He sees more opportunity in the complementary side of the market. For example, in the supply chain execution space, the average company size is $2 million to $4 million and undercapitalized, according to Elliott.
Companies this small usually aren’t attractive to the bigger players who need to see an acquisition “move the needle,”so to speak, but they are attractive to a smaller software player like Elliott’s Accellos.
Software companies with a history of acquisitions are likely to stay on that road, filling gaps in their product offerings. Pugmire says that Sage will look at acquisitive and organic growth opportunities as it looks to expand into new markets. Infor says the same. “If there is an area we want to get involved in, it’s always a strong possibility,”Rippen says.
Activant plans to focus on opportunities with existing customers in the next year, Mellott says. “However, based on where the market is today and the valuations of software companies, we are still looking at certain opportunities that could provide some immediate benefit to our organization,”he says.
SAP is more apt to focus on organic growth, according to Karen Lynch, vice president of global wholesale distribution for SAP. Any acquisitions would fill gaps in current offerings.
Epicor’s Winger says that with new technologies making waves in the marketplace, consolidation is not over. “You’ve got companies pushing specifically on the Software as a Service (SaaS) side of things now,”Winger says. “With that, there will always be new companies that come into play. And with them, more acquisitions will likely take place.”
Activant and Infor: Growth in the Distribution Software Industry
Two major players in distribution software are the results of a long line of acquisitions. In the end, Activant and Infor acquired three of the key distribution-centric software providers from the 1990s: NxTrend, Eclipse and Prophet 21. Here’s a look at how Activant Solutions and Infor grew to where they are today. (Most deals represented.)
Infor
1993 R&D Systems Company decides to focus exclusively on wholesale distribution
1995 R&D Systems Company changes name to NxTrend Technology Inc.
NxTrend acquires Ultimate Data Systems
1997 NxTrend acquires Goretek Data Systems and Saber Systems
2000 NxTrend acquired by BuildNet Inc.
2001 BuildNet Inc. files for bankruptcy; NxTrend emerges independent
2002 Agilisys, software provider for manufacturers and distributors, formed
2003 NxTrend acquires Dimasys Software
2004 Agilisys acquires daly.commerce and NxTrend
Agilisys changes name to Infor Global Solutions, reflecting 2003 acquisition of
German company named Infor
2005 Infor acquires Formation Systems
2006 Infor acquires Datastream Systems Inc. and SSA Global
Activant
1990s Prophet 21 builds position in wholesale distribution software and goes public in 1994
2002 Prophet 21 taken private in management buyout in $70 million deal
Intuit acquires Eclipse Inc.
2003 Prophet 21 acquires Systems Design Inc. and Faspac Systems Inc.
2004 Prophet 21 acquires Dynamic Data Systems and Distributor Information Systems Corp. (DISC)
2005 Activant Solutions acquires Prophet 21 for $215 million
Activant acquires Speedware Corp. to complement Prophet 21
2006 Activant is acquired by two private equity firms: Hellman &Friedman LLC and Thoma Cressey Equity Partners
2007 Activant acquires Silk Systems
Activant buys Eclipse from Intuit for $100 million
To better understand the dynamics in the distribution software market, MDM spoke with distributors and more than a dozen software providers. This is the first in a series of articles based on those interviews. This article focuses on the relatively recent consolidation in distribution software and its impact on the distribution industry. Part II of this series will run Oct. 10, 2008.
Take a snapshot in 1995 of software for distributors. The picture is fragmented. For the most part, there were small providers, most focused on one or two product sectors. The landscape today looks very different from even five years ago -not to mention the vast shift we’ve seen over the past decade.
Consolidation of software providers in the early part of this decade resulted in fewer distribution-only software players and the phasing out of the smallest solutions. The small independent ERP provider is still going strong in only a few subsectors.
Large software providers such as SAP, Oracle and Microsoft have grown more competitive in the distribution space. In part fueled by the pressure to grow, Activant Solutions and Infor both bought into the market in the past five years by acquiring long-time distribution software providers, Prophet 21, NxTrend and daly.commerce. Intuit -which buoyed its position in distribution with its purchase of Eclipse -sold the platform to Activant last year.
Many of these software companies now see distribution as a high-growth opportunity with industry-specific needs. In many cases, distribution is no longer being lumped with retail or manufacturing when it comes to marketing and development.
Still, many distributors openly question whether industry-specific needs are being met in this new rolled-up environment. Some were working with software companies specializing in their distribution segment; now they are working with larger companies with a different style of management, a much broader reach in the distribution market and a different set of corporate objectives.
Has this sea change been good or bad for distributors? What tradeoffs have distributors had to make in this new environment? High levels of sector-specific service has in some cases been sacrificed for more generic attention. But distributors have gained more stability on the financial and software development fronts -arguably a good thing when it comes to long-term value and support for their systems.
Without question, competition has intensified as the universe of software providers into wholesale distribution grows less fragmented. Distributors are left with fewer options, but according to one industry veteran, the new class of software providers has an opportunity to make those options better as they grow and learn in the industry.
Factors Driving Consolidation
Three factors fueled a wave of selloffs of smaller distribution software companies at the start of this decade.
First, a major recession that started at the end of 2001 and continued through the next couple of years in the U.S. hit the manufacturing, distribution and software industries hard.
The Internet bust and Y2K also had a big impact on the operations of software companies, according to Tim Reynolds, president of Tribute Inc., a niche software provider to fluid power and hose distributors. What Y2K did was take two years of forward demand and move it backwards,”Reynolds says. Many distributors had upgraded their computer systems to protect their businesses from what was supposed to be (but wasn’t) a widespread system breakdown when the clock struck midnight on Jan. 1, 2000.
The Y2K selling frenzy and the subsequent Internet bust sparked skepticism in the strategic nature of software to a business. “Before this, it was taken on faith that the software was strategic to distributors,”Reynolds says. “Now we have to demonstrate it. I think that’s very healthy, but it’s a big change.”
And the transition from green-screen applications to Windows was a “step change”that forced software providers to stay relevant or leave the industry. They had to tap “entirely different technical skills”and programmers had to learn new languages and embark on multi-year projects to update their offerings. “It took a major investment in training,”Reynolds says, to adapt to graphical interfaces.
Most small companies the size of Reynolds’Tribute were owned or run by people who were close to retirement. “They were not interested in putting more money into their company and maybe did not have the capabilities themselves to make that kind of investment or the knowledge necessary to manage those types of projects,”Reynolds says.
“What you had was a large number of undercapitalized companies because of the downturn in business who had either failed to make or decided to not make the technology change. Some of them went out of business, but most of them, as an exit strategy, sold to the consolidators.”
The Consolidators
Rod Winger sold his warehouse management software company, TDC Solutions Inc., to Epicor in 2003. “We’ve seen a whole group swallowed up by the larger companies,”says Winger, now Epicor’s director of product marketing. “I will bet the number of smaller software providers has been reduced by 80 percent if I were to do a company name count of who is left as a standalone vendor.”
And with larger companies like SAP and Oracle now reaching into the middle market of distribution for customers, Winger does not believe there will be a resurgence of smaller niche software companies in the distribution space anytime soon. “I don’t see the opportunity that was there 12 years ago when I first started my company. It is tough to compete when the competition is no longer just 100 or so niche players. Today you’re competing with a handful of large companies with more resources.”
Activant Solutions and Infor have been two of the more prominent consolidators in the distribution software industry. (Scroll to the bottom of this article for a graphical look at the two companies’ acquisitive history.)
Activant’s most recent acquisition was also one of its biggest in recent years. The software provider bought Eclipse from Intuit for $100 million in July 2007. It’s also known for its purchase of long-time distribution software provider Prophet 21 for $215 million in September 2005 from a private equity firm. The acquisition brought Activant full-throttle into the wholesale distribution sector. Before its acquisition by Activant, Prophet 21 had a long history of acquisitive growth in the space.
Infor, a $2.2 billion software company, is another big player in the distribution sector. In March 2004, as Agilisys, it bought into distribution with its purchase of daly.commerce. In June 2004, it purchased NxTrend, Colorado Springs, CO, also a distribution-focused software provider. NxTrend itself was a consolidator in the industry, acquiring a series of distribution-focused companies from the ’90s until it was acquired in 2004. Over 25 years, NxTrend built and acquired a customer base of 1,900 companies.
“We cover the entire ERP ecosystem,”says Gary Rippen, Infor’s director of distribution industry marketing, of his company’s acquisition strategy. “Across the board, we can pretty much come in with our core distribution products and dot around that entire ERP system with the systems a customer is looking for. We fill a lot of gaps in a lot of different areas.”
Distributors on smaller niche systems that have been acquired by companies such as Infor and Activant say they feel pressure to migrate to the parent’s core product offerings, though most software providers have maintained support, however minimal, for even the smallest of systems. But as Reynolds says, developing and maintaining “domain expertise”is a difficult and expensive task for consolidators. It is especially daunting if the expertise must be spread across multiple market segments.
Activant says it maintains service levels on acquired software packages, but also helps distributors examine whether newer technologies will bring more value and ROI to their businesses, says Russ Mellott, vice president and general manager for Activant. “If that is determined, the biggest value we add as the combined company is the ability to leverage resources on their existing platform to work in the migration to the new platform to ensure the highest level of success while minimizing any disruptions to their daily business,”Mellott says.
Impact of Consolidation
Charles Gray, owner of Machinery and Factory Industrial Supply, Racine, WI, believes that every software provider has something good to offer. However, finding a complete package that meets the needs of his small company is a challenge. He attributes that in part to consolidation. “Every time a company gets bigger, they suffer a certain amount of service loss,”he says. “And for me and my company, service is important, especially in the tech world.”
At the same time, smaller software companies can’t necessarily provide all the functionality that Gray is looking for. “They say they’re as good as the big players, but really they may have one or two or three modules that are OK, and that’s it,”he says.
That’s the dilemma many of the smaller distributors see in the face of consolidation.
On one hand, the companies left standing after the latest wave of consolidation are more financially viable than in the past. Ross Elliott, who was an executive with NxTrend when it was sold to Infor and now is executive vice president and chief technology officer of supply chain execution software company, Accellos, says that “less than 20 percent of all software companies with revenues of less than $20 million are properly capitalized, which suggests that many of the distribution software companies were constantly living near the danger zone and their customers along with them.”
Along with financial stability, consolidation into a larger company can provide research and development stability. The uncertainty of whether a smaller company would exist in a few years may stunt its development of new products.
Consolidation may force a company to give up 10-20 percent of the feature-function capability of a product. But customization allows those nuances to be built in on a case-by-case basis, says Epicor’s Winger. The challenge for a small distribution company is supporting and realizing sufficient ROI on that customization.
Consolidation also offers the opportunity for distributors to better integrate their systems, says Scott Pugmire, senior vertical industry manager for Sage Software. Larger companies often acquire niche providers to fill gaps in service, he says.
Infor’s Rippen agrees: “I think a bigger company has more opportunity to bring in more options and has the technology expertise to give the customer what he wants.”
Steve Raines, president of RMP Industrial Supply Inc., Fort Worth, TX, says that’s the case for his company. RMP recently began implementing a Software as a Service (SaaS) option from Activant after using Acclaim from Activant’s Prophet 21 for more than a decade.
“They were able to offer us the changes we were looking for, and it just made sense since we’d been with Prophet 21 for so long,”Raines says.
The Flip Side
On the other hand, niche solutions have grown scarce, narrowing the choices that distributors have. Gray needed a software provider that would meet a specialized need. But when he began his search for a new software provider, one large distribution software provider was hesitant to even provide a quote to develop a program that would cater to his need for cylinder management functions for his welding supply unit. “They said, ‘If you need that, we simply don’t have it,'”Gray says. Gray’s company is currently using a niche software provider that meets that need.
While many of the acquired niche programs are still out there, thanks to maintenance by consolidators, “you’re still stuck on obsolete software,”Reynolds says. “But now your strategic systems partner is a guy who has a much more generic vision of what his business is than what you used to have. The domain knowledge of your specific business and needs is disappearing.”
Zach Nelson, president and CEO of NetSuite, a Software as a Service-focused provider founded with seed capital from Oracle CEO Larry Ellison, believes consolidation of traditional applications is bad for distributors. He says the level of investment and focus on the distribution market segment inevitably shrinks as a company’s portfolio grows. “
Luke Bucklin, president of Sierra Bravo Corp., which works with distributors to adapt their legacy systems to modern technology, says that niche providers are finding it harder to remain competitive. “I’ll think we’ll continue to see consolidation and deprecation of these systems,”he says.
Bucklin does not believe this is necessarily bad. “I think (the consolidators) will continue to evolve their product. So I think we will have fewer choices, but they will be fewer better choices when it comes to what type of solution people can choose.”
Forecast
The general consensus is that the major wave of consolidation in distribution software is over. Elliott says that in the ERP space, software providers will likely look for strategic buys to fill holes in their product strategies. “But there isn’t much more to buy,”he says. “The major buys have taken place.”
