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February 21, 1999


By CBR Staff Writer

Accounting software company The Sage Group is known for making opportunistic acquisitions to expand beyond the UK into global territories. The strategy is serving it well. Sage is now the fourth most profitable European software company with margins that are largely unheard of in the PC software market. Sage reported net profits up 29% at 32.4 million pounds ($51.8 million) on revenues that rose 26% to 191.5m pounds ($306.4 million). The recently-announced acquisition of US accounting software veteran, PeachTree Software, should only serve to push margins still higher since the $145m cash transaction should be non-dilutive this year and accretive thereafter.

It seems ADP was as eager to divest itself of PeachTree as Sage was to buy it. We heard that PeachTree was filing for an IPO and we immediately offered a broadly similar price. The company’s parent, Automatic Data Processing (ADP) accepted, says Aidan Hughes, CFO at Sage.

Although profitable and showing healthy signs of growth – PeachTree saw fiscal 1998 profits of $6.0 million on revenues up 12% at $52.5 million before amortization of intangibles – the company had always been a thorn in its parent’s side. ADP, a $4.5 billion powerhouse in payroll bureau services, found PeachTree’s core business in small business accounting software an ill fit. And although it acquired the business and ran the operation as a wholly-owned subsidiary for five years, it was keen to find a divestiture strategy. PeachTree had been filing for an IPO when Sage swooped on the subsidiary thus offering an exit strategy with less risk attached to it.

PeachTree is Sage’s third US acquisition after State of the Art (SOTA), for which it paid $263 million in January 1998 and DacEasy, which it bought in 1991. DacEasy was good value because it had a large installed base to which we could sell new products, but bigger players such as PeachTree and Intuit soon began to dominate the sector, says Hughes.

In purchasing PeachTree, Sage has effectively bought market share snapping up the number two player in the US for PC-based accounting packages. The company’s DOS, Windows and Microsoft Office-based accounting packages have been bought by one million companies. PeachTree also has a well-established brand name particularly in the US and this can boost Sage’s visibility in North America. (Despite its US acquisitions, SOTA and DacEasy, only 25% of Sage’s revenues came from the US last year.)

Brand recognition is highly valued in the PC accounting software sector. The bulk of sales come through retail outlets where customers are often unused to buying software and so will look for well known products. Software vendors, conversely, need a well-established distribution channel to stand a fighting chance of competing for attention.

Furthermore, PC software purchasing patterns are different from those in big business. Customers tend to buy single copies of the software and there is less chance of repeat business through licensing additional seats as is the case in the enterprise software market. Vendors can only reap additional business from existing customers by selling upgrades or new products. Historically this has proved difficult to do. But Sage now has a two-tier channel with SOTA providing a string of VARs geared to sell to companies with between 50 and 100 staff, and PeachTree which has a low-end distribution channel and theoretically should be able to more effectively compete with US market leader Intuit. PeachTree strengthens our position in the US particularly amongst the 5-50 employee segment where we weren’t strong, unlike in Europe, says Hughes.

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Aside from selling additional products and upgrades into the PeachTree installed base, Sage also plans to develop a recurring revenue stream from support contracts. Although PeachTree has one million packages out in the market place (50% of which have been added in the last two years – reflecting the high growth nature of its business), only 36,000 of them are sold with support contr

acts, according to Hughes. He believes that there is a lucrative vein to be tapped in selling support contracts to this customer base. This is a tactic the company has used before, with previous acquisitions such as Ciel in France. And it is a strategic move that has met with success. In its last fiscal year the company sold 44,000 new support contracts bringing the total number up to 154,000.

The accounting market for small businesses is showing good growth and generated $1.0 billion in license and maintenance revenues in 1997 and is expected to grow at a compound annual growth rate of 14% to $1.9 billion in 2002, according to IDC. With SOTA and soon PeachTree under its belt, Sage believes it is now better placed to capture a large piece of the action. We estimate there are about three million small businesses in the US and that’s our hunting ground, says Hughes.

PeachTree should further Sage’s US ambitions. The company slots neatly into Sage’s rather unusual business model as it will be run as a relatively separate concern much the same way as it operates all its regional businesses. Unlike other software companies that build a global presence through acquisition by consolidating operations and product lines, Sage makes few changes to the acquired business on the basis that small businesses tend to operate in one country only and therefore have accounting software requirements that are peculiar to that country. This business model bodes well for PeachTree’s product line and customer base who are likely to see only positive changes under the new management.

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