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Wedding Bells for OpenAir and NetSuite

A Deal That Re-Defines the PSA Space

Today, NetSuite announced that it is acquiring OpenAir, a professional services automation (PSA) software company based in Boston, Massachusetts.  NetSuite will pay approximately $26 million in cash for OpenAir.

Why We Like This Deal

We believe this deal will have a significant impact on the PSA software market space.  Why?  For many years now, the PSA marketplace has maintained a nominal sense of stability wherein PSA vendors quietly competed with one another.  And, although large ERP vendors purchased some earlier PSA solutions, they have failed to take full advantage of same in the marketplace.  In fact, we would argue that only Primavera has done a reasonable job of integrating companies (e.g., Evolve) into its product suite. In fact, recent merger and acquisition activity in the space has mostly been between PSA and PPM (project portfolio management) vendors.

In our discussions with SMB top executives, we have consistently heard complaints about the high cost of integrating clusters of application functionality with other components that companies have purchased/licensed.  For example, users are distraught about the cost of integrating back-office solutions to front-office solutions to vertical specific solutions (e.g., PSA or manufacturing).  Specifically, users have indicated that the cost of integrating these collections of functionality together is often a form factor greater than the license cost of a specific application suite.

By doing this deal, OpenAir now brings to the market an integrated financial back-office solution with its own service industry product line.  Both will be offered in an on-demand (i.e., SaaS) basis. Service firms will, in time, benefit from the tight integration to come between these two product offerings.  In a conversation this morning we had with Zach Nelson, CEO of NetSuite and Morris Panner, CEO of OpenAir, we learned that the integration will take place in three steps.  Step one will be to integrate the two companies and their organizations.  Step two will tie the existing product lines from both firms together.  Step three will see the rebuilding of the OpenAir solution under the NetSuite toolset.

While NetSuite had its own service solution, OpenAir's is a more robust product and will undoubtedly assume the service industry leadership role within NetSuite.  We believe this transaction will put considerable pressure on other PSA vendors such as QuickArrow and will likely result in a wave of other acquisitions in the PSA sector.

The deal brings other opportunities for the combined company.  The acquisition of OpenAir brings a significant East Coast presence to NetSuite.  OpenAir brings 300 service based customers into the NetSuite family.  Virtually all of these customers utilize back-office applications that are prime replacement candidates for NetSuite.  A typical OpenAir customer would be using solutions such as Microsoft Dynamics, Great Plains, Sage, AccPac or other financial accounting software.  Every OpenAir customer is an upsell opportunity for NetSuite.  Likewise, NetSuite has over 5000 customers and considerable experience in the services sector.  However, what we really like about NetSuite is its product development architecture: NS-BOS. This platform, also known as the NetSuite business operating system, permits two key things:

• the rapid development of vertically specific applications in a well-designed multitenant SaaS architecture
• the seamless integration of these applications with NetSuite's core front and back office products

This deal should be accretive in short order if both sales forces are unleashed to sell the NetSuite front office solution, the NetSuite back office solution and the OpenAir PSA solution.

This entry cross-posted to the Services Safari blog.

Mergers: Taleo, Vurv, HP, EDS

                          Logic Behind Recent Mergers

                                                    Taleo and Vurv

Taleo and Vurv are hooking up. My research firm, Vital Analysis, did a report on Vurv last fall. Vurv is the rebranded Recruitmax and they had spent a lot of time replatforming their talent management solution over the last couple of years. The result of their efforts was debuted to much fanfare at the Fall HR Technology show in Chicago. The Vurv solution set is complete and looks good. Taleo will get a nice solution from this deal as well as 1700 customers.

This deal is interesting  as both firms offer relatively complete talent management solutions and have enjoyed similar customer/market successes. At first blush, it would appear that is a market share play. A review of the underlying technologies and geographic reach of the two firms would suggest that this deal expands the reach of the combined firm, lowers future development and operating costs and offers additional solution formats (e.g., SaaS). This deal should be good for shareholders and most employees. Some redundant back office personnel will likely be let go, though. Customers using old versions of either vendor's product line might want to seriously consider upgrading to a more recent product once the combined firm announces its post-merger product line rationalization strategy.

                                                     HP/EDS

EDS could probably tell HP management what happens when you buy a consulting firm. EDS bought AT Kearney several years ago and never really integrated it. The culture of a consulting firm is an interesting beast and it must be considered whenever a consultancy is acquired.

Some would argue that EDS is not a consultancy but rather an integrator or outsourcer. For the most part, this assessment is correct. The point about cultural integration remains though. The HP culture of old, an engineering excellence culture, would have been a hard one to fit in with EDS. One pundit described EDS several years ago as 'sharks in wingtips'. The EDS people I've met are solid with numbers and definitely know how to put together big deals. They can play to the top execs and the CIO with equal aplomb. In a really big deal, I'd give the advantage to the EDS sales team.

If you combine EDS and HP, I'd also give the vertical industry advantage to the EDS personnel, too. That said, I'm not so sure either firm is really great at getting verticals the way that integrators like Accenture (ACN) can.

I understood why HP pursued PriceWaterhouseCoopers years ago for their consulting expertise. That deal could have really changed the HP landscape. PWC Consulting has been a boon to IBM although that took a while to become accretive. The HP/EDS deal may not have as many rough patches before it as EDS has a lot of long-term outsourcing arrangements that should remain relatively untouched post-merger. It's the long-term view of this merger that I'm questioning.

What's tougher to figure are the real long-term upsides in this merger. HP could help EDS with additional cost reductions as more HP equipment is brought into its deals. HP could also see hardware sales improvements as EDS utilizes more HP (and not IBM) gear. Both firms are already global but the increased density of personnel and abilities in lightly staffed markets should help shares.

Both parties understand mergers. EDS used to be owned by GM and bought ATKearney. They've even done a joint venture deal with Hitachi in the past. HP has bought Compaq and countless other firms. Both companies have acquired many smaller software and services firms, too. Merger integration skills should be available in-house (and, if not, HP should give me a call) but the scale of this one is going to be big and complex.   

Accenture: Acquisitions and Layoffs

                                 Accenture Adjustments

The Houston Chronicle reported last week that: "Accenture LLP plans to cut 95 jobs in the Houston area on July 1." On the same day that this broke, Wachovia Capital Markets, LLC reported that: "Accenture (ACN, Outperform, $37.79) agreed to acquire AddVal Technology Inc., a privately owned provider of shipment management products and services. The acquisition is expected to close within 45 days. Financial terms were not disclosed."

While any job loss is tough for the person(s) affected, 95 people are not significant in the total view of Accenture's workforce. However, if these cuts are part of other cuts or are a result of the loss of a major customer(s), we will want to follow this story very closely.

IPO or Merger - What's Your Software Co. Exit Plan?

                Planning Your Firm's Exit? Tough Stats to Read

Dow Jones has a great daily newsletter, Venture Wire. I highly recommend a subscription. Today, they posted the following stats on exits:

"A report today from VentureSource, a unit of VentureWire publisher Dow Jones & Co., shows the merger and acquisition market saw 80 deals valued at $7.78 billion in the first quarter of 2008, a drop from 110 deals valued at $15.69 billion in the previous quarter and 105 deals at $10.2 billion in the first quarter of 2007.

It's the lowest number of M&A deals since the first quarter of 2003, when 77 deals took place in a year that was this decade's worst for the market.

Initial public offerings unsurprisingly came to a virtual halt in the first quarter, with only six venture-backed companies managing to go public, raising just $391.9 million. That's down from $1.89 billion raised in 25 offerings in the fourth quarter of 2007 and $1.20 billion in 13 offerings in the first quarter of 2007." (source: venturewire@dowjones.com, April 2, 2008)

When the IPO market is down (or closed off), M&A is only other real exit opportunity left. Unfortunately, when this situation occurs, valuations often weaken as the market shifts to a buyers market. Capital is scarce and opportunities abundant. For executives running venture backed firms, you can expect:

• upset venture backers due to lower market valuations
• frustrated venture backers who want an exit on their timeline not on a timeline driven by market forces
• more pressure to do a deal, any deal, so that VCs can recoup their investment
• your job could be in jeopardy

Some Pruning of the SAP Product Line

                            SAP Rationalizes Its BI Products

Users of Business Objects, OutlookSoft, SAP, Crystal and many other products should definitely read InfoWorld's recap of SAP's product retirement announcements.  (see: http://www.infoworld.com/article/08/03/28/SAP-retires-overlapping-BI-products_1.html?source=NLC-TB&cgd=2008-03-28 )

I want to applaud SAP on this move. Instead of taking the approach some its large competitors have taken with their acquisitions, SAP is offering three years of support and is picking the best of the acquired lines that it will continue to enhance. I like this as it shows courage and it offers the best value long-term to the supported products. R&D, in this case, will not get diluted across many redundant products. Instead, it will be focused on a few products and will give those products and the companies that use them, a great deal of enhancements over time.

Other vendors like to promise eternal support for acquired products but end up offering only token upgrades. The SAP approach should yield more material upgrades and a better, stronger product line.

(Users of Pilot, Cartesis, SRC, ALG, Activity Analysis, BEx, Acorn, BPC, SEM, etc. should read the full article)

Lawson and VasTech

         Lawson Acquires Vertical Expertise in Workforce Management

Lawson Software has announced its intention to acquire VasTech. This deal gives Lawson a very deep solution in the health care, hospitality and government services sectors. (see: http://www.vastech.com/lawson_vastech.pdf)

Generic HR solutions are quite common but products targeted especially for key verticals are much rarer. This deal definitely provides deep vertical capabilities. When you look into the VasTech solutions, you find functionality that supports shift auctions/bidding which is a key need in the health care industry where three shifts of personnel must always be staffed with a scarce, technical workforce.

Staffing shifts round-the-clock is a critical need of convenience stores, health care organizations, call centers, emergency response groups, etc. VasTech's workforce management functionality should play well with many Lawson customers. Lawson has long had a strong penetration in the health care industry and the retail sector. These industry strengths pre-date the Lawson-Intentia deal a couple of years ago.

This deal, if the products are integrated into Lawson quickly, should be accretive in short order. As software deals go, this one may be one of the better consolidation deals of late.

CODA and Agresso

                         M&A News - More ERP Consolidation

It appears that the Coda acquisition by Unit4/Agresso is happening. (see: http://www.coda.com/Art?AID=1536 and http://www.unit4agresso.com/files/Offer_CODA_%20Unconditional_%20260208.pdf ).

The deal could be a good one for several reasons. Some of these will benefit customers and others shareholders. For example:

• While both entities have some product line overlap, Agresso could cross-sell its CRM solution into CODA's install base.
• CODA's Neon product line has some interesting and powerful capabilities for shared service firms and procurement users. This could also be cross-sold to the Agresso install base.
• Agresso's HR offerings could be sold into the Coda install base as well.

I've tracked CODA since the late 1980s. In its heyday, the company had a significant sales organization in the US and made major inroads in the DEC Vax marketplace. Their product line had a highly integrated general ledger, accounts payable and accounts receivable modules that shared a common balance and transaction databases. That architecture is especially powerful for users seeking a very maleable solution. Given Agresso's similar BLINC (businesses living in change) focus, the CODA user base will find Agresso a simpatico solution. That doesn't always happen in software acquisitions.

I prepared a report on  the NEON product line a few months ago. If you'd like a copy of that report, send an email to: contact@vitalanalysis.com .

Why I Like This Fight

                         MSFT + Yahoo vs. Google

The recent $40+ billion offer by Microsoft to acquire Yahoo has tech and Wall St. pundits buzzing. Personally, I like the concept of this deal if only because it will force incredible amounts of transparency on the operations of both Microsoft and Google.  More specifically, it will bring into the stark bright light of day the issues involving to repurposing of user information (be it search words or content within documents) for economic gain by these parties and other external groups.

From a privacy perspective, I do not want or like having systems parse through my e-mails and place context-sensitive advertising around or within them.  I don't care if the email is provided free of charge as correspondence between two entities should have some expectation of privacy.  Granted, some would argue that an automated parsing tool is not the same as a human set of eyeballs but the incursion nonetheless remains. Furthermore, just because the service is free doesn't mean that privacy should be tossed out the window.

In my prior career with a firm whose roots were deep in public accounting, we were admonished repeatedly to "avoid the appearance of impropriety".  That meant, that we could not engage in behaviors that could potentially cause harm to clients and we could not do things that gave the impression that we were potentially violating our client's trust.

What's missing in the Internet today are companies who view their customers and users as more than a means to create advertising revenue.  This potential merger makes it abundantly clear that advertising revenue is the economic engine behind Google and Yahoo.  Granted, industry watchers have known this for years but Microsoft's foray into the space forces all of us to look at this deal and decide if now is the time for citizens and governments to make a stand regarding privacy.

Microsoft's interest in this may belie a broader strategy shift for the company.  When you look at the age and maturity of Microsoft's product line, its main moneymakers have been the Office automation suite and its desktop operating systems.  But, as time has borne out, users gain incrementally fewer net benefits from newer releases of these products and are rebelling at the need to upgrade to newer products.  Why has the upgrade path to its Vista product slowed?  Part of it may be the product itself but frankly Windows XP does a fine job as is.  My copies of Office 2003 and Office XP function fabulously for what I need.  The incremental improvements in later releases of both the desktop operating system and office have not been greatly needed by the marketplace.

So, if you were Microsoft and you saw your revenue line flattening while the cost to create huge breakthrough innovations that would trigger a massive replacement sales bulge is growing, you would need to rethink the economics of your business.  Alternatively, you could accept the fact that your products are maturing and may not need the kinds of expensive upgrades that were required in the past.  Once you reach this conclusion, your company is free to explore new directions in revenue creation and product lines.  It is that concept, where Microsoft realizes it's 20+ year old products have hit middle age, that is driving them into a new business line.

Microsoft wants Yahoo for market share, ownership of more desktop eyeballs and for advertising revenue.  Google clearly sees a well financed competitor in the wings and is obviously nervous.  But this nervousness is triggered partly by normal competitive pressures and also because it will force great regulatory scrutiny of Google and Microsoft.

In an interesting sense, this merger may be beneficial to IT users because regulators and competition may force both companies to be more forthright and flexible in protecting their user's privacy.  Above all else,  additional scrutiny of this privacy issue will be the best outcome of this potential deal. Just last week, the EU ruled that IP addresses are private. I'd love to hear how they view other issues that will surely arise from this proposed transaction.

Whoa - Where are all these deals coming from?

                             Quick Analysis of Recent Deals

Workstream - According to http://humancapitalist.com/?p=522 , Workstream may be acquired by a UK firm. Vital Analysis recently reviewed Workstream and a copy of their report is available at: http://vitalanalysis.com/va_blog/?p=18 . Venture backed companies are always looking for a liquidity event for their portfolio firms. If Workstream weren't in play, I'd be surprised. Let's hope they get a good multiple. My assessment: Workstream's talent management solution would be a solid fit for many potential acquirers.

CODA/Agresso - These two firms are in currently in talks. See: http://www.unit4agresso.com/subpage.aspx?l1=310&l2=312&subaction=details&newsid=1893&from=homepage . I like both of these firms. CODA has recently upgraded their product line and TechVentive, Inc. (prior to the Vital Analysis re-branding) also developed a report on their Neon line. See: http://softwaresafari.typepad.com/software_safari_premium_b/2007/09/new-report-on-c.html .  This deal could be very beneficial to Agresso in North America given the customer base there and access to additional sales professionals in this market. I like this deal.

Cyborg - Hewitt Associates is selling off its Cyborg HR software line to a private equity firm (see: http://www.hewittassociates.com/Intl/NA/en-US/AboutHewitt/Newsroom/PressReleaseDetail.aspx?cid=4691).  Vista Equity Partners is the buyer. Cyborg was acquired by Hewitt in 2003. Personally, I watched Cyborg for a long time as they are a Chicago based outfit. Deal terms are still unknown at this time. Vista Equity Partners has made a number of software and IP investments (e.g., Reynolds and Reynolds) (see: http://www.vistaequitypartners.com/Companies.html). It's premature to predict how this will do long-term. I'm pretty sure Hewitt will continue to use the Cyborg solution in its BPO offerings. Vista Equity Partners may need to make other acquisitions to make a more complete enterprise offering. Let's watch this space.

SUN/MySQL - Everyone's talking this one up. I like it not just because it's a big open source monetization deal. I like it as MySQL shows up more and more as an alternative to Oracle's DBMS in a lot of big ERP solutions. SUN will likely get continuing upside on this one.

Oracle/BEA - I've been expecting this one for like years. It's finely here. Not an interesting deal just expensive. Let's hope it's really accretive.

Maybe we should start seeing others...

Maybe we should start seeing others…. 

 

There comes a time in many relationships when one party needs to get on with their life.  Sometimes it occurs when one individual has simply grown apart or needs to grow in a matter inconsistent with the needs and wishes of the other party. Sometimes no one is at fault but the end result is still the same -- it's time to move on. 

 

I've attended a number of midmarket software conferences this fall.  In some of these events, I had the opportunity to interview users of these solutions.  I am struck by the diversity in their needs and wants and I'm also equally amazed at their expectations of the vendor whose solution they use.  In some cases, users may be almost lethargic or unimaginative when it comes to articulating new product innovations or directions they wish to see from their solution provider.  In some cases, users can be quite articulate and demanding as they fully expect their solutions should be keeping up with them. When the needs/wants of both parties conflict, there’s trouble afoot. 

 

Every industry needs a janitor.  That's true even in the software industry.  As a senior software executive once told me "software vendors come and go but their solutions live on forever".  What he meant was that vendors may go out of business or be acquired at any time yet there's always someone ready to pick up the customer base and the maintenance revenue that continues to pay dividends for years and years to come. 

 

Software companies are sold or acquired often at two different stages in their lifecycle.  Sometimes hot, new, emerging firms are taking the market by storm and have attracted the interest of many potential suitors.  These deals often have the effect of creating numerous underage instant millionaires or billionaires.  While these stories get much press, the reality is that most software company sales occur at the end of a company's lifecycle. When these deals go down, few people get any sort of upside (e.g., creditors, employees, founders, etc.) except for the acquirer. 

 

So, why do people continue to pay maintenance after their late-stage, mature software company has been sold?  This should be a question for the likes of Dr. Phil and others in the psychiatric field.  Once a mature vendor has been acquired, one or more of the following has certainly occurred:

§         the founders have cashed out and left

§         revenues have flat-lined or declined causing R&D investments to plummet as well

§         the best and brightest product innovators have jumped to newer, cooler and more entrepreneurial firms

§         the company has lost market momentum in its space

§         larger competitors have now entered the space thus relegating this solution provider to a marginalized and unwinnable market situation

Acquiring firms will tell you that they bring stability, better sales and distribution channels and other assets into the deal.  They want you to believe that this is a good deal for both them and you.  For sure, you can bet it's a good deal for them.  How so?  Many software packages require annual maintenance fees equal to 20% or more of the current year license revenue. The inflow of cash from these acquired products can be substantial.  All the acquiring vendor needs to do is provide enough maintenance or upgrades so as to keep the product technically current, secure and relevant or comply with new government and taxation requirements.  Beyond that they have little or no motivation to add additional functionality into these products.  They know these products are old and long in the tooth.  Little value will be gained by the acquirer for rebuilding, re-platforming or re-architecting acquired products.

 

 

This leads us to the theme of this post.  If you are the licensee of an old school software product and it has been acquired, should you really continue to pay maintenance?

 

 

Maybe the best way to think of this is to see the commonality between software vendors and drug dealers. Their jobs are to get people hooked on their products and they need to make it difficult for these people to give it up. Software vendors will quickly remind you of the significant economic penalties they will assess if you drop maintenance and then try and reestablish it one or two years later.  Should your addiction grow, they will gladly charge you a whole new license fee just to upgrade you to a different product that this same company offers. 

 

 

When your mature solution has been acquired, you need to open up a can of tough love and ask your vendor’s new owner:

§         We had a long-term strategic relationship with the prior solution owner.  Your firm now has a combined customer base measured in the tens of thousands to millions of customers.  Now that we are no longer strategic to your success, why should we remain loyal and committed to your firm? 

§         What's in this for me?  How does our firm specifically benefit from this new owner?

§         Will the new owner force us to convert are existing solution to a different product in their product family?

§         What assurances do we have that the new owners will honor any prior enhancement promises, functional upgrade plans, release schedules, quality improvements, etc.?

§         How long can we remain with a frozen version of this technology?

 

 

In negotiation settings, I often tell the other side that I "need to feel the love". If your assessment of the altered relationship between you and acquired vendor has less love than ever, your firm needs to (in the words of Dear Abby) “seek true love elsewhere”. Remember, you did not sell your solution provider.  You did not cause the acquirer to be made part of your business environment.  They have forced themselves upon you but you do not have to accept them.  Unless they are willing to offer you a superior relationship than the one you enjoyed previously, you need to cut them free.

 

 

Next: Speed dating for a new ERP solution?