Epicor buys Scala

Mid-market play

cable

Last week Epicor Software Corporation and Scala Business Solutions announced they had reached a definitive agreement to merge, writes Fran Howarth of Bloor Research. This merger will take the form of Epicor buying all outstanding shares in the capital of Scala for a cash price of $41.7 million plus 4.1 million shares of Epicor's common stock. Should the merger go ahead, it is expected to be sealed in the first quarter of 2004.

Epicor was founded in California in 1984 and went public in 1992. It provides solutions for customer relationship management, financials, manufacturing, supply chain management, professional services automation and collaborative commerce, as well as providing a number of complementary services. Epicor aims its products at the mid-market - primarily companies with annual revenues in the range of $10 million to $500 million annually. The firm's primary market is the US, with international revenues making up less than one-third of its annual total.

Scala was founded in Sweden some 25 years ago and is primarily known for its enterprise resource planning, supply chain management and customer relationship management solutions. Strong in manufacturing, transport and distribution, pharmaceuticals and consumer goods markets, Scala targets companies that average 12 to 24 users of its software.

Both Epicor and Scala have been partners of Microsoft for some time. In fact, Microsoft's Business Solutions group - focusing on sales to the mid-market - is touting Scala as one of its premier partners in Europe. Two years ago, Scala was named enterprise resource planning solution of the year by Microsoft, and Scala has recently become the first Microsoft partner in Europe to extend its customer relationship management offering. Its main strength in developing applications is that it is very strong in providing highly localised technology for businesses internationally. In 2001, Epicor was given the same honour as Scala regarding its enterprise resource planning solution, but for North America rather than Europe. Both Epicor and Scala utilise a .Net environment and web services to improve the integration and interoperability options for their solutions.

Should the merger go ahead, the combined company will have annual revenues of around $250 million. However, that is less than the revenues for Epicor alone in 1999, when it recorded total revenues of $262 million. Blaming adverse economic conditions, including lower licence sales that have led to fewer implementations and, hence, consulting projects, Epicor has seen its revenues slip by 45% to just $143 million in 2002. Over the same period, it has downsized its workforce by the same percentage. However, business results have been better in 2003, with the company returning to growth.

Scala has performed rather better than Epicor in recent years, although 2002 was a tough year for the vendor and the firm ended the year with 29% fewer employees. These measures allowed total revenues to increase recently, resulting in a positive operating income balance. Recent results in 2003 were ahead of the firm's expectations - bolstered by a new product release at the end of the quarter that is the first in-depth new functionality release since 1997. Releases in the intervening period were mainly focused on improvements to the underlying technology platform.

Why merge at this point? The merger will bring obvious benefits to Epicor in terms of opening up the international market to the vendor, allowing it to capitalise on Scala's presence, particularly in the European market. The importance of Scala to Epicor can be seen in the price that it is prepared to pay - representing a significant premium over its current share price. The merger will mean that the resulting company will be the largest independent mid-market enterprise resource planning company based on a .Net and web services environment. Its partnership with Microsoft will remain strong and the vendor will continue to capitalise on the solution that Microsoft provides. For Scala, the merger allows its solutions to be sold into larger organisations, including corporates, opening it up to a wider range of customers.

The two firms have some way to go before the merger is definite but, with business conditions improving for both firms, the timing appears to be good for it to capitalise on a market that is returning to stability, if not growth.

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