By Krishna Roy
The removal of two top level executives at market leading business intelligence vendor, Hyperion Solutions last week is the latest slip up in what has become one of the most messy takeovers in recent years. When the $350m merger between OLAP (on-line analytical processing) company Arbor Software and financial analytical application house Hyperion Software was originally mooted in May 1998, John Dillon, ex-Arbor CEO and chief architect behind the deal believed the combined entity could rise to the top of the business intelligence market. The plan was to leverage the strengths of Hyperion’s analytical applications on top of Arbor’s widely deployed Essbase OLAP engine, and therefore, head off the impending threat Microsoft’s OLAP Services would have on each company’s respective revenues.
On one level Dillon was correct. The merger achieved the desired effect of propelling the re-named Hyperion Solutions into the lead as the largest business intelligence software company with revenues 60% higher than nearest rival Oracle. But the company’s inability to successfully execute a post-merger strategy appears to have caused a level of dissension within virtually every aspect of the organization. The conservative Hyperion failed, and is still failing, to gel with the more dynamic and performance- oriented Arbor. And one year on since the deal was first announced the combined Hyperion Solutions looks in only slightly better shape than when then operation was being run as two as separate organizations.
The merger has failed to bring the quick boost to the top and bottom lines originally anticipated. When Hyperion announced third quarter revenue last month, the company recorded a sequential drop in revenue for the third quarter in a row. The board decided it was time for heads to roll and Dillon, alongside senior vice president of sales, Bill Binch were the first top level executives to be fired, although not the first to leave the company.
So where did Hyperion go wrong? We’ve had merger integration issues in every area of the company – even in areas where we didn’t think we’d have any, says former CFO and now interim CEO, Steve Imbler. The integration of the Arbor and Hyperion sales forces into a unified worldwide sales team started in October 1998 caused particular problems. We underestimated the challenges of integration, says Imbler, when we initiated further management changes in January we ended up with an ‘over- managed’ sales force with two people managing the North American sales force and two managers in Europe.
Although the company now says it has sorted out the sales force challenge, it has been a long and painful road, and one that has had the most detrimental effect on the company’s earnings. One of Hyperion’s fundamental mistakes was to create a global sales force and therefore task Arbor and Hyperion sales people with selling product lines that had once been competitive. Sales people on both side found themselves having to extol the virtues of products they had once trashed. Ex-Hyperion sales people, who are to believed to have delivered the majority of the revenues, were told that the old underlying technology on which Hyperion applications were built was inferior to Essbase. They consequently lost confidence in these applications and sales began to suffer. To make up the revenue shortfall in the applications business, Hyperion decided to increase the consulting and implementation services offered with Essbase – but this only served to make sales people even more demotivated.
Partnership programs were also an unforeseen problem. Arbor had cultivated a strong value-added reseller (VAR) channel of partners that would build applications on top of Essbase. However, many of these VARs saw Hyperion developing into a direct competitor as it started to knit Hyperion Enterprise and Pillar into the Arbor multi-dimensional database. The arrival of Microsoft OLAP Services has only served to make matters worse. Many VARs have chosen to ditch developing for Essbase in favor of building applications on the Microsoft OLAP engine.
Dillon and Binch will no doubt tacitly shoulder the blame for the initial mismanagement of the merger. But there are strong suggestions that the competitive threats from various sectors of the market will prove too great for even a new executive team to rectify the damage wrought by deal. Hyperion is stuck. Microsoft is beginning to eat its lunch in the old Arbor Essbase business with OLAP Services. PeopleSoft, Oracle and SAP are threatening the application side of its business as the market shifts to requiring analytical applications more geared towards ERP and CRM applications, says one investment analyst at Goldman Sachs. The investment bank has lowered revenue and earnings per share estimates four times since the transaction took place and is now forecasting EPS of $0.75 for fiscal 99, down from an earlier estimate of $0.79, and $0.57 from $0.69 in fiscal 2000.
And Goldman Sachs is not the only investment bank to downgrade Hyperion. We have long thought the June quarter presented the biggest challenge for the company (32% of revenue for the year based on our most recent estimate.) We felt this was feasible as long as the company had a head of steam moving through the previous two quarters. It now appears that the second and third quarters represent challenges… making the most recent fourth quarter target appear insurmountable, concluded First Albany in a report put out earlier in the year.
When Hyperion did release third quarter numbers at the end of last month, First Albany’s predictions turned out to be accurate. Although the market had already been warned of a third quarter earnings shortfall and had adjusted models accordingly, the numbers were not attractive.
For the March quarter net income was down 23.5% at $2.58m on revenue up 14.5% at $101.6m. Furthermore, the growth was artificially inflated by the fact that pre-merger, Arbor and Hyperion closed their respective fiscal years in different quarters. Last quarter Hyperion announced a 15% growth rate but it should really have been 8% if you compare like with like, says Nigel Pendse, a leading OLAP analyst and author of ‘The Olap Report’. This difference in timing between Arbor and Hyperion’s financial reporting had already proven problematic. When we tried to combine budgets for a new fiscal year end of June 30th one side had still got six months to run on revenue projections so it was difficult combining budgets, says Imbler. Although this was a merger that had already received a large dose of skepticism when it was first announced – Arbor’s shares dropped 30% on news that Hyperion planned to acquire it – the recent management changes and string of three under performing quarters has done little to raise Wall Street’s confidence in the company’s future prospects.
The merger has wiped close to a billion dollars off the company’s market capitalization. Hyperion and Arbor had a combined market cap of $1.3bn just before the merger was announced in May 1998. It had already fallen to $909m when the deal closed in August and had dropped to $541m by the end of 1998. It has now dropped still further to a paltry $421.5m on May 6. Hyperion’s return will be very difficult, says one investment analyst at Soundview Financial. Some analysts take an even more doubtful view Microsoft will be the number one player in the space within three years, says Pendse.
