When two halves don't make a whole...JDA buys Manugistics

One of the fallacies of M&A is that 1+1 = 3. Nearly every merger or acquisition is met with undying enthusiasm for how the combination of cost synergies, cross-selling, expansion of channels and other factors will create a more powerful entity than either could've done on its own.

Now, as I've mentioned in the past, these "synergies" are often impossible to attain and yet the Street often takes the bait hook, line and sinker.

It's that phenomenon which continues to drive mergers like the one announced yesterday between Manugistics (MANU) and JDA Software (JDAS). Long-suffering Manugistics shareholders are being given $2.50 per share in cash. JDA shareholders didn't get off as well, as JDA has taken out debt (via a $175mm term loan and a $50mm revolving credit facility) and is also accepting a private investment  (in the form of convertible preferred) from Orlando Bravo of TCEP. Bravo will join JDA's board as a result.

The hard questions JDA shareholders need to ask:

1) The myth of scale...Yes, the industry is consolidating. Yes, Oracle (Retek and ProfitLogic) and SAP (Khimetrics and Triversity) are making retail-focused acquisitions to increase their footprint. But does bringing together two floundering businesses really offset the behemoths' encroachment?

2) What does this merger do to reverse JDA's struggles?..Commensurate with yesterday's merger announcement, JDA released Q1 results that, shall we say, left a lot to be desired. Revenues of $47.9mm were down sequentially and YOY. More astounding, license revenues were just $7.1 million, representing a 54% sequential decline. CEO Hamish Brewer blamed the shortfall on "deal slippage"...haven't we heard that song before? During Brewer's prepared remarks on the conference call he said:

First, it’s clear that a number of customers that we’re engaging at this time do not have significant compelling events that drive the schedule. Unexpected changes and organizational events continue to delay decisions, and we also continue to see the need for most organizations to gain approval from senior-level executives or, often, at board level before any significant investment decision can be finalized.

In other words, JDA can't establish its value proposition to its prospective customers.

3) But wait, didn't Manugistics report a pretty decent quarter?..Let's keep some perspective. Relative to the Q3 debacle, Manugistics Q4 results look sparkling. Manugistics reported license revenues of $9 to $10mm (up from $4.1 million last quarter); representing less than 20% of the total revenue mix. Furthermore, Manugistics gave on mention of its bookings in the quarter (after reporting virtually no bookings in Q3).

4) Putting aside the financial engineering involved in this transaction, does this merger truly alter the strategic direction of either company? Does coming together give them better competitive insulation from SAP, Oracle and others? How many customers were clamoring for this functionality to be combined further? JDA and Manugistics have 150 joint customers, is it realistic to expect more cross-selling now that the two companies act as one?

Here's the thing...from a purely financial perspective, this is an "accretive" acquisition for JDA. Manugistics isn't right-sized for its current state of customer demand; and hasn't been for a long time. JDA can cut the fat and get Manugistics profitable on an ongoing basis. But for this merger to really be worthy of the term "transformational" (as Brewer called it on the c.c.), it has to materially augment the value JDA/Manu brings to customers and, at the same time, allow that value to translate into re-accelerating levels of growth and profitability.

Related Posts:

• Manugistics: This Trend is NOT Your Friend
• Hope You Got A Gift Receipt: JDA Software Pre-Announces
• Symantec/Veritas: Where Oh Where the Synergies?

Note: At the time of this writing I, and/or funds I maintain discretionary control over, did not maintain a position (long or short) in MANU or JDAS but did maintain long equity positions in SAP and ORCL.

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Comments

[Karl Waldman]

ProfitLogic was much more focused on doing one thing well in one industry and had a great leadership team. Manu had a much broader footprint in multiple industries and more turnover at the top. These things are significant negatives towards valuations unless you can make it work.

Karl

PS - The 5 years in my previous comment came from a friend at Oracle. However, integration is not the right term - rewrite is more accurate...)

[Jason Busch]

Jason,

Nice financial and business analysis. The financial engineering behind this deal raises the question as to whether it is worth it to shareholders in the first place. But what most concerns me about it (from the supply chain market perspective) is the valuation. Or, perhaps MANU really had something to hide by selling out now. Consider how Profitlogic sold out to Oracle at a much higher multiple recently (the exact terms were not disclosed, but it was a similiar size deal). Remember guys, MANU has a nice little business in profit optimization (in addition to the core planning stuff) as well. Methinks something must be up here, or MANU got second-rate valuation advice.

[Dennis Howlett]

As I said at Jason Busch's place - there's always the fall back of GEAC if the deal doesn't owrk out.

[Jason Wood]

Karl,

Make no mistake, neither SAP nor Oracle have five years to integrate any kind of code; advancements in code and architecture happen far more rapidly than that.

From a complexity issue, the MANU/JDA merger is puzzling. JDA has put a ton of time and effort into re-architecting its core suite into a .Net environment, something Manugistics is nowhere near. And from a product complexity standpoint, both JDA and Manugistics have a lot of overlapping functionality that will need to be supported and ultimately brought into one codestream. Not an easy task under the best of circumstances; much less when you don't have high margin license revenue flowing in to support the incremental development costs.

[Karl Waldman]

Oracle and SAP have the 5 + years it will take to fully integrate the 2 sets of software when they buy a company. JDA doesn't have that sort of time frame. Even if JDA cuts a huge amount of "costs", especially of if they cut costs-- those costs represent the skills they need to actually get the software to work at a client site and the industry knowledge needed to bring value to clients.

Karl