M&As

THE MERGER AND ACQUISITION (M&A) trend continued through 2006, impacting a large number of technology providers that service the consumer goods (CG) industry. When a software vendor is acquired, the impact is felt most acutely by users of the applications, and the more dependent a manufacturer is on a particular technology, the more thought needs to be put into the IT planning process.

 

So, what do the "experts" recommend? When an M&A effects a CG company's provider, they often turn to analysts for guidance. According to Jim Shepard, AMR Research analyst, "Our advice to clients is that they shouldn't panic over their vendor being purchased. Generally the impact on customers in these transactions is very minor and often beneficial. Software acquirers are typically buying a customer base and software maintenance revenue, which means that they are desperate to establish good relations with the acquired customers to ensure that they continue to subscribe to maintenance and potentially buy more software."

 

This is not to say that a CG company should take no action. Shepard explains, "We do recommend that clients reach out to the new owner to establish a relationship and understand their strategy for the products. Often the vendor will try to establish some kind of customer advisory panel, and if the product is strategic, it may make sense to participate."

 

Shepard also notes that M&As can, and do, frequently benefit the customer. He goes on to say, "It's important to recognize that an acquisition often means that you will end up with a larger vendor with more resources to invest into the product. We really don't see many situations these days where the buyer just ignores the asset or tries to force the acquired customers to move to another product -- everyone understands that just doesn't work."

 

The vendor companies who are performing the acquisitions tend to agree with this point. Wayne Usie, senior vice president, Retail, JDA Software, affirms, "Our overall objective and mission upon the acquisition of Manugistics is to be the leading global provider of endto- end optimization solutions. Commitment to our customers is key." Usie points out that more than half of JDA's revenue comes from current customers and that they are dedicated to providing the best possible solutions.

 

Oracle, which completed several large acquisitions in the last few years, says it dedicates significant resources to ensuring the customer of a predecessor company that is merging with Oracle receives special handling and extraordinary support during the transition of people, processes, tools and company entities. Oracle's Web site offers a special section called "Acquired Products Support," with links to each effected technology. It states, "We have maintained many of the same expert product support people, processes and tools to ensure continued high quality support, and to minimize any disruption to you during the transition."

 

Oracle says it adopts best practices from each of the companies to further improve support capabilities. The company says, "We expect to provide you higher levels of support and assistance than you've experienced before as the companies combine."

 

Thus far, all indications seem positive, but the real test here is with the end user -- the CG customer -- and we asked several CG executives about their company policies and tendencies around potential M&As and about their experience with recent activities.

 

First we asked about looking at providers during the selection process -- When you are first looking to buy a piece of software, does the possibility of a company becoming a target of a future acquisition factor into your decision? And then we wanted to know what provisions were made to protect the CG company's investment -- In general, do you do anything contractually if you go ahead with that vendor? If so what? (For example, putting source code in escrow, etc.)

 

Geoff Eccles, IT director, Global Program Office, Wm. Wrigley Jr. Company, says, "Generally this is not a major concern for us at Wrigley given that we rarely go outside from the major vendors (SAP, Microsoft, etc.) unless their offerings clearly do not meet the business requirements for an application. Having said that, there are a handful of applications that we have that are either truly bespoke (such as field sales automation) or where the vendor adds some niche functionality to our ERP/core systems that adds competitive advantage in some way. In these instances we will give some consideration as to whether we need to have some additional protection, which can range from accepting the risk (where the size of the vendor is deemed large enough and/or their trading history is significant), through some level of escrow agreement, and even to periodic releases of software code and ownership of IP if the developer is truly a 'contract' resource who is coding to our specifications."

 

Larry Kumor, vice president, enterprise applications, Scotts Miracle-Gro Company, chimes in. "We look at a number of factors in evaluating vendors, including assessing the company's long term viability. Obviously, you do not want to make a significant investment without proper due diligence. We look at the company's past, current and projected future financial position to ensure that we are comfortable with including a new vendor into our solution portfolio. In certain cases we have taken steps to protect our investment, such as putting the source code into escrow or requesting periodic financial reviews with our executive management team."

 

Interestingly, Randy Benz, vice president and chief information officer of Energizer, concurs with the previously mentioned notions from AMR and the vendors, in that he views acquisitions optimistically. He says, "I think the viability of a solution provider has to be one of the principle considerations in today's world. However, I would consider the potential of someone being acquired by a larger player more of a positive than a negative." His primary worry comes from another issue. He explains, "I'm far more concerned about the number of players out there that lever a one-off consulting arrangement into a so-called 'package' that they don't have the financial wherewithal to sustain. In cases where acquisition and/or financial failure is a risk, the old fashioned escrow approach might give you a little bit of a fall-back, but it is generally not very realistic to assume that you meaningfully pick up support for a package with limited internal resources. "

 

Touching upon the selection process Paul Gross expands on what the other CG executives think. He says, "It does influence our thinking. All things being equal, we'd prefer a company who's prospects of staying independent are good i.e., we know what the future will hold."

 

Which leads to the question of: What do you do when one if the software companies you currently use is acquired?

 

To this, Gross can speak from experience, and he says the reaction depends on the situation. "We just had an example where the vendor was acquired and the product we purchased was not in line with the new company's strategy and we are forced into migrating or losing support. On the other hand, Cognos acquired a planning tool we bought and the new investment has resulted in an enhanced product. We do require all software to be put into escrow, but unless we are willing to maintain, it provides little consolation," he says.

 

Benz's wisdom also comes from having been through it. He suggests, "Wait and watch -- a lot depends on what the new owner puts behind the product. I've seen instances where the new owner infused new investment and technology improvements into a tired old product which made it very positive for us. I've also seen instances where the new owner acquired technology for no reason other than to milk the maintenance revenue stream. It usually takes about a year to know the difference."

 

Kumor talks about his company's comprehensive approach. "We tend to view our software vendors as strategic partners who we team with to deliver value-add solutions to our business customers. This type of approach requires collaborating on a fairly frequent basis to identify synergies between our business needs and the solution offerings of our partners, as opposed to an approach where the vendor finds out about our needs only when they receive an RFP. An end result of this model is a stronger, more personal relationship with the partner at all levels of the organization which leads to fewer surprises on both sides."

 

That said, however, no matter how proactive a company is, unexpected acquisitions happen. Kumor says, "A natural course of action when a partner is acquired by another company would be a review of the strategy of the acquiring company (why did they buy the company), an understanding of the potential benefits of the acquisition for Scotts Miracle-Gro and agreement on the go-forward engagement model -- ideally, we would want to structure a similar arrangement with the new company where we work together towards a mutually beneficial goal." CG