of $115.2 million on revenue of $319.9 million for the previous fiscal year.

Of the two, i2 is a less likely candidate for acquisition than Manugistics, says ARC Advisory's Moore, because it's saddled with too many issues and too much debt. Even then, he thinks the only vendor that might be interested in Manugistics is SSA GT and Baan. Together, SSA GT and Baan will become one of the largest ERP vendors in the manufacturing sector, and Manugistics counts among its clients Boeing, Caterpillar, Cisco Systems, DaimlerChrysler, Ford, Harley-Davidson, and Unilever.

Though executives at SSA GT and Baan will not specifically name companies they'd like to buy, one thing is clear: They will buy something. "We've got $13 billion behind us so we can acquire," says SSA GT CEO Mike Greenough, referring to the investment group of Cerberus Capital Management and General Atlantic Partners that will own the combined SSA GT and Baan.

Baan president Laurens van der Tang says the company will likely acquire more companies focused in the manufacturing space to boost market share. "Any companies in this sort of category are logical targets," he says.

One ERP company that's considered to be an acquisition target is QAD Inc., which sells to midsize manufacturers. As sales to big customers slow, the midmarket space is increasingly seen as an area for fresh growth, so companies with expertise in that market look particularly attractive.

But AMR's Shepherd says QAD tends to shy away from merger-and-acquisition activity and may be even less interested since its most recent quarter looked good. For the fiscal 2004 first quarter ended April 30, QAD's revenue increased 27% to $56.3 million, up from $44.3 million the same time a year ago. License revenue rose 45% to $17.3 million, and maintenance and services revenue increased by about 20%.

ERP vendor Lawson Software Inc. has strong relationships with mid-market health-care, retail, and professional-services firms. But since those markets are well covered by the ERP leaders, Lawson isn't quite as appealing to those companies. Lawson also is struggling financially. For its third quarter ended February 2003, it reported revenue of $78.4 million, compared with $118.8 million the same time a year ago. License revenue took a huge cut, down to $14.2 million, compared with $49.1 million a year ago.

The customer-relationship management market should also get interesting. "In both the supply-chain and CRM market, there are a staggering number of vendors--arguably way too many," Shepherd says.

TOM SIEBEL PHOTO

Most analysts don't believe Tom Siebel's Siebel Systems is an acquisition target.
At the top of the market is Siebel Systems Inc., but most analysts don't believe that it's an acquisition target. As in the supply-chain management space, the big ERP vendors have already strengthened their capabilities in this area. And Siebel, with $1.64 billion in revenue last year, would be a particularly big company to swallow. "The companies that are out there that have the money to acquire Siebel already have the CRM they need," says Elizabeth Shahnam Roche, a VP covering CRM at Meta Group.

Indeed, Siebel could use the enterprise-apps market consolidation to its advantage by touting its best-of-breed approach as a better bet than buying into a single vendor that claims to have it all, Shahnam Roche says. That's because when one vendor acquires another, chances are good that some of the acquired vendor's software will disappear, which means customers may face the potentially costly task of migrating to another platform.

"This has shown that [vendor] size doesn't equal technology safety, and the old adage of not putting all your eggs in one basket still has merit," Shahnam Roche says. "Even though there's more to maintain and integrate, it spreads out your risks to go with different vendors."

That argument wouldn't cut it with Brian Capone, director of business applications at Hutton Communications Inc., a distributor of commercial wireless communications and related equipment. When Hutton was considering a CRM product, it had already chosen J.D. Edwards for other enterprise apps. And while it looked at six different CRM vendors, Hutton chose J.D. Edwards.

"If we had purchased some other party's CRM product ... it would have been three to four, maybe even five times, the cost of integration just to make it work right," Capone says.

A potential path for Siebel, which has long resisted the idea of moving outside its specialty, is acquiring another vendor with interests that tie into the CRM space. It's already made some moves in that area, such as its acquisition two weeks ago of E-marketing vendor BoldFish Inc. Rod Johnson, an AMR Research analyst, says Siebel probably isn't interested in smaller pure-play CRM vendors, though it could possibly take a look at a company like Aprimo Inc. for marketing-planning and activity-management tools or Blue Pumpkin Software Inc. for call-center management software.

Some say that Siebel might want to rethink its strategy of staying within its market, however. If Oracle's bid for PeopleSoft goes through, even though PeopleSoft's board rejected the offer last week, "Siebel could buy J.D. Edwards. It would be an interesting combination because Siebel has been looking at ways to get into the midmarket," Shahnam Roche says. "They're looking for a way to compete with SAP, Microsoft, and Oracle." What Microsoft will do is anyone's guess, though some analysts say it also might look at J.D. Edwards if the PeopleSoft deal falls through, as it tries to build out its enterprise-applications strategy.

Regardless, everyone is closely watching what Siebel will do. "The big issue right now is going to be how Siebel responds and if it takes this as an opportunity to do something big," Shahnam Roche says. "Whatever it does will set the tone for the little vendors in this space."

Companies that provide call-center infrastructure--such as Aspect Communications, Avaya, Cisco Systems, and Genesys Telecommunications Laboratories--might also be on the prowl for midmarket players in the self-service and E-mail-management arena, such as Kana or Right-Now Technologies, Johnson says.

But odds are no one will acquire E.piphany Inc., which specializes in marketing-automation tools. "They've never gained market acceptance on sales and service products, and while there might be some synergies with other companies out there, the acquisitions we're seeing at the high end of the market aren't about capabilities, they're about installed base," Johnson says. "E.piphany doesn't bring that to [the table to] get larger vendors more interested." Interest in such an acquisition would come from vendors such as NCR Teradata, SAS Institute, or other large analytical software companies. "E.piphany has a history of acquiring companies and not leveraging them well, so they probably won't be out there making acquisitions themselves," he says.

One possible CRM merger: Pivotal Corp. and Onyx Software Corp. "One $125 million business is better than two $75 million businesses, and there's safety in numbers," Johnson says.

Bernie Campbell, VP and CIO at Sonoco Products Co., a $2.8 billion global industrial and consumer-packaging manufacturer, says the outcome is interesting only to the degree that it affects customer relationships. "I'm more interested in the stability and continued levels of customer satisfaction and customer support," he says.

While that may not be assured in every case, at least in the short term, many analysts say that having fewer vendors ultimately will be a good thing. "The net result is healthy, because you will have more stable companies and more secure companies," says ARC Advisory's Moore, "and companies will be better able to support the software for the long term." --with Eileen Colkin Cuneo

Illustration by IPS/Photonica
Photo of Siebel by Bloomberg/Landovs

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