Golden Gate for Geac

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Summary
ERP industry consolidation continues as Golden Gate Capital announced it will acquire Geac. Ventana Research thinks the purchase strengthens Golden Gate’s hand in the manufacturing software segment and gives it a significant new beachhead in financial applications. We do not expect the combination to have a material impact — positive or negative — on software users in the short-to-intermediate term. 

Assessment
Geac, a software company based in Ontario, Canada, is being acquired by Golden Gate Capital, a San Francisco private equity group with an expanding software company portfolio. Geac’s strategy was to grow through acquisition, combining companies that had large installed bases of maintenance-paying customers with companies that showed growth potential. However, as a public company it recently has been finding it difficult to identify acquisitions that meet its minimum requirements. Valuations often were too high for it to make acquisitions that made sense but would not dilute future earnings per share excessively. Enter Golden Gate, which is acting also as a consolidator of enterprise applications. It does not have to report quarterly results to shareholders, and by using debt financing for a portion of the purchase, it can leverage the returns to its equity investors.

Golden Gate will split Geac’s software portfolio between two groups. It will combine Geac’s manufacturing and supply chain software lines, re-branding them as offerings by Infor, a Golden Gate Capital company that has grown through acquisition of discrete and process manufacturing software companies, among them Mapics Inc. and Lilly Software Associates.

Geac’s financial management applications will become most of the holdings of an as-yet-unnamed company, along with the remainder of its vertically focused software. This includes the MPC performance management suite, which received Ventana Research’s highest ranking in our 2005 Performance Management Vendor and Product Scorecard. It also incorporates the Extensity expense management offerings and the SmartStream client/server accounting and HR application. In addition, the business has a large installed base of mainframe accounting and finance users that provides a slowly but steadily declining stream of maintenance revenues.

Market Impact
The manufacturing software segment of the enterprise software market has consolidated significantly since 2001. While it still is fragmented, revenue increasingly is concentrating at the larger companies. As a result, vendors are likely to have a bit more pricing power than in the past, but users are likely to benefit from these companies’ ability to make larger investments in product development. Smaller vendors such as QAD may find the competitive climate more difficult as consolidation enables the larger units to have that much larger sales and marketing presence. We think Infor now is well-positioned to go after companies in the JD Edwards user base that become disenchanted with Oracle, which acquired that software company when it bought PeopleSoft. Should this happen, Infor is likely to show above-average growth, in which case Golden Gate would likely take the company public. We do not expect much market impact from the change in ownership of the as-yet-unnamed company. We assume there will be few changes to strategy, product plans or sales and marketing efforts. Of course, now that Golden Gate has an “anchor” in the enterprise financial applications business, it may make additional investments that could change the competitive balance.

Recommendation
Ventana Research does not expect this change from public to private ownership to disrupt Geac’s business nor to have any negative impact on user organizations. Indeed, in the right hands, a private software company can have greater flexibility in making investments and greater freedom in making business decisions, since it does not have to report quarterly results. We advise companies that were considering any of Geac’s products to consider this acquisition a nonevent.

About Ventana Research
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© 2005 Ventana Research