Analysis: SSA Global's midmarket empire dreams

Analysis: SSA Global's midmarket empire dreams

SSA Global Technologies Inc. has lately been on a buying spree of enterprise application vendors that rivals Oracle Corp.'s, in deal frequency if not size. The once-bankrupt ERP (enterprise resource planning) vendor is amassing an eclectic portfolio that analysts say positions it as an emerging major player in the changing back-office applications market.

SSA Global Technologies Inc. has lately been on a buying spree of enterprise application vendors that rivals Oracle Corp.'s, in deal frequency if not size. The once-bankrupt ERP (enterprise resource planning) vendor is amassing an eclectic portfolio that analysts say positions it as an emerging major player in the changing back-office applications market. Chicago-based SSA Global was buzzard bait a few years ago. Its current incarnation was formed in 2000, when several investment firms stepped in and bought the assets of bankrupt software maker System Software Associates Inc. The company's backers, primarily distressed-company forager Cerberus Capital Management LP (named for the mythical three-headed dog that guards the gates of hell), began bulking up SSA Global's portfolio by buying similarly struggling ERP assets. Most notably among those was Baan, which SSA got in 2003 for around US$132 million only a few years after Invesnsys PLC paid €762 million (around $708 million at the time) for the storied, but foundering, company.

SSA Global's string of acquisitions gives it a comfortable cushion of support and maintenance revenue for its legacy applications. Nearly 50 percent of its revenue for the nine-month period ended April 30 came from support, with services contributing another 23 percent.

The company stayed under the radar until this year, when it raised $99 million in a May IPO (initial public offering). Most of that cash went to repay debts owed to Cerberus and investment company General Atlantic LLC, which together own 87 percent of SSA Global. Still, the IPO gave SSA Global a public fundraising mechanism and raised its visibility. This month, it announced its biggest acquisition to date, buying CRM maker Epiphany Inc. for $329 million in cash.

Analysts praised the move as a smart pick on SSA Global's part. Although Epiphany is struggling with shrinking revenue and has posted a loss every year since its inception, it brings $239 million in cash and investments to SSA Global, significantly trimming its purchase cost. It also has strengths in its CRM (customer relationship management) software set that SSA Global lacked, especially in marketing and call-center functionality.

"They got them at a very good price, and it's a complementary area," said AMR Research Inc. Research Director Judy Sweeney. Forrester Research Inc. analyst Ray Wang called the deal a great one for SSA Global's customers, who will gain access to Epiphany's sales and marketing tools.

As SSA Global rolls up ailing ERP technologies into its portfolio, its challenge is to create a sensible, unified applications set from its collection of disparate pieces. The company's chief technology officer, Cory Eaves, said the company has mapped out a two-part strategy.

First, it will maintain the applications it buys for as long as existing customers want to continue using them. Second, it is developing its own SSA-branded line of enterprise applications encompassing the whole range of corporate operations, including sales, human resources, supply chain, product lifecycle, and corporate performance management software. SSA is picking out the best features from its acquired software to add to its SSA line, according to Eaves.

"If [customers] want to move forward, we have a single, go-forward set of applications," he said. "Some are acquired and some aren't. We're spending over $100 million on research and development investments. We've been building a ton of technology ourselves."

SSA Global's success will depend both on how well it retains legacy customers and on how well its new ERP line fares in a crowded market. On the first count, analysts say it's doing a solid job.

"I've slowly been converted," said Forrester's Wang. In his conversations with legacy customers, most say they're happy with SSA Global's work to preserve their applications. "They've been focused a lot on giving their existing customers a safety net -- the right upgrades, the right patches," he said.

"They've been on target with all the promises they've made," Sweeney agreed.

SSA Global rests in the precarious "second tier" of ERP companies, behind industry giants Oracle and SAP AG. That segment is changing rapidly, with most companies struggling for profitability as they fend off bigger players on the high end and ambitious new entrants like Microsoft Corp. and Inc. in the SMB (small and medium business) space. Vendors frequently disappear through consolidation, as Epiphany is about to.

But SSA Global has several major advantages: its base of more than 13,000 legacy customers, and a strong position in the manufacturing industry, which accounts for more than 80 percent of its revenue. Complex product configuration, field service and repair are all particular strengths of SSA Global's software, areas that less targeted CRM products can't match.

"I think this is a market that keeps SAP and Oracle up at night," Wang said. "SSA has all these manufacturing customers and has been good at keeping them. These are customers that SAP and Oracle would have thought would have migrated by now."

SSA Global doesn't have the financial resources to become an aggregator on the scale of, say, Oracle, which followed its $10 billion PeopleSoft purchase with $630 million Retek buy made more expensive by a high-profile bidding war. SSA Global's last quarterly report, for the period ended April 30, showed a cash balance of $128.9 million; for the first nine months of its fiscal year, it had net income of $23.6 million on revenue of $524.9 million.

Still, investors like SSA Global's strategy. "The management team at SSA has decades of experience at midmarket software companies, so they have a strong understanding of the industry dynamics and the other companies in the marketplace," Smith Barney analyst Mark Verbeck wrote in a recent research note. "SSA's acquisition of Epiphany is an excellent example of the benefits of the company's acquisition strategy."

The question facing customers and industry analysts is, as the midmarket ERP field shakes out, which vendors will be left standing? AMR Research's Sweeny sees SSA Global and Infor Global Solutions as the two key players left in the manufacturing applications market. Wang cited SSA Global, Infor, Lawson Software Inc. (which recently bulked up by agreeing to buy Intentia International AB), Sage Software Inc. (another aggregator working to turn an acquired software collection into an integrated set) and everyone's favorite ERP stealth shark, Microsoft, as the top candidates to be independent companies doing $1 billion in annual revenue by 2008.

"Our view is, the market is absolutely consolidating, but even at the end of the consolidation, there's not going to be just two companies left," Eaves said. "We have our key niche. We're not going anywhere." -- IDG News Service

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