On November 1, 2012, RedPrairie Corporation and JDA Software announced their merger. Under the terms of the agreement, the entities affiliated with RedPrairie will effect a cash tender offer to acquire all outstanding shares of JDA common stock for $45 per share. My initial positive and negative thoughts on the merger were outlined in Part One of this blog series.
Cynical and jaded market observers will see this merger as a déjà vu whereby two software companies that have been unable to perform to their full potential are coming together with the hope things will improve just like that. As we have seen in the past with other such mergers in the industry, the probability of success with this is low. In addition to the Dillard’s settlement (see Part One), JDA has been under significant stress for the past couple of years. The acquisition of i2 has been challenging, the company is just completing an investigation from the U.S. Securities and Exchange Commission (SEC) regarding accounting issues, and the Q3 2012 financial results the company released on the day of the merger were weak. JDA reported Q3 license revenue declined 18 percent versus Q3 2011, total revenue declined 5 percent, and adjusted earnings per share declined 21 percent. To be fair, RedPrairie has been hitting its financial benchmarks, continuing to grow and diversify its product offerings organically and through acquisitions, and expanding in global markets.
Some estimate that the hefty $1.9 billion price of the JDA-RedPrairie merger means that the combined company will likely need to borrow somewhere around $1.5 billion to complete the transaction. The interest payment on this $1.5 billion debt will likely be about $150 million per year, and I suspect research and development (R&D), sales, marketing, and other costs will have to be trimmed down to service the debt. Think about what this means in terms of innovation. These acquisitive software companies have tons of people just ‘keeping the lights on’ in terms of supporting the legacy installs of all the products. How can they bring their development costs down while allocating product development people to focus on innovation?
Frequently, in the merging of software companies, an enormous amount of time and effort has to be spent both in R&D and in deployment to harmonize the data models between the apps even before new capabilities can be thought about. And, like for any software company with several modules, each application has its software product management team that fights for its survival, and a sales organization that cannot be weaned off the revenue. The theory about the lack of innovation coming out of roll ups is definitely based upon the business model, meaning that they focus so much attention on servicing the debt that they do not have the ability to spend on innovation. Think about it: every R&D dollar the company has must be split over a whole bunch of applications, so how much innovation is it able to get in each app? RedPrairie and JDA will have to consider this, and try not to follow in the footsteps of those companies that have lost innovation power after a merger.
Don’t cast your vote yet
It is always a challenge for roll-ups to manage debt vs. innovation, and it is easy to lean towards being more pessimistic than optimistic when predicting an outcome after a merger. On the other hand, there is always the possibility in a merger such as this of innovating (and getting new revenues) via cross-sale and integration of products that would add value to each other. Sure, i2 has had an atrocious acquisition record, but JDA has at least managed to get some cross-innovation going, as described in my article on the JDA Focus 2012 conference.
And there are rare examples of merging vendors reenergizing each other: Deltek and Maconomy under New Mountain Capital (NMC) are one great example, as well as JDA and Manugistics before adding i2, while Kronos has had many good moves in that regard, and arguably Oracle as well.
And RedPrairie and JDA’s merger is not necessarily a “roll-up” merger a la Infor — there really isn’t very much overlap in products other than the obvious aforementioned transportation management system (TMS). Both companies have considerable experience in acquisitions and mergers while maintaining both innovation and healthy profit margins. By all means, this is a much bigger merger but these are still two strong companies with solid revenue streams and profits. I do appreciate there will be integration challenges, but no different than what Oracle, SAP, and many other acquisitive software companies face.
And we must not forget that one of the drivers of the RedPrairie/JDA merger was that NMC had to recognize a lot of synergies, i.e., cost savings in uniting these two organizations. The cost savings in redundant corporate functions could be applied to product innovation. Can one realistically believe the combined company will not continue to fight tooth and nail (and back that up financially) to remain best-of-breed in areas such as warehouse management system (WMS), workforce management (WFM), and retail SCM products?
At the end of the day, this merger is not the result of two companies coming together and “figuring out” the benefits of a merger, neither is this one company stumbling through an acquisition of another. NMC is in the driver’s seat here, a firm with hefty financial wherewithal and a history of success, going “all-in” to make this combined entity a success. Also, compared to the synergies of uniting planning and execution, the product overlap is very minimal. If the “new” JDA tries to have one platform, that feat might take a decade. But the mitigating factor could be that there may not even be the need for a tight and compact SCM platform, given that managers in retail stores, retail warehouses/distribution centers (DCs), and in upstream warehouses all have different best practices and care for different performance metrics. (Even Infor has backed away from the single set of industry solutions on a single platform and has opted for a lightweight middleware layer, Infor ION.)
I know there are still a lot of unanswered questions, but NMC and the new JDA deserve a chance before raining on their parade and casting a vote against this combination. Even in politics each new government gets a “first hundred days” grace period before one can discern how well it is performing.
Related TEC posts:
Other related posts:
Another One Bites the Dust (Nov 2012)