Having plucked the peach from PeachTree to shore up its position in the US SME accounting marketplace in early March, Sage Software is now consolidating its already strong position in UK accounting with the planned acquisition of mid-market accounting veteran, Tetra Software.
If the deal goes through – it will no doubt receive shareholder approval since Sage’s 78m pound (approximately $124.8m) offer in cash and stock is believed to be over 38 million pounds (approximately $60.8m) more than the first bid received from UK systems and services company, The Lynx Group – Sage will become an industry goliath in its accounting niche. The only obstacle to completion is the Monopolies and Mergers Commission, the UK M&A regulatory board, which is obliged to investigate the transaction because the addition of Tetra’s market share will give Sage more than a 50% share of the UK accounting market.
Sage’s meteoric growth through acquisition is somewhat akin to Computer Associates or Platinum Technology’s rise to market dominance in their respective markets. The company already has a market valuation of 2bn pounds (approximately $3.2bn) and the announcement to buy Tetra will increase it still further as investors see Tetra’s revenues hit its bottom line.
Sage stock has already risen 10% to 22.3bn pounds [approximately $35.7m] in the two weeks since the bid was made public and analysts believe the stock will continue on its stratospheric growth curve. It’s the best UK software company that we have. It has a market leadership position in the UK, France and the US and is only one of four IT companies listed on the London Stock Exchange that has been consistently profitable in the last ten years, says UK industry analyst, Richard Holway.
In buying Tetra, Sage will have effectively wiped out any competition from UK-based accounting software suppliers in its home territory. Aside from Pegasus which competes directly with Sage at the low end of the market for standalone and single digit licenses, Sage’s main competition now comes from US companies such as Intuit and Great Plains Software.
Tetra is a classic Sage acquisition target since it has all the attributes the UK turning US accounting software supplier looks for: lower profits margins than its own; an installed base of 3,000-4,000 small and medium sized companies to which it can sell SageCover, its global support contract package; and a local VAR channel. Sage has always managed to increase its acquired businesses’ profit margins by selling the existing installed base support contracts and retaining localized products rather than going for the globalized approach adopted by all of its competitors.
However, this acquisition is different from the 10 it has made so far, in that it opens up a new market for the company. Sage has bought a VAR channel but it is a channel that sells a more sophisticated modular accounting package, CS/3, to the 20-30 user market place where average sales are in the $50,000-$80,000 bracket rather than the $100-$500 market in which it has traditionally played.
We are definitely getting into a new market. We’ve always concentrated on the single to 10 user market because we knew we didn’t have the management or distribution channel needed to make a big splash in the mid-market, says Aidan Hughes, Sage’s CFO. Tetra should provide the necessary distribution vehicle as it has around 20 value added resellers that have focused exclusively on selling to this market. Sage will pitch CS/3 at to the top-end of its customer base as well as through 30-40 of its own larger VARs in a bid to regenerate recent sorry sales.
Although Tetra produced an operating profit before exceptional and non-recurring items of 1.6m pounds (approximately $2.6m) on revenues of 16.2 million pounds (approximately $25.9m) for the six months to November 30 1998, the company had been experiencing financially turbulent times and had made a loss in its last fiscal year. Management problems had prompted a reorganization and, in the meantime, its competitors such as Pendleton and Systems Union, began to eat in Tetra’s market. With just $30m in revenues Tetra was too small to compete in the mid-market. It could not give larger companies the support they needed and so it began losing sales, says Holway.
Sage also sees an opportunity to push Acuity, a Microsoft-based accounting package it picked up when it bought State of the Art (SOTA) last year, through its newly enlarged UK VAR channel. When we bought SOTA last year we found that we had a mid-range accounting package and no distribution through which to sell it. We plan to take Acuity into the UK since it has a strong services orientation and will play well with our telesales customers in particular, says Hughes.
CS/3 on the other hand will be positioned higher up the food chain. With 30 modules, CS/3 is a more complex accounting package that has core accounting competencies in fixed assets, general ledger and multi-currency support but also offers manufacturing and distribution modules.
However, Sage’s acquisition strategy is not totally watertight as the Tetra acquisition has caused some product duplication. The company still has to find a place in its UK product portfolio for a third mid-market offering from its 1994 acquisition of UK accounting software house, Multisoft. Furthermore, the move to Sage will not be a painless transition especially for some of the low-end VARs who may be missed out of Sage’s acquisition plans. Sage will decrease third party sales revenues through Tetra VARs as it moves to consolidate its UK channel, warns Holway.
