An earthquake of sort jolted the tech world late Friday when Infor made an $1.8 billion bid for Lawson, one of its chief rivals in the Enterprise Resource Planning(ERP) applications market.
The tremor, which is expected to shake up the midmarket space as well as the adjacent software segments, will release considerable seismic activity with competitors scurrying for counter measures and potential bidders joining the fray in the days ahead.
The unsolicited cash offer at $11.25 a share could result in one of the largest ERP buyouts since 2007. With the passing of the ERP consolidation wave that was driven for the sake of filling product gaps and acquiring maintenance revenues, the latest move by Infor suggested a break from the past for a number of reasons.
1. Acquiring similar products – While Lawson and Infor complement each other in many ways, their product lines are strikingly similar. Lawson offers M3 ERP apps for asset intensive industries such as food and apparel manufacturing with functions from costing to supply chain planning, Infor also sells best-of-class applications that address complex factory automation, work order and logistics requirements. On the services side, Lawson S3 ERP product line has been well received because of robust Human Capital Management capabilities including those designed for talent management. Similarly Infor sells core HR applications what used to be known as Infinium, which has been paired with Boniva for strategic HCM projects. Thus the deal is to raise barriers of entry to shut out any potential gatecrasher, while chasing bigger opportunities among existing customers.
2. Winning the midmarket – For companies with between 100 and 5,000 employees, demand for ERP applications is expected to surge past that of XL enterprises with more than 5,000 employees. The aggregated size of the three midmarket segments of the ERP market tops $16.4 billion at a compound annual growth rate of 3.9%, compared with $15.9 billion for the XL segment with a 2.4% CAGR through 2015.
The addition of Lawson, which has an installed base of nearly 5,000 customers with many fitting the midmarket description, will provide Infor, which in itself has more than 70,000 customers(again mostly midmarket organizations), with extensive coverage in key verticals like healthcare, public sector and manufacturing as well as the product breadth needed to dominate the segment.
Moreover the combination of Infor and Lawson could displace the current No. 4 ERP player Microsoft Dynamics, while closing in on the No. 3 Sage, even though it still trails behind the No. 2 Oracle, and the No. 1 SAP in the worldwide ERP market, according to our preliminary estimates.
With combined ERP revenues of about $1.31B in 2010, Infor/Lawson will have 3.9% share of the market, compared with Microsoft’s 3.8%, Sage’s 4.3%, Oracle’s 10.8%, and SAP’s 18.7% based on preliminary estimates. These estimates are preliminary because December 2010 sales from Lawson and Oracle were rolled into their latest quarter ended Feb. 28 with earnings results due out in the coming weeks. Whatever the case, it is fair to assume that Infor, upon the purchase of Lawson, will be considered the frontrunner in the midmarket segment given the majority of ERP revenues for SAP and Oracle is derived from XL enterprises. Sage, on the other hand, excels among companies with fewer than 100 employees.
3. Creating a bigger Cloud – The disruptive power of Cloud Computing has changed the rules of the game and most ERP vendors can no longer rely on maintenance revenues as their cash cow, let alone expanding the recurring revenue stream through tactical acquisitions. While both vendors have not been particularly successful in driving Cloud-based revenues, it is more imperative than ever for the two to leverage the economy of scale in order to define and optimize a common on-demand framework for their existing and future customers. Much of the work will lie in reconciling the differences between Lawson Cloud Services based on the Amazon Elastic Compute Cloud or Amazon EC2 and the Infor Cloud Solutions running on Microsoft Azure platform. The good news is that over the past few years both Lawson and Infor have been aligning their development and portal strategies with Microsoft technologies.
By no means is Infor’s acquisition of Lawson a done deal given the volatility of current economic climate, not to mention the fractious nature of its major shareholders. On one side, its founder Richard Lawson has been keeping his eponymous company independent for years and is revered among long-time employees and customers. On the other side, there are a number of institutional investors namely takeover artist Carl Icahn, who owns 8.3% of Lawson, hankering for their expected returns.
For naysayers, there is the criticism of putting two mediocre players together doesn’t make a winner given the history of their fair but otherwise ineffectual execution(namely the drawn-out integration of Intentia for Lawson that spawned the M3 line, and Infor’s shifting Services Oriented Architecture strategies that undermined the modernization of its legacy systems).
After all, the on-demand strategies at both vendors are a work in progress. The same applies to their challenges in areas such as mobility. For example, because RIM is a customer, Infor has fine-tuned its Expense Management applications for Blackberry, rather than iPhone. The support of iPhone, or lack thereof, underscores Infor’s development limitations. Lawson, on the other hand, is considering bulking up its mobile capabilities in the next release of M3.
In the meantime, the performance of both vendors has been lackluster at best. In 2010 Infor was estimated to post a 9% rise in license revenues following a steep decline in 2009 due to the recession. On the other hand, Lawson’s license revenues fell 6% in the two most recent quarters even though it managed to post a 7% rise for the past 12 months. By comparison, many of their competitors rebounded more quickly with some registering double-digit increases in license and/or subscription revenues in 2010.
If the deal goes through, one can expect the following developments to become more pronounced:
1. Accelerating vertical push – Lawson, which has been making significant inroads into healthcare with its HCM, supply chain and procurement applications, will load up Infor with much ammunition to target integrated delivery networks. Lawson’s recent acquisition of Healthvision added the critical health information exchange component to its already formidable healthcare offerings. Similarly Infor’s Hansen public sector offerings will complement Lawson’s state and local government applications for financial management that comes with best-of-breed features such as encumbrance accounting. Additionally Lawson has carved out a niche in the equipment service management and rental market led by sales into Caterpillar dealers, an advantage that Infor can readily exploit given its experience in the automotive and transportation verticals.
2. Kicking off with HCM duo – When it comes to human capital management applications, the combination of Lawson and Infor could leapfrog many of the niche talent management vendors because of their experiences in selling into a wide swath of verticals from labor-intensive airlines that standardize on Infor Workbrain for workforce management to user-centric organizations in government and healthcare that have been enamored with Lawson’s intuitive features, which have been augmented by its recent acquisition of Enwisen for its popular HR portal.
3. Expanding into emerging markets – Both Infor and Lawson have made great strides selling into emerging markets – the former winning manufacturing and distribution customers in Asia Pacific, while the latter gaining ground in the Middle East. The deal should provide ample opportunity for the combined entity to harness local resources and revamped channel programs, while extending their reach through an extensive product portfolio and rapid implementations for customers of all stripes and regions.
Though it is not possible to predict the outcome of this high-stakes battle, one thing is clear. The aftershocks of a major earthquake could continue for days, but the combination of Infor and Lawson could have lasting impact on the enterprise applications market for years to come.
With a show of brinkmanship and ready capital, Infor, led by its new CEO Charles Phillips who similarly orchestrated a series of acquisitions at Oracle, is aiming to redraw the competitive landscape by asserting control of the ERP midmarket as well as a growing list of verticals. And the proposed deal to buy Lawson may well be the early sign of the main event to come.
Send me an email at apang@appsruntheworld.com and tell me what you think of the proposed acquisition of Lawson by Infor and how it may impact your business. Remember to follow us on Twitter @appsruntheworld for real-time updates on major developments in the ERP market.