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April 25, 1999

M&A Impact: A New Era for Neon?

By CBR Staff Writer

By Krishna Roy

New Era of Networks’ (Neon) CEO Rick Adam is the man credited with coining the expression EAI or enterprise application integration, a market that has attracted big investment bucks and a great deal of hype based on the supposed ability to stitch together highly complex enterprise backbones.

Adam is also a man under pressure. While undoubtedly still basking in the glow of ten quarters of earnings and revenue growth, capped last week with the announcement of sterling quarter one 1999 numbers, Adam may not be able to confidently assert that his company leads the EAI field for much longer.

Although Neon saw earnings per share, excluding charges, almost quadruple from $0.03 to $0.11, on revenues that tripled to reach $29.6m, its competitors have been on acquisition sprees to boost their size and market share. The last WinterGreen Research figures place Neon in a comfortable lead with 18.5% of the EAI infrastructure and message broker markets, ahead of Dialogic with 12.6%, TSI with 7.9%, STC with 7.7%, Active Software with 5.3% and Tibco with 4.5%. That map of the EAI market now looks as if it had been drawn in shifting sand.

Last month, one of Neon’s most staunch competitors, TSI International bought the Braid Group for $30m in cash and 1.1 million shares of TSI common stock, priced at $52 on March 23, 1999, valuing the deal at $95.2m. Not only does the acquisition make TSI roughly the same size as Neon – Neon reported annual revenues of $65.8m last year while TSI’s revenues were $45.3m – it also enables TSI to match its rivals in the lucrative financial services market.

TSI’s primary market has been in SAP implementations with Mercator being a main EAI product for R/3 integration. The area has provided rich pickings and by the fourth quarter of 1998 TSI had amassed 225 SAP customers, up from 50 in the comparable period in 1997. The Braid group is the largest vendor in the EAI financial services market after Tibco, according the Gartner Group, and will therefore catapult its breadth and visibility in the financial services sector.

SunGard Data Systems, a company best known for its disaster recovery services is one that also has a much larger business in investment support systems. It also moved to consolidate its position in this sector by acquiring Mint Software Technologies, a $12.5m subsidiary of Oshap Technologies. The impact of this acquisition cannot be underestimated. SunGard claims to be one of the 20 largest software companies in the world and the Mint acquisition brings a formidable set of EAI products in the form of Message Broker, Rule Manager and Knowledge Manager.

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Financial services is one of the largest and fastest growing verticals for the EAI suppliers because the software promises to integrate disparate financial applications and networks that are required for hot areas such as e-brokerage or on-line trading. The process can call for the lashing together of various databases, packaged software, old Cobol programs and new Java applications, web server scripts, CICS transactions and all sorts of external data streams such as stock tickers.

Between SunGard, TSI and us, we’ve cleaned up in the financial products market, says Adam despite Neon having bought UK-based MSB Consultants, a privately held supplier of trading software, middleware applications and data management in June last year to bolster its financial services business. Neon also bought Vie Systems, a competitive enterprise application integration software house, on undisclosed terms at the beginning of the month. Vie also sells application integration tools primarily to financial services companies.

The acquisition activities of its competitors have, however, forced Neon’s hand somewhat. To keep it ahead of the field, it is now looking beyond financial services to the other promised land: ERP-based EAI projects. The acquisition of SAP consultancy, SLI International for $22m in cash last week was clearly a defensive strategic move to head off the pressure it is now feeling in financial services. SLI, which had $18m in trailing revenues, provides Neon with a well seasoned 150 strong band of R/3 consultants and implementation practitioners, as well as an equal number of customers. We now want to be the leader in SAP implementations, Adam confidently asserts.

But that ambition will be hard to achieve. The acquisition reinforces our position that, because EAI projects are still 75% systems integration and 25% software, domain expertise (vertical, horizontal, or application set) is more valuable than product architecture, concludes a recent Meta Group report on EAI takeovers. Neon’s competitors are all too aware of that fact and are frantically buying expertise to maintain their market position. But none of today’s EAI software offerings will solve the integration challenge. In fact, the entire EAI field faces stiffest competition from the traditional systems integrators who have a long and proven history against these young pretenders.

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