The acquisition of ailing mid-range ERP vendor, Marcam, by $18 billion British automation and control conglomerate, Invensys, has left many analysts scratching their hands as they struggle to understand the logic behind the $60 million transaction. It’s like adding fish to beef stew, says Dan Miklovic at Gartner Group, summing up widely-held concerns that this deal will ultimately result in an entirely unsavory outcome for the vast majority of Marcam’s 1,400 customers. There are other worries that it will add very little to Invensys’ revenue stream.
Heading the list of concerns, is its new parent’s ability to support and develop Marcam’s preponderance of customers using Prism, its AS/400 ERP suite. Wonderware [the acquired independent software subsidiary into which Marcam will be subsumed] has no experience in the AS/400 market place. If it tries to maintain Protean [the Marcam object-oriented client/server ERP suite] and Prism it is delusional, says Bruce Richardson at AMR Research.
While Wonderware is not entirely inexperienced in the ERP market place, it has focused on a specialized niche, developing a suite of mainly manufacturing-based applications called Factory Suite. It also has only ever developed product on NT. Consequently, its sales model has been based on pushing high volume relatively low- cost product through a sophisticated channel. It is unused to providing the higher-cost /lower-volume direct sales approach and consulting/implementation requirements that enterprise software such as Marcam’s Prism and Protean suites require, say analysts.
Although Wonderware has publicly stated its allegiance to all Marcam customers, there seems to be an implicit suggestion that Prism accounts in particular are more highly valued as a stable on-going revenue stream than a source of potential new business in the mid-range market. Wonderware may recognize its limitations and therefore be looking to maintain a status quo within the acquired customer base than actively continue to build upon it. The AS/400 installed base is a good strong revenue stream from which we can gain revenues from support and software sales, says Joe Cowan, senior VP of sales and marketing at Wonderware, adding substance to this theory.
Having said that, Wonderware will no doubt offer Prism customers a migration path. But that path is likely to be downstream into its own NT-based shrink wrapped manufacturing software, Factory Suite, which will not always be the desired direction into which many customers will want to head. This scenario has led to the suggestion that Marcam’s competitors, particularly SSA and JD Edwards, will look to capitalize on the disaffection amongst the user base and tempt customers to migrate across to competitive products such as eBPCS or World.
However it is not only Prism customers that potentially face a bleak future ahead of them. Those users that have chosen Protean, the object-oriented antecedent to Prism, may also want to clarify the company’s future plans for the product before making any further financial commitments to the application suite.
Wonderware plans to pick apart the suite and re-position it as a process-based product management suite used in conjunction with a heavy duty ERP package such as R/3. Effectively, the financials and order management pieces will therefore be stripped out so that the software becomes a plant integration and operations application. Protean-based enterprises running non-manufacturing functions should evaluate making a transition to other financial and order management products by mid-2002, concludes a report by the Gartner Group. If you’re using Protean with PeopleSoft you’re OK but otherwise, worry, warns Miklovic.
Avantis, the object-oriented asset management suite Marcam originally developed to work with Protean, will also see the wield of developers’ knives when Wonderware tries to integrate a number of its various asset management components into FactorySuite later in the year.
Investment
analysts take a different view of this transaction. They argue that the value of the deal lies in Wonderware’s ability to secure new business around FactorySuite by using Marcam as the carrot. And while Marcam customers may undoubtedly suffer under its new parent, the repercussions will be of little consequence to Wonderware. Invensys, the parent company, made a $60 million investment in Marcam to secure an $8 million deal it already had in place with a major multi-national client in consumer packaged goods. It also has another large customer that is preparing to sign up $0.5 million of business – but only on the basis that Invensys buys Marcam. It will be able to offer object-based manufacturing modules as a feeder to a SAP R/3 ERP system the client already has in place.
If Wonderware can manage to appease the acquired installed base by offering a reasonable level of support it will have a large enough annual maintenance stream from existing Marcam customers to guarantee a growth rate of 25-30% this year, according to Cowan.
Effectively, therefore, Marcam will add at least $100 million to Wonderware’s top line in the next 12 months, says one investment analyst. For its last full year to September 30th 1998 Marcam had an operating loss of $6.2 million on sales of $124.5 million. That said, the company will have to absorb an estimated $100 million in debt that Marcam has racked up after four years of unprofitable operations. But that is presumable a small price to pay for the fortuitous new business it will gain.
It was a mercy-killing, says Richardson, who argues that Marcam was desperate for revenues and cash and, therefore, only too willing to be purchased to rescue it from its plight. Having undergone a 20% reduction in staff which cost the company $1.6 million in severance related pay in the December 98 first quarter, it incurred an additional $1.5 million in charges associated with the closure of its Asia Pacific office. Marcam was struggling to keep its head above the parapet.
Aside from suffering the industry wide ERP slowdown felt by all of its competitors, Marcam’s problems have been linked to two key errors the company made when formulating a product strategy. Marcam wanted to be a pioneer in object-oriented technology but it misjudged the market and moved into OO development too early. That was a big strategic blunder, says Miklovic. The other mistake arose from development plans regarding Avantis and Protean. Originally, the company planned to co-develop the products so that there were closely linked. That would have been a powerful solution. But then executives decided it would be better to deliver two different products that were funded by two separate R&D projects and it was down hill from then on, he says.
The imminent acquisition has caused an immediate recovery in Marcam stock. On May 27th, the day the deal was announced, company stock jumped 92% to $7.8125 and has since been trading at roughly the same level after months of settling at the $2 mark. Invensys will offer Marcam shareholders the equivalent of $7.50 per Marcam share when the deal closes at the end of the month, leaving investors rubbing their hands gleefully while customers become more anxious as the closure data approaches.
