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May 22, 1997updated 05 Sep 2016 12:53pm

SOFTWARE AG THROWS OFF ITS SHACKLES

By CBR Staff Writer

When Peter Schnell, the founder of the German database management systems and development tools vendor Software AG, placed his entire $500m holding in the company into two trusts in 1993, there was much speculation about his motives. The official line was that this selfless gesture would protect the company from hostile takeover bids and would raise the morale of employees by assuring them that shareholders interests would never take precedence. But some cynics hinted that Schnell’s motives had more to do with tax advantages and the fact that he did not want his son to inherit the company. Whatever the reasons, it is clear that Schnell’s attachment to the company he founded in 1969 was great, and he was determined to safeguard its operational future. He did not want to see Software AG, Europe’s second largest software company after integrated business applications giant SAP swallowed up by a larger corporation, or run by US financiers and investment capitalists. At the time, Schnell’s actions seemed to make sense. But just four years on, it now seems that the very actions Schnell took to keep tight, local management control of his company may have led to just the opposite happening. For the past two to three years, the company, which was profitable for its first 24 years, has been losing money, revenue growth has been sluggish or flat, and it has been unable to raise money to expand the business. The result has been upheaval and a strategic reversal. Early last year, Schnell resigned (CI No 2,951) and since then, sweeping management changes have been made from the top down. Most dramatically, the recently installed chief executive officer Erwin Koenigs (CI No 3,008) has begun to realize his ambition of turning the company into a global player by selling off an undisclosed majority stake in the company’s US operations to a Washington DC-based investment company, Thayer Capital Partners, for $150m (CI No 3,132). The sale raises much needed capital for Software AG and may enable the company to break free of the shackles Schnell wound around it. First, the European company can now get back to its core European markets, while the US company will be free to expand – and, if successful, send back royalties to Germany. Second, the sale could have a dramatic effect on the company’s product lines. Software AG needs to increase sales of its data access, datawarehousing and middleware products – iXpress, Sourcepoint and Entire – and it also needs to rejuvenate its renowned Adabas relational database management system.

Damaging influence of shareholders

Although Adabas still accounts for around a quarter of Software AG’s revenues, it has taken a bit of a knock over the past year due to competition from Oracle Corp, IBM Corp and Informix Software Inc. Schnell believed that the potential influence of shareholders on the future direction of his company, along with stock market fluctuations, would, in the long-term, be damaging. He could not bear to phase out any of the company’s 270 products, but, as a result, Software AG missed out on the first wave of client/server technology and, consequently, has suffered flat earnings for the past three years. Koenigs has attempted to redress this problem by shifting the company’s focus away from technology and, instead, making it more market driven. It was this change that prompted Schnell’s departure and ignited the search for a way to raise cash and revitalize the product lines. Unable to raise capital in Germany because of Schnell’s legacy of a trust fund structure, and propelled by the need to catch up with a market that had been growing at between 30% and 40% a year, Software AG had little choice other than to sell, says Laureng Lachal of the Ovum market research company. Further reversing Schnell’s plans, Koenigs aims to float the German company in three years. In the meantime, the capital raised from the US sale will be used to develop Software AG’s language, middleware, web and data warehousing development tools in a bid to capitalize on the burgeoning object orientated market. The company’s distribution model is also being changed. Today it sells direct but it will now also plough money into the development of indirect sales channels. The US arm, which generated $160m last year, about a third of total revenues, will also now embark on product development and acquisitions to help strengthen its product portfolio. Koenigs retains a seat on the US board of the German company, which will get the rights to any products developed by the US business. Ironically the sale of the US subsidiary will see the wheel come full circle. Thayer plans to hold the company for three to five years and then float off a large portion of it – returning it to its original state.

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